I’m sorry, you don’t need (or even want) property – Part 1/2

A recent opinion piece from Vish was the first salvo in this debate we agreed to have, and what’s interesting is how he framed it – his opinion. Because that’s what it is, it’s his opinion - see here:

Property

I’m sorry, but you need property to be rich

View

This rebuttal is going to be a little different. I’m not going to share my views, I’ve already done that, and nothing has changed, see here:

Property

Residential investment property is a sub-par way to grow your wealth – Part 1/2

View

But importantly, this isn’t an opinion piece – I’m going to rely on facts and data and reason and logic to directly challenge Vish’s points. This isn't about "winning", the numbers have already decided that, but what I do want to do is to make clear the flawed mindset that so often sends Australian investors into residential property with their marginal investment dollars.

To his credit, Vish has stated them quite eloquently is his top-tier piece. But the mindset he uses, that many people use, is still flawed, and it’s almost always about the dismissal of the costs or a simplified assumption around the costs. I'll touch on 5 things Vish raised (and 3 of them centre around costs), and I’ll do it in point form so it’s easy to decipher. I'll cover the first 3 points here in part 1, and I’ll offer 2 more in a follow up shortly.

Point 1 - the vast majority of Australians who made real money, particularly by their 30s and 40s, either owned a successful business or built a substantial real estate portfolio.

The real estate piece of that is entirely untrue. I owned three investment properties by the time I was 29 and they have not been the driver to my wealth. In hindsight, I regret them all. Anyone who is genuinely wealthy as early as their 30s and 40s did it almost exclusively through their own business. And if you did it through property, it’s because you got involved in property development, which is not what Vish is advocating for here, he’s advocating the much lower risk option of buy-and-hold-and-manage.

His chart then goes on to show the sectors of wealth in the AFR 2024 Rich List. Property is chunky at 19% but it is absolutely not the buy-and-hold-and-manage crowd, and even if I’m wrong there (which I am not), it is not the vast majority, clearly…..it’s 19%. Rich people buy property, but that doesn’t mean that property makes people rich. It makes some people rich but they have taken a lot of risk, and they’re certainly not buying-and-holding-and-managing.

Point 2 - you have to spend money to make money.

This is entirely true, I can’t argue with him here. But Vish then goes on to demonstrate how Harry Triguboff spent money in the capital-intensive world of real estate development (editor’s note: again, not the buy-and-hold-and-manage crowd, super risky development), and how Elon Musk tipped loads of money into Tesla. He even mentions how much educating your kids costs. All true by the way, but here’s the bit he missed – he has defined that incorrectly. All of those items are investments whereas the items that Vish lays out - stamp duty, agent fees, council rates, taxes, interest on debt, and on-going maintenance as well as the fees paid on the sale – these are all expenses. This is basic and simple accounting definitions, and they are absolutely not the same.

Investments pay off in the future, in multiples if you do it right. Expenditure and taxes are gone, never to be seen again. They drag on your return, and they annoy you like hell.

Point 3 - his dad’s first property has a net yield-on-cost exceeding 20%.

This is a made-up definition of yield, often called the acquisition yield, to help people who have sub-par investments sleep at night. There’s essentially no such thing in the real world of accounting. I won’t walk through it here because it’s too long but I figured out that if I include all of Vish’s dad’s costs over the life of this property, his annualized annual return is 5.1%. The net annual yield is 2.5% or so, giving a total return of 7.6%.

Over essentially the same time, the total return of the ASX 200 was 8.8%, the S&P 500 was 7.7%, and the Nasdaq 100 was 7.8%.

Before you say, “the returns are the same” – remember that real estate is illiquid and that illiquidity risk should be compensated. Obviously, you’ve not been compensated (and almost never are BTW). Furthermore, the world has changed and it is much more global now. For the last 15 years, as opposed to the almost 30 years noted above, the ASX 200 is up 8%, the S&P 500 is up 14%, and the Nasdaq 100 is up 15%.

So I ask you – do you think the world for the next 20 years will look more like the last 15 years, or more like the period between 1997 and 2010? I reckon that answer is pretty easy.

And finally, the yield is 2.5%, not exceeding 20%, because the rent is below market, the property is worth less than $1 million (exact details unknown on both items but it doesn’t meaningfully change the number or make the point less valid), and because you don’t get to choose the denominator for the yield calculation. It is net rent divided by value. That’s about $25,000 divided by about $1 million.

There is no legitimate yield here that is anywhere near 20% - of that, I am certain.

I'll follow up with my last 2 points next week, and let me know how you feel about these 3 points, or another point that I didn't cover.

Good luck out there.