The Power of Leverage: Property vs Shares
Updated: 2 hours ago
One of the most significant advantages of property investment is the ability to leverage and borrow 80% to 95% of the value of the property to allow you to purchase an asset of greater value.
This is why leverage can play a pivotal role in property investment when compared to share investment.
Let’s explore how leverage in property compares to investing in shares and why it might be the right choice for some investors, particularly if you have time on your side until retirement.
Leveraging Property for Greater Returns
For example, if you have $200,000 in cash, you can purchase a $1 million investment property by securing an investment loan with 80% loan-to-value ratio (LVR). This means you borrow $800,000, resulting in a total asset value of $1 million. Work out your borrowing capacity to see what this could look like for you.
Here’s how the numbers play out over time with an assumed 5% annual growth rate and a 3% rental yield:
At purchase: $1,000,000 – Rental return: $30,000
10 years: $1,628,895 – Rental return: $48,867
20 years: $2,653,298 – Rental return: $79,599
30 years: $4,321,942 – Rental return: $129,658
Over 30 years, you would earn approximately $2,092,824 in rental income.
The property itself would have appreciated by $3,321,942, giving you a total gain of $5,414,766.08.
After accounting for mortgage interest payments totaling $1,058,400.58, you still net $4,356,365.50, resulting in a gain of around $3.3 million.
Investing in Shares: A Different Approach
Now, let’s consider investing the same $200,000 in shares without any leverage, with the same 5% growth and 3% yield:
At purchase: $200,000 – Yield: $6,000
10 years: $325,779 – Yield: $9,773
20 years: $530,660 – Yield: $15,920
30 years: $864,388 – Yield: $25,932
Over 30 years, your total yield would be approximately $418,565, with the shares growing in value by $664,388.
This results in a total gain of $1,082,953.22.
The difference between property and shares over 30 years when starting with $200,000 in savings is over $4 million, illustrating how leverage can tip the scales in favor of property investment.
This example highlights why property can be particularly advantageous for younger investors with time on their side.
Instead of Property vs Shares - Leverage Property to Invest in Shares
Another strategy involves leveraging property to invest in shares.
This approach allows you to access more funds through accessing equity through a refinance, but uses up the equity in your property, limiting your ability to re-leverage for further property investments.
Alternatively, you can leverage shares against a margin loan, but these typically have lower loan-to-value ratios (60-70%), higher interest rates, and the risk of margin calls if share values drop.
Each method has its risks and benefits, and understanding these is crucial before deciding.
Balancing Risk and Personal Preference for Property vs Shares
Despite the leverage advantage in property, investing in shares is still appealing for many for diversification reasons.
Property investment often involves more risk due to associated debt though the tax treatment of a negatively geared property can offset some of that cost.
When choosing between property and shares it’s crucial to consider your:
Risk tolerance
Comfort with managing debt
Ability to withstand market fluctuations which happen more often in shares
Your timeline to retirement
Likelihood for your income to increase
Personal preference for property and shares
Diversification between property and shares inside and outside of superannuation
Unlike shares, property investment allows you to amplify your returns by borrowing money, which can significantly impact your overall financial gains.
This is especially useful in growing wealth during your early to middle working age years.
Need a hand?
If you would like to talk through how leverage could work for your situation, reach out to us or hear The Property Trio team talk through the detail in Ep 79: Property v Shares: How to strike the right balance in your investment portfolio.
Our support, service and advice is ongoing and continues throughout your investment journey from our property planning process to strategic mortgage broking along the way.
And if you haven't reviewed your investment strategy in a while, get in touch with us.
We'll look at your current position, your borrowing capacity and your timeline to retirement to help you decide what mix of property and shares is right for you.
Disclaimer - This article is general information only and does not take into account your personal financial situation or needs. It is not financial, taxation or legal advice. The figures and examples used are hypothetical and for illustration only. They are not a reliable indicator of future performance, and actual property and share market returns will vary. Leverage increases both potential gains and potential losses. Before borrowing to invest in property or shares, seek independent financial and legal advice specific to your circumstances.
