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Sydney’s Mortgage Loan Portfolio Diversification: Spreading Profit Risks – Director, Advisory Services and Head of Digital Assets. Certified Bitcoin Expert with over 17 years of experience in the ETF market. Passionate about the future of money.
, and although house prices have fallen from recent highs, they remain above pre-Covid levels. With rental vacancies below 2% in most major cities
Sydney’s Mortgage Loan Portfolio Diversification: Spreading Profit Risks
, and following rental price growth of around 6% – as shown in the chart below – the situation in the Australian property market is difficult, for home buyers and investors.
Year In Review
Australia has a notorious love affair with property and many Australians firmly believe that its value will never decrease. However, not everyone has the minimum amount required to put down a deposit on the property and secure the loan.
This has made many people wonder if it makes more sense to invest in the stock market or dive into property? Despite modern movements, this is an old debate.
Let’s examine some of the similarities and differences between the asset classes, as well as some of the pros and cons to help with your research.
A 2015 research paper from the Federal Reserve of San Francisco titled Universal Rate of Return looked at nearly 150 years of data to determine long-term returns across different asset classes and geographies. Australian housing returns 6.37% p.a. in real terms over the full data sample, while stocks returned 7.81% p.a. Just looking at the data since 1950, real estate has fared better, returning 8.29% p.a. against 7.57% p.a. in shares. However, considering only the most recent series since 1980, the pendulum has swung the other way, with shares returning 8.78% p.a. against 7.16% p.a. of housing
Mpa 22.06 By Key Media
Comparison has its limits of course. The return can vary according to the selected period, and you can break the property in different regions or stocks in different sectors. It is important to remember that there have been periods of ups and downs in both asset classes. Returns vary even more when gear and costs are factored into the equation. Also, it is important to remember that past performance is not indicative of future performance.
However, no matter how you slice the data, it’s clear that both shares and property have produced attractive long-term returns.
Over the 12 months to 31 May 2023, the A200 Australia 200 ETF, which invests in 200 of the largest companies by market capitalization listed on the ASX, pays a distribution yield of 6.5% on franc credits. There are also a number of products for sale that aim to increase income from shares.
The property can also generate income, provided it is occupied. In Sydney, houses offer an average gross rental yield of 2.8% p.a., while units offer 4.1% p.a. It’s a similar story in Melbourne, with houses having an average gross rental yield of 3% p.a. contribution, and units that 4.5% p.a.
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With ownership, you should keep in mind that there will be annual maintenance costs associated with repairs, maintenance and upgrades. If you use a property manager, there will be costs associated with this.
Other costs associated with starting your search and initial purchase include search fees, pest and property reports, legal fees, and shipping and stamp fees.
Property maintenance costs can be unpredictable and can become very high if something unexpected happens.
With stocks, depending on how you choose to invest, there may be transaction costs when you buy and sell, such as brokerage. In addition, if you use an advisor or broker, there may be advisory and portfolio management fees or commissions, usually calculated as a percentage of the value of your portfolio. If you use actively managed funds or exchange-traded funds (ETFs) to gain equity exposure, there will be management fees built into the value of those funds, although ETFs generally provide a cost-effective way to earned. exposure to stocks.
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For example, the A200 Australia 200 ETF provides exposure to a diversified share portfolio at just 0.04% p.a.
It is not easy to come up with the required deposit to secure the loan. Typically, if you don’t put down at least 20% of the purchase price, there will be additional mortgage insurance costs. It can take years to save up these costs – and of course take the commitment of a mortgage payment that must be made every month.
Conversely, if you are ready to invest in stocks, you can start with $500, or even less (depending on your broker’s trading limits). All you need to do is open an account with the trading platform.
One of the easiest and cheapest ways to get into stocks is through an ETF. ETFs are funds that can be bought and sold on an exchange such as the ASX. Instead of buying shares in a single company, ETFs allow you to gain exposure to a basket of stocks or other assets with a single trade.
Mpa 22.05 By Key Media
With stocks, you can invest in companies run by some of the most influential people of our generation – Warren Buffett, Jeff Bezos and Mark Zuckerberg come to mind when you think of the founders of companies that rule the world and continue to grow and improve businesses . . As a shareholder, you can own a part of these companies without being involved in their day-to-day operations.
In direct property investment, there is a lot of practical involvement. You can be a landlord yourself – or you can hire a property manager, which reduces your workload but costs money.
1. Leverage – This can be a big winner for property investing. What matters most to an investor is your return on investment. When you buy a property, you usually borrow a large part of the cost. Assuming you put down 20% of the property’s value, you are offered 80%. Therefore, your return (or loss) increases by a ratio of 4:1
Sure, you can build an equity portfolio to some degree, but far fewer equity investors than property investors grow their investments. This may be due to the presence of landlines, which you may not own. Home equity loans (also known as margin loans) typically charge higher interest rates than home equity loans.
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2. Add Value – You’ve no doubt heard the saying “buy the worst house on the best street” – the reason being that with a little TLC and hard work, through renovations, improvements and additions, you can add value. on your property.
1. Diversification – while property investors typically invest in a very small number of assets, mutual fund investors can spread their money across a range of investments. ETFs make this easy. ETFs allow you to easily diversify your portfolio without buying multiple companies across multiple sectors and asset classes. You can invest in many companies across a broad market or gain experience in specific sectors or ‘themes’. By using ETFs, you can gain exposure to other asset classes, such as fixed income, commodities and currencies.
The DHHF Diversified All Growth ETF is a comprehensive investment solution that provides low-cost exposure to a diversified portfolio covering Australia, global developed and emerging markets, in a single ASX trade.
The BGBL Global Shares ETF offers a convenient and cost-effective way to access an index comprising approximately 1,500 companies in the world’s developed markets (ex-Australia) with a management fee of just 0.08%.
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2. Liquidity – ETFs are generally liquid, meaning they can be easily bought or sold when needed. When you sell your units, the proceeds are available two business days later. This is an important benefit if something unexpected happens and you need to use your funds. Compare this to the time it takes to decide to sell an investment property, until you receive a profit on the sale. And, if you don’t need all your money, you can’t just sell the bedroom!
Investing does not depend only on the asset category that provides the best returns. You should consider the risks associated with the asset as well as your personal situation such as your goals, financial situation, risk appetite and age.
Diversification into different asset classes is key. A healthy investment portfolio should include exposure to a range of different assets and geographies, which may include equities and property. Fortunately, ETFs provide an efficient way for investors to build a diversified stock portfolio while reducing transaction and management costs.
There are risks associated with investing in the Funds, including market risk and index tracking risk, as well as international investment risk and currency risk (for DHHF and BGBL). The value of the investment can go up and down. Investment in the Fund should only be made after considering your specific circumstances, including your risk tolerance. For more information about the risks and other characteristics of each fund, please see the Product Disclosure Statement and Target Market Disclosure, both available on this website.
Mortgage Professional Australia Magazine Issue 12.06 By Key Media
References: 1. RBA Currency Target 2. New Perspectives on the Rental Market 3. Please note that it is important to consider your.
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