This blog post is based on the book “Real Estate Riches” by Dolf De Roos, where Dolf dives in to show us what to invest in: Property or Stocks using 4 simple yet powerful questions. These questions will help us get to our answer. Where to Invest 100k? In Real Estate or Stocks. For simplicity sake we will not include fees and costs.
Question 1 – How Much Worth of Assets can you Buy?
You can buy $100,000 worth of shares. You can buy a little more using margin but if the share prices go down then a margin call will be issued to bring the loan ratio back to acceptable risk levels. If you didn’t understand that last part don’t worry! Just remember with $100,000 cash you can buy $100,000 worth of shares.
With property you can use leverage, in other words borrowed funds. You can borrow as much as 80% of the property value. Using a $100,000 deposit we can borrow $400,000 and buy a property that is priced at $500,000 (Note – I mentioned property priced at $500,000 not value. We will get to this in the next question). Are you with me so far?
Now let’s say both the above investments goes up in value by 10% after 1 year. The share portfolio will give us a $10,000 in profit that is 10% of $100,000.
The property would have gone up in value by the same 10% and would give us a price increase of $50,000 which is 10% of the original price of $500,000.
Score: Property 1 – Shares 0.
Question 2 – How Much is the Asset worth Soon after Purchase?
With shares the answer is simple, they are worth exactly what you paid for baring no unforeseen circumstances.
With property the answer is – it depends. The property could have been worth only $300,000 and someone sold you a lemon or it could be worth $700,000. Hold on, how can the property be worth $700,000 when we just bought it for $500,000? Good question, there could be a number of reasons:
- You found a bargain by pure luck or research
- There is a divorce situation and the partners want to split as soon as possible
- The owner is relocating to another state or country and wants a quick sale
- There is a death in the family
- The know it all owner who gets no appraisal
- The owners bought the property for $10,000 some decades back and believe $700,000 is too much and sell the property for $500,000
- Inherited property and disharmony between family members
- The person selling the property is not the owner and has no vested interest in the property or knows nothing about property in general
- Un-renovated property or run down property
- A rookie real estate agent handling the transaction
Score: Property 2 – Shares 0.
Question 3 – Can you Increase the Value of the Asset?
What can you as an individual investor do to increase the value of the share price of the company’s stock you just invested in? Nothing much, just keep watching the news on TV and read the newspapers. Maybe you can buy some products from the company to increase their sales and hopefully their share price!
“How about writing a letter to the directors of the company wishing them well?” – Dolf De Roos.
With property you can add value by painting the property, doing cosmetic rehab, doing a large-scale renovation like putting in a new kitchen or bathroom. What about putting in a garage or a swimming pool or new air conditioner or heater? Yes please… What do you think all or any of these does to the property value? That’s right, the property value goes up.
Score: Property 3 – Shares 0.
Question 4 – How to Enjoy the Profit from the Increased Value?
Let’s assume both the assets have doubled in value over a period of time. This maybe 3 years or 5 years.
To enjoy the profit with shares the most likely answer is to sell, write a cheque to the tax man and take a hit to your pocket, a big one at that. With property you can pull the equity out or refinance. Does this have a tax impact? No. There was no sale hence no tax impact. What if you use the profit as a down payment for another property? Great idea, so our $700,000 property (let’s say you found a bargain) is now worth $1.4 million, that’s right we are millionaires now. We can pull 80% out so that would be $1.12 million. Don’t forget the original mortgage is still outstanding and let’s say it was interest only. So that’s $400,000 that needs to be paid off. This leaves us with $720,000 that could be invested elsewhere tax-free. Using the same 80% borrowing, you can buy a property worth $3.6 million. Wow! By the way the interest on this $720,000 and the new mortgage is all tax-deductible.
Score: Can we say it’s 4 – 0 to property?
Oh wait, what if you bought a car with the equity before buying the 2nd property and use it to inspect your property? Now that does sweeten the deal even further. All the expenses related to the car are now tax-deductible. So we made money via the property, did not sell it but refinanced it and paid no tax. We also bought a car and get a tax deduction for all the running costs related to the car thus allowing us to lower our taxable income. We haven’t even started to talk about depreciation or tax benefits of owning a rental property yet.
Score: That’s really a score of 5 – 0 to property. The last one was an own goal, oh dear!
At the end of the day it is your decision where you want to invest. If you have the knowledge and you are comfortable with investing in shares, then so be it. This article is merely trying to show the added advantage and benefits of investing in real estate. Investing in something is better than investing in nothing.
Good luck with your investing. If you like it, share it! Comments welcome.