Property vs Shares for a 20 something

[ENP]

Situation is I have roughly $30,000 in savings accounts/term deposits. Safe, secure, etc.

I'm building up towards a first home deposit on a rental property either in Auckland (where I live) or elsewhere. If I was to go down this route, I'd be able to buy within 1-2 years based on 15% deposit (which mortgage broker has told me). However, with rental yields being quite poor in New Zealand and especially parts of Auckland, I'm wondering if going down the property route is the way to go. I'm thinking I could just build up a healthy share portfolio instead for anywhere from 5-7+ years until I settle down, buy a home with my partner, etc.

I've always had the idea of building up a wealth base of property, leaveraging each property and then getting into shares later but I'm really struggling to see how property is a good investment at present.

[lou]

I would buy a investment property first. The leverage on the investment property will see a higher return than shares.

I would go under the presumption of a property to live in and which will allow you to have a 5% deposit. Allowing you to get into the market now.

After a couple of years you can use equity in the property + additional savings to start your share portfolio. Using a revolving credit facility you effectively have margin lending with out the risk of margin calls.

[ENP]

I would buy a investment property first. The leverage on the investment property will see a higher return than shares.

I would go under the presumption of a property to live in and which will allow you to have a 5% deposit. Allowing you to get into the market now.

After a couple of years you can use equity in the property + additional savings to start your share portfolio. Using a revolving credit facility you effectively have margin lending with out the risk of margin calls.

Ahh yes but you see, I don't want to live in my own place.

I want to have the flexibility of renting so I can go overseas, move easily to new jobs if I get them, live in a nicer suburb than I would if I owned a place.

It's really between a rental or shares, as my own house is out of the question until I'm 5-7+ years down the track.

[ENP]

The three options I really have are:

- Buy a rental in Auckland for roughly 350-400k. This would take me another year or two to get the deposit, increase my salary to support the borrowings, etc.
- Buy a rental in a smaller NZ town other than Auckland, Wellington, Christchruch for 200-300k I could do this in 3-6 months
- Buy a portfolio of shares for a 5-7 year time frame to build as a first house deposit when I want to buy my own house to live in

[fungus pudding]

The three options I really have are:

- Buy a rental in Auckland for roughly 350-400k. This would take me another year or two to get the deposit, increase my salary to support the borrowings, etc.
- Buy a rental in a smaller NZ town other than Auckland, Wellington, Christchruch for 200-300k I could do this in 3-6 months
- Buy a portfolio of shares for a 5-7 year time frame to build as a first house deposit when I want to buy my own house to live in

Work out how much you would have to subsidise the rental by, allowing realistic amount for repairs and maintenance, (usually the biggest cost), plus management, interest and all the usual rates, insurance etc. Then add on the loss of interest on your initial 30,000 plus loss of interest on your monthly input - then see if you expect capital gain to exceed this over the next decade.
History shows capital gain is far from a straight line and has stalled completely for long periods at times. Then consider at present NZ prices are way over the top as a multiple of annual earnings. In fact they are at an all time high. You may form a different opinion, but I'd run a mile from residential investment at present. There is no guarantee of capital gain, and never overlook the possibility of a capital loss that comes with any investment you can name.

[G on]

Have a read of :The truth about residential property investment by Duncan Balmer. May help your decision.

[lou]

Ahh yes but you see, I don't want to live in my own place.

I want to have the flexibility of renting so I can go overseas, move easily to new jobs if I get them, live in a nicer suburb than I would if I owned a place.

It's really between a rental or shares, as my own house is out of the question until I'm 5-7+ years down the track.

I was implying that you tell the bank you will live in the property, then rent the property.

[modandm]

before you invest in property do a spreadsheet model for it as an investment - factoring in different interest rates and different rates of capital growth.

When I last did it for my parents I proved buying a property in Glendowie the capital gain needed to be 2-3%p.a to break even and gain/lose about 12k for each % either side. That was factoring in everything including tax benefits on 39% - which is no longer available due to changed laws. That also was self-managed - not professional.

If you do this thoroughly without bias - evaluate the risks and decide it is a good investment - go ahead. Otherwise just keep saving for your first home (not investment). Your own home is generally a good investment provided you pay your mortgage off as fast as you can. I personally tell friends not to buy until they have 50% deposit.

[modandm]

if you want my spreadsheet you can pm me. Its old and will require rework but its a good base to start.

[JBmurc]

before you invest in property do a spreadsheet model for it as an investment - factoring in different interest rates and different rates of capital growth.

When I last did it for my parents I proved buying a property in Glendowie the capital gain needed to be 2-3%p.a to break even and gain/lose about 12k for each % either side. That was factoring in everything including tax benefits on 39% - which is no longer available due to changed laws. That also was self-managed - not professional.

If you do this thoroughly without bias - evaluate the risks and decide it is a good investment - go ahead. Otherwise just keep saving for your first home (not investment). Your own home is generally a good investment provided you pay your mortgage off as fast as you can. I personally tell friends not to buy until they have 50% deposit.


wise words ,,i agree nothing worse that ticking upto the eyeballs to then see low to no Capital growth longer term(likely going forward 10yrs) and negative cash-flow when one could go out and just buy a few high yielder NZX shares 8-12% yield without all the hassle...

IMHO 30k would be invested in 3 different NZX blue chip high yielders or if it was me at the same stage as ENP 20k in high yields 5k in two higher risk high growth plays ASX

Of course I'd keep my eye on the property markets I was keen on and if a sharp deal come up you can aways sell your shares

[modandm]

i agree with some of what you are saying but ultimatly you need strong consisetent capital growth for property to pay off. Unlike shares where peoples greed fear plays a big role in pricing house prices generally dont move as much. Partly because if people cant get a good price they dont sell. Transaction costs are alot higher. Very different market.

[trackers]

Wise words AA