In this episode of PodMD, Managing Director of Oxlade Financial, Mark O’Flynn will be discussing the topic of Property vs Shares. We discuss property versus shares and which one is more beneficial, the returns and role that shares and property play in investment portfolios, liquidity, things to look out for when investing in property, what shares to be looking for and more!
- Transcript
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*As always, all in this PodMD podcast is intended for health professionals and the comments are of a general nature. Information given is not intended as specific medical advice pertaining to any given patient. If you have a clinical issue with one of your patients please seek appropriate advice from a colleague with expertise in the area.
Oxlade Financial is an Independent Financial Planning practice that specialises in helping medical clients. They help Doctors use their income to build real wealth and reach the lifestyle they aspire to.
Oxlade Financial provides tailored, proactive and unbiased advice across all aspects of their clients’ wealth. They are one of the few independent financial planning practices in Australia, and take a goals-based approach, tailoring advice to achieve your specific objectives.
Today I’d like to welcome to the PodMd studio, from Oxlade Financial, Managing Director Mark O’Flynn, talking with Peter Chaplin, finance from Rooms with Style (RWS).
Today, we’ll be discussing the topic of investing in property vs shares.
We do hope you enjoy this podcast but please remember that the information discussed here is of a general nature and is not intended to serve as advice. The views and opinions expressed in this podcast are those of Oxlade Financial, not PodMD. Oxlade Financial reminds you that any information or opinion in this podcast is general in nature, and does not consider your personal objectives, situation or needs. Nothing in this podcast is a recommendation, and you should seek personal advice from a registered financial adviser before making any decisions.
Mark, thanks for talking with us on Pod MD today.
Mark: Thank you for having me.
Question 1
We here today to talk about investing in property versus shares, a juicy topic and one that I imagine a lot of doctors are going to be quite interested in. So Mark, overall property versus shares, which one?Mark: Now we will get into which one, but before we do that, I mean the first thing I want to say is that both have been and continue to be really good investments. The second thing I wanted to clarify is when we refer to property in this context, we’re mainly talking about direct residential property here and in Australia it’s near and dear to everyone’s hearts. But there are I wanna clarify lots of different types of property. There’s commercial property. Obviously you can buy your practiced property as well, and there are a lot of ways to get exposure to properly not just directly, so you can buy investments on the share market as well, like listed property trusts that give you exposure to residential property, commercial property overseas and in Australia. And doctors more so than anyone else in the country, really have a, in my view, a strong desire to invest in property. Often we buy our first home and we’re very familiar with the bricks and mortar and there are very favourable bank lending policies that encourage them and make it easy to buy more property, but in a lot of cases we find moderation is important. And also diversification as well. So it’s critical that you know you look around at what other options you got and you don’t have all your eggs in one basket, whether it is in one area or one asset class. Shares and property obviously have pros and cons which we’ll go into and holding investments in property and shares is really likely to give you really great investment outcomes over the long term, but you don’t want to skew things in one direction or another too much.
Question 2
Yeah, it certainly sounds like there’s a lot to it, that’s for sure. So if you can drill down perhaps a little for us more into the returns and the role that shares and property play in one’s investment portfolio, perhaps we start with the talking property first.Mark: Sure and as we all know recently, particularly since the COVID years, Australian residential property has performed very strongly. Indeed, call logic so they produce a lot of data on residential property movements. Median property prices have grown about 70% over the last 10 years, up until mid 2023. So you know, I think one thing’s important we don’t extrapolate of the last one or two years returns indefinitely, but certainly returns have been strong. Also it’s particularly important to note the returns, you know whether it shares a property, but in this case property don’t go up evenly by that amount every year. So you know, if you’re expecting 10% a year, you know sometimes you can go 10, you know 10 years and be flat and then you get all the return in one or two year space. Property typically starts off with losing money at the beginning on an income basis, cause most people negative gear into property and tha means the income that you get from rent is not enough to cover all the expenses, including the interest repayments on loans. However, one really big benefit is the tax benefits. So obviously if the income doesn’t cover things like expenses and interest. And then you can offset that loss against your other income and looking at in most cases, doctors will be on highest marginal tax rates, so you know the government effectively halves that loss, but you do really need the capital growth eventually they’ll said that. One of the downsides of investing in property is it’s very expensive to get in into property with stamp duty and then out mostly being real estate commission. Obviously property is very expensive, so it’s a very large single investment that’s a liquid and takes a lot of money to purchase. So it often gets coupled with debt as well and as property is quite a liquid so you don’t get a price of your property flashing in red 6 hours a day, five days a week. So often the price volatility is a lot lower and that can provide a lot of comfort for investors. Another thing to consider is obviously the income from property. Once you net out all the expenses is quite low, so you’re really chasing capital growth in Australia.
Question 3
You mentioned Mark just about a term there liquidity. Can you just expand and what that actually means?Mark: Yeah, liquidity really means your ability to turn the value of your investment into cash quickly at market value. And so you know with property, obviously it takes time to actually sell the property. So maybe you gotta do a few things to get it ready for sale. You know, you gotta find an agent, appoint them, get photos, etcetera, etcetera, then do a marketing campaign and then have a settlement period probably 30 to 90 days. So that can be quite time-consuming. And also if you wanna get full value for the property, you don’t want to rush the sale. And so that’s what we mean by illiquid it it can be quite a a long period of time before you can convert. The actual asset value to cash, conversely, with shares, for example, you can sell shares on the share market 6 hours a day, five days a week, and you’ll get the money back three days later.
Yeah, for sure. For sure. Yeah, that makes sense. So obviously one of the pitfalls then or one of the shortcomings of property is just that liquidity issue that you mentioned.
That’s right.Question 4
Yeah. And are there others that have pitfalls with that that well, you know, areas that that people should be aware of when they’re investing in property.Mark: Other areas, I think it’s important to just be realistic about, you know the returns like I said, you shouldn’t extrapolate recent returns and assume you’ll get that year on year. Any sort of investments is a long term gain and and you’ve got to be patient about that and we need to be realistic about the expenses that go into holding property or the repairs and things like that sometimes land tax obviously particularly relevant in places like Victoria as well. So you know often people overlook the you know the expenses that go into just holding property.
Question 5
Sure, sure. So and by comparison to property, shares; what should we be looking for there?Mark: Yeah, conversely with share markets, what you need to know is that it is a finite investment in, in a sense that you can use very small amounts of money to buy a portfolio of shares. Returns have probably been slightly better over the very long term. And whether you’re a Share or property person. You know, people tend to choose time periods to suit their arguments, so over different time periods properties done better. Different time period shares have done better and you know what? You know, if you talk to someone skewed towards property or shares, they’ll they’ll go back in history and you know, choose a period to suit their argument. I think if you look at it over the really long Term Shares of outperform, for example, the share market in the US has done about 10% Per annum for 50 years until 2020, and that turns out to be an 11,600% return. So unbelievable and there’s no that is after all cost. So with the share market, you know, some of the priorities are it’s extremely low cost to get in and out. So now with technology. And some of these online broking firms. You can literally transaction fees are literally going to 0. There’s no stamp duty and highly liquid as I raised before. The downside of liquidity is you get a price 6 hours a day, five days a week. As I said. And that means when you have liquidity. You get the price volatility so you get something in the news or something else that happens. So in the short term, share markets tend to move around a lot more just because it’s just so easy to get in and out and that can be a benefit. So you can buy things that aren’t the value, but it can be a negative cause some people can get quite spooked. You know, if you get it’s COVID type thing come from left field. The share markets dropped very quickly. That can be disconcerting for a lot of people and lead to poor decision making. As well and also I think we’ve investing in shares, it can be very simple, less time consuming and it can be really tax effective. We have the frank dividend system in Australian, you know people can have strategies like debt recycling and even negative gearing into shares as well.
Question 6
OK. You touched on the franking of dividends and Bill Shorten pretty much lost the election back in 2019 on that point or a lot of people think he did anyway.Yeah.Tell us a Little bit more about that in terms of investing in shares, what does the franking dividend mean and how does it affect people?
Mark: Yeah, I’m trying to work out a simple way to explain it, but basically companies pay tax at 30% on our you know, on the investors behalf. And when you get a dividend, you effectively get a credit for that 30% tax already paid. So you don’t have to pay Tax twice on that amount of money. Yeah, that’s effectively the frank dividend system.
So People are actually getting that 30% Back if you will?
Yeah, that goes into the tax return, but then they get a rebate for that tax already paid and it’s really powerful as well in a low tax environment, for example, the superannuation environment and particularly when people are in pension phase and there is 0 Tax. If a company has already paid tax at 30% and you’re in a 0 tax environment and get that dividend, you actually get a cash refund of those franking credits. So a lot of people in pension fees and their super funds, they actually get a check back from the government once a year for those franking credits as well. Which goes into enhancing returns.Question 7
Yeah you mentioned about being able to negative gear shares as well and obviously people associate that with property. So how does sort of debt come into play in property versus shares?Mark: Yeah So sure. What you need to know about debt Is it enhances the return upwards or downwards. And one major benefit of property investing in and particularly for doctors is that whilst the percentage returns. You know, if you’re reasonable, look better in the share market. One benefit of the property market is you can is the level of gearing that enhances the returns. So for example. Well, a lot of doctors can borrow 90 to 100% of the property value up front, and they have to put very little down as a deposit. And so if you, if that’s the case, as the property value goes up, your percentage return on the very little you put down. Really enhances the return upwards. It also has an effect downwards. Of course if the property. Value declines, which is not out of the case as well in many places, including in Australia, people tend to forget that it can go down as well and it has. We’ve had experiences overseas as well. The gearing enhances the loss as well. So like I said, if you’re negative Gearing into property, you are making an income loss. If you don’t get the capital gross to offset that well, the investment wasn’t worthwhile. The other thing you need to know about debt is it and like as I said it, it amplifies the returns. Having a lot of debt obviously minimises our flexibility in life, and there’s a great book, the psychology of money, written by Morgan Housel, who also has a blog About this and and really when you have little to no debt, you have the most flexibility in life to be able to deal with the normal ups and downs of life and the loss volatility, say loss volatility could be something external like COVID or war that disrupts things the financial crisis. It could be something in our own lives, like our relationship breakdown, changes to our work environments, someone getting sick in our family, whether it’s ourselves or kids or partners. And so having a lot of debt limits our ability and flexibility to Deal with those issues. So it’s one key thing when you’re looking into how much is a reasonable amount of debt. And this often gets coupled with going into property is actually dealing with those situations. And what’s the chances of us encountering one of those situations in our life? Well 100%. So as we go through our careers, you know, really we’re hoping that our debt levels start to reduce over time and to be able to deal with those other situations andnd give ourselves flexibility.
Question 8
So on that point. Are there times where property versus shares are more suited at particular stages in life.Mark: Yeah, absolutely. I think so. And specifically for doctors, they tend to be high income earners on the highest marginal tax rate. And if we think about the residential property return characteristics in Australia, so you know quite low income like after all the expenses like insurance And land tax and all those different things. There’s the income yields probably 1 to 2% realistically, so all of the return or the majority of the return has to come from capital growth. If we also think about the negative gearing rules as well. And you know this, you touched on sort of the chances and the risk of rules changing here But at the moment we have negative gearing. So that is the most beneficial for people on the highest marginal tax rate i.e. doctors And so residential property, given those characteristics tends to suit people that are accumulating money. So for example, doctors sort of mid-career where they don’t need any income from the from the investment on higher marginal tax rates. And they’ve got a long period of time to wait for capital growth, so can therefore residential property would sort of suit people working. Conversely, as you get towards retirement. Maybe you’re reducing your wage and dropping days etcetera in your practice you start to, you know, switch gears and actually start thinking about well, how am I going to get income from my investments to live and that’s where probably residential property becomes less suitable in retirement because again, if you go back and think about the characteristics reasonably low income, it’s a, you know, a larger liquid asset. So you can’t sell a door where you can’t sell partial growth. You’re limited to spending the net rent, which is probably 1 to 2%, assuming it’s not geared, and if it is geared, it’s a negative income and that’s why sort of as you progress towards retirement or some form of, it’s important to that diversification and perhaps more liquid investments like a portfolio of shares and remembering this portfolio can have property in it, just not direct property can be listed properly on the share market. So when we sort of talk about shares here, we are really talking about a more diversified investment portfolio.
Question 9
So in terms of ease of getting started, property versus shares?Mark: Yeah, ease of getting started. Definitely the share market probably beats that aspect of the property market in the in the sense that you could probably open an online share broking account in 5 minutes from your desk on your mobile phone. Like I said, the transaction costs. And there’s zero now with all these technology platforms and you can set up a, you know, regular direct debit for as much as you spend on coffee per Week you can get into the share market. And so in summary, it’s low cost. It’s not very time consuming at all and also you can start with borrowed amounts of money. Conversely, the property market, obviously with direct property for example, you know you tend, you know the it’s bigger chunks Of money now, given how far property prices have gone up, you would need to organise in a lot of cases financing with the banks and then it can be expensive to get in and out. Like I said, with mainly stamp duty.
Question 10
So which would your pick be? Property or shares.Mark: The answer to that question would be both, so I think it’s important to have a balance as well. So we don’t want to be skewed too heavily in property and conversely, we don’t want to be skewed too heavily in the share market. You know different times Like I said, property is done better than the share market. And vice versa. So it’s that diversification tends to smooth out the risk. The one other thing I would tend to say is any sort of investment and money accumulations meant to make your life better, so we shouldn’t be up at night worrying about it too much. And that means we should be doing things that we’re really comfortable with and we get a good night’s sleep. As well. In terms of diversifying, you know, making sure we have a mixture of investments, property or shares that actually suit our knowledge and making sure we’re willing to look outside the box, but also suit our stage of life.
Concluding question
Thank you for your time here today in the PodMD studio. To sum up for us, could you please identify the three key take home messages from today’s podcast on investing in property vs shares?Mark: All right. So that, yeah. Look, the three key messages are are firstly diversification. So I’ve already touched on that. But you know we don’t want to be too skewed in one direction or another and having a mix of investments can really smooth out returns. And that mix needs to be skewed towards where we are in life. The second one thing I wanna say is just be realistic about returns either way in the share market or the property market, we shouldn’t extrapolate recent returns and assume they’ll last forever. And it’s important to also to get the measurements right as well. So we we need to be realistic. About what we bought for and what have been the holding costs and any sort of money spent on various things and expenses when we do a proper compare. And and it it also pays thirdly to look around as well. So we want to do things that are we’re comfortable with, but we don’t necessarily want to just do continue to do the same thing that we’re familiar with. There are many, many different investment opportunities. And like I said, just because something’s done well recently, we shouldn’t assume it will continue as well. So it does pay to do your research. Both types of investment shares and property have performed really strongly in the past and should continue to do so, but it’s important to have that balance.
Thanks again for your time and the insight’s you’ve provided.
Mark: Thanks.
