Koda Capital financial advisor Sebastian Ferrando owns three real estate investments in Australia, but wishes he'd put the money into US shares instead.
As reported in the Australian Financial Review (AFR), the finance professional thinks the cost of buying, holding and selling residential real estate makes buying investment property a wealth trap.
Ferrando laments the growing disparity between the net returns on Australian investment property vs. US shares.
For example, in 2023, the S&P 500 Index (SP: .INX) rose by 24.2%.
By comparison, the S&P/ASX 200 Index (ASX: XJO) and Australian property vastly underperformed the US stock benchmark, delivering just 8.1% in capital growth.
Why is real estate investment a wealth trap?
Ferrando doesn't mince words, commenting:
The truth is you can leverage the crap out of residential real estate and that's a massive advantage.
But to buy, hold, maintain, and sell real estate involves large costs.
If you take the costs out of real estate transactions, the returns [for apartments] are sub 4 per cent a year as costs like maintenance, agent fees, rates, insurance, repairs, stamp duty, and strata are hidden, high, and constant.
Ferrando estimates that typical property investors in Sydney, Melbourne, or Brisbane buying a $1 million investment property will contribute a 35% deposit and get an investment property loan covering 65%.
They rent the property out and benefit from negative gearing at tax time.
Over time, they profit from the leverage as they make investment earnings from rent and capital growth on a $1 million asset after spending only $350,000 of their own money.
Ferrando reckons leverage is one of the biggest appeals of property investment.
And that all sounds well and good, but it's the costs of real estate investment that bother him.
The typical costs of Sydney real estate investment
Just to give you an example, here's a typical scenario for a Sydney investor buying a two bedroom apartment at today's median price of $837,253.
- $32,413 in stamp duty on the purchase
- $500 for a building and pest report
- $2,000 on the purchase conveyance
- $10,000 to replace a few major things over the long term, such as carpet, blinds, hot water tank
- $7,000 to $10,000 per year on strata levies, council and water rates, insurance, and property management fees
- $15,000 for re-painting, styling and marketing when it's time to sell
- $20,000 selling agent fee (2% on a sale price of $1 million)
- Another $2,000 on the sale conveyance
While this is a lot of money, Sydney has an outstanding history of long-term capital growth, so you may well still come out on top if you buy and hold through at least two major market cycle upswings.
But as you can imagine, it's not just the ongoing costs that property investors need to consider. There's a lot of work involved in researching, finding, buying, holding, and selling a real estate investment.
The alternative is buying ASX or international shares online from the comfort of your own home for a brokerage fee as low as $5.
And this is Ferrando's main point.
What should you do instead of property investment?
Ferrando points out that investors can use leverage on shares investing too, using a margin facility.
On shares vs. property, he sums it up:
I say, buy real estate if you want to enjoy it every day, but don't buy it with your investment dollars.
Ferrando was primarily comparing the performance of Australian real estate investment vs. US shares.
We recently looked at how ASX shares performed compared to Australian real estate over 10 years.
And if you're curious about which ASX shares and Australian property markets are delivering the best passive income for investors today, via the highest dividend and rental yields, click here.
