Property vs Shares: Why Both Matter (and When)

Some of my best investment decisions over time have been in property, and I've also learned some not-so-good decisions. I'm not pro-shares or pro-property. Both can have a place in somebody's portfolio. If you get a big plumbing bill, you can't sell a bathroom to be able to pay for that, right? But you can sell down the share portfolio.

Having too much in property, you might not get the income you need. You might be forced to sell a property at a time you don't want to. Yeah, we might have got to a really good outcome with one asset quite fast, but the way you retain your wealth over time is by diversifying. So we kind of guide clients on how they can use both asset classes to be able to grow their wealth. Here at The Property Nerds, we get to speak to some pretty cool professionals.

In this case, it's outside the world of property and more zoned in on the world of financial planning. So Simran joins us from the team at Abundant Advisory, where we learn more about how he helps people, how they remain holistic, and why they remain holistic of property, shares, and other approaches to building wealth, and just learn more about the importance of building a diversified portfolio, the considerations, and also some pretty interesting things in the tech world, where we see some vesting share packages and more. So there's a lot to unpack. Join us on this next episode of The Property Nerds podcast, where we speak to Simran from Abundant Advisory, going through the world of financial planning, and how together with property investing, you can build a rock-solid portfolio. Nerd alert!

Property Nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines, and trends. Simran, blast from the past, mate. Welcome back. Yeah, thanks for having me. Mate, we've known each other for many, many years, going back even before our days in business, working together at the Big Four.

Now you're leading the team here at Abundant Advisory. I wanted to just first give the audience, in terms of that financial planning space and your company, Abundant Advisory, give us a bit of background about what you do in that space, or some of the key differentiators in that space. Yeah, cool. Well, we're a full-service holistic financial planning business. We started Abundant six years ago, so I had about 12 and a half years at Commonwealth Bank as an advisor, and left there and started my own practice with a business partner.

A few of my clients followed me, which was wonderful, and really all of our clients have come from word of mouth over the years. The typical client that we usually work with are people generally in the band of sort of 40 to 60 years of age. They're generally high-income professionals, professional families, people that are really trying to make good decisions to try and get ahead and put themselves on a trajectory to be able to retire the way they want in the future. Kind of why we sort of gravitated to working with people that are accumulators rather than the typical financial planner deals with retirees or pre-retirees, retirees. I found that when I was working with those people back at the bank, I was meeting them one or two years out from when they were going to retire, and it was really too late for me to do much to help them.

So what I could see is if I could get those people 10 years, 15 years out at least, I could make a much bigger difference by getting the right behaviours in place. So we focus on high-income accumulators generally. That's the general clientele we have. I've probably carved out a bit of a niche in the last few years working with tech professionals. Interesting.

Yeah, it's been an interesting one. I've got a few clients that worked in tech and they've naturally referred friends and families. It's a bit different. Not every advisor deals with clients that have employee shares and restricted stock units. So it makes it a bit different, different challenges, but it's somewhere that I really enjoy and it's led to some good things over time.

Yeah, I think that niche as well from tech professionals there. The industries are growing at rapid amounts and rapid rates. And so what do you feel that particular group of clients really needs in terms of the differences here when it becomes tech professionals as an example? Yeah, so probably the one big difference with them is when you work in big tech, it's very common for a big part of your employment package to be in equity compensation. And so you normally get a bunch of shares when you start in the company that you're working for and they let them vest.

You hold them for a number of years and every year some more become available to you to be able to sell. And what's becoming quite common is that most of the bonuses for a lot of those clients are also paid in these shares. And that presents a whole number of opportunities and issues for them that they need to deal with. And if you've been in a big tech company the last few years, the share price has been going up. So it feels pretty good that instead of getting some cash that you get some shares that are going up in value, but it presents some challenges around tax and how you manage that.

The first reason I get a lot of people come and see me is they get this huge tax bill of $50,000 owing. They're like, oh no, where did this come from? So it presents some challenges to plan for that, but it provides some really good opportunities and it's somewhere that I feel like people don't really understand how to best utilize that opportunity and how to take some of the risk out of it and leverage it to really get ahead over time. Yeah, so I'm in mortgages. Most people that are buying property would need a loan.

I'm curious to know, do you have many clients that use leverage or debt to get into shares? Absolutely, yeah. Using debt is a fantastic way to be able to accelerate your growth over time. What I've found is people predominantly gravitate to leveraging into property, typically because if you've got say $100,000 to invest, you can leverage that $100,000 to $500,000 or $600,000 and get a much bigger asset. But we do do a lot of equity gearing into shares as well and it can be a great place to start before you get to, you might not be at the point where you can afford to take on a $600,000 or $700,000 home loan, but we could often use some of the equity in your home to be able to start borrowing and building an equity portfolio as well.

That would probably be the most common one, like debt recycling, putting money into a redraw, taking it back out or just creating a new split. What about having a cash deposit, going to a major bank, having a cash deposit and then them giving you a 70-75% loan on shares? I know that that exists. Do you see that often with your clients or more just the other side? Yeah, not very often at all.

So that's not very common and that sort of lending is not the norm. The majority of people we work with, we find that it is easier for them to be able to get the debt if they are going to be using a property as security. So that's typically the pathway we take. The debt recycling is probably more so what we do. Yeah, gotcha.

For a lot of our clients, property is like the cornerstone of their wealth creation strategy. What do you see as some disadvantages to that of being too property heavy and not considering like a diversified approach across shares? Yeah, well, it wouldn't be a discussion with a financial plan if we're not talking about diversification. Look, concentration in any one asset can be a way that you can accumulate wealth very quickly. It's also a way that you can lose wealth quite quickly as well.

And so one conversation I often have with clients is, yeah, we might have got to a really good outcome with one asset quite fast, but the way you retain your wealth over time is by diversifying. And I'm not pro shares or pro property. I think both can have a place in somebody's portfolio. I do think though that you can bring in some idiosyncratic risk when you put too much money into one particular area and making sure that you've got a balance of being able to meet some short-term costs if something goes wrong on a property, for example. Put it this way, if you get a big plumbing bill, you can't sell a bathroom to be able to pay for that, right?

But you can sell down the share portfolio if you need to. So liquidity is a big one. I found self-managed super funds is an area where everyone's getting quite excited about buying property. I don't think it's for everybody. And one particular issue with being very property heavy in that space is as you get a bit closer to retirement, you go into the phase of wanting to live on your money in retirement.

There's a certain amount you need to be able to get out each year if you want some of the tax benefits that come along with super. And having too much in property, you might not get the income you need to be able to do that. And you might be forced to sell a property at a time you don't want to. So we kind of guide clients on how they can use both asset classes to be able to grow their wealth in a way that is going to hopefully preserve their wealth and do it consistently over time. Loving the show and keen to invest?

Well, book your free discovery call and we'll actually walk you through how to build a high growth portfolio without all the guesswork. Just jump onto the link in the show notes or visit investikit. com. au to book your discovery call. And now let's get back into the show.

Continuing on the theme of debt, what we see obviously as a property company is that it really is so All debt is bad, and that's what they stick with forever, and they just never get out of that mentality. Whereas, you know, as long as you talk to the right people, obviously yourself, Jack as well, they can educate you on these things like good debt and how it's beneficial to actually potentially have more debt. 100%. Well, me and Sim, going back to the CBA days, this is something really opposite. Like, we had an opposite view of thinking in comparison to the person that would not be in the banking industry.

When we'd, you know, branch days, swipe the card on the keyboard, open up the profile, and you saw what someone's position was, if it was someone not working in the industry, they'd look at cash and be like, whoa, they've got a lot of cash. But you know what our response was? Whoa, they've got a lot of debt. Like, that was cool. That was what we considered rich.

That was what we considered wealthy. Someone's borrowing capacity and how much debt they had. So it's like interesting, the people that deal with money all the time look at good debt and basically go, wow, you're wealthy. But then when people who don't deal with money all the time look at cash, they go, wow, you're wealthy. So it's funny how like just being in the industry versus outside what we see.

But Sim, I want to talk property from a perspective of financial planning because this is where we love working together with your team. You're holistic. And holistic is, I know it sounds a bit cliche here that it's hard to combine the financial planning space or the property space because we're so focused on our relevant industries. What's made your team and your company so different where it's like most financial planners don't want to have property in the mix of conversation. But whilst you're not advising on it, you're still having the conversation and you're still discussing it.

And it's obviously important for you guys as a team that you understand that it plays a role in the customer's portfolio. Where has this come from? Why does it happen so much with your team but so less with other financial planners, which is a compliment to you guys? Yeah, I think probably it stems from the fact that I've been a property investor in the past, right? And some of my best investment decisions over time have been in property.

And I've also learned some not so good decisions over time as well. And I think very quickly we can run to an outcome that there's one particular way of doing things that's right and another way that isn't. And I spent a long time at Commonwealth Bank as an advisor and I saw many people that were very wealthy and many of them had accumulated that wealth in property. So it definitely opens your eyes to go, well, there is a pathway there to be able to build wealth. We don't think there's a right or wrong.

We think both property and shares can form a part of what you're doing and a way to build wealth. What we try to do with clients is we help educate them on the pros and cons of different asset classes. And sometimes property is a great pathway at a particular point in time in life. And there are times in life where it's probably not a great pathway for you to be taking. And that's where something more liquid might make sense.

But we help clients understand that both can play a part. And that probably makes us a little bit different to a lot of other advisors. A lot of advisors pretty much know we want to go down the pathway of shares. And that might typically come from the fact that they're dealing with older clients in a lot of cases. So if your clients are 60 plus taking on a whole lot of debt to be able to buy an investment property is probably not going to be the smartest pathway if income is going to be a priority when you're living on your money.

However, if you've got a 10, 15, 20 year time frame ahead of you where you can accumulate wealth, that leverage into a good property can allow you to make some pretty big gains. What we try to do is help them understand what they can afford from their cash flow position, make sure they're thinking about diversification, making sure that they've got adequate money and like a buffer or an emergency fund to be able to deal with a period of time where there's no tenant or something goes wrong on the property. And then thinking about if the worst case scenario happens, so someone gets really sick in the household or someone passes away, you've got things like life insurance and income protection sorted out. As long as we're taking as many steps to reduce risk as possible, you can take that leverage and you can grow your wealth with property. So it's about thinking about it a little bit differently.

And look, I've had a number of clients that have worked with your team over the past few years and they've made some very significant capital gains over that time. And so I definitely know that there's some value in them building a property portfolio. Some of those clients may be repeat customers, maybe people you talk to again. Some of them don't need that. Some of them just need that one property that's going to do that work in the background will build the other assets.

But we think that there's a place for both and we have the discussion and work out what's right for the client. Absolutely. The holistic nature is just really a big difference maker we've seen in terms of what you guys do. You touched on SMSF prior and I think that's a real popular vehicle in terms of things people are going down. But I'd love to be that devil's advocate and talk about who shouldn't.

I know each individual circumstance advice needs to be looked at in that view, but what are the common traits around the people where you say, you know what, this just doesn't look good for you? Yeah, probably the more common one I see is people with relatively low super balances trying to leverage into a property. That's the big red flag to me. And typically these people have very relatively low contributions going into their super fund and a relatively low balance to start with. And you wouldn't believe how many times someone with $100,000 in super as a family come to me saying, I want to open an SMSF and buy a unit down the road, right?

And so typically a couple of things that you need to be aware of when buying property in SMSF, you know, it comes along with a few extra costs. The interest rates can be a little bit higher. There are a few pitfalls that can happen. And if you don't have strong contributions going into the fund, if you have a period of low returns or you have a period of no tenants, you have something goes wrong, you might not be in a position to be able to cover those costs and you don't want to be a forced seller of any asset at the wrong time. So that's probably the biggest one.

The other one that I would probably say is people looking to buy right before retirement and typically with a lot of leverage. So that doesn't make a lot of sense. You need the time to be able to pay down the loan. You need the ability to be able to generate income in excess of what your expenses are going to be within the fund. So they're probably the two big red flags that I find.

And look, through the middle, some people, there might be other reasons why you may or may not go down the property pathway, but they're probably the big ones. Absolutely. I think like when it comes to leverage as well, whilst it has a great tool in SMSF through property investing, the downside of it is that I see too many people do it too close to retirement, as you pointed out. If you do the math, like right next to each other, it doesn't really kick in in your favor unless you're sitting at 15 years or more on that clock. Because when you're looking at leverage, that's a great upside.

But right at the start, you'll have transaction fees. You'll have negative cash flow at the highest point at the start of an acquisition because the negative gearing or the higher, lower yield in comparison to interest rates, obviously it gets better over time. Obviously the leverage helps over time. But I feel like that's a big part. Like you need time.

And when you're short on time, really advice needs to be sound and you need to have that advice with the key professionals. And then from there you can go, okay, where does this go? So really friendly, really good reminder on the importance of like the what nots to do or the when to consider it. But Simran, I think in terms of financial planning, I just want to say thank you for your time here in today's episode. It's really helped us get a better understanding of who you speak to, who you speak to often and being holistic in the nature.

I might actually transition over from financial planning to the other side that people don't often talk about, which is the insurance and protection side, right? When do you feel like people most consider this? Like when do you feel like they now look into the side and go, oh, I should look into the side of protection. When's that come up? Yeah, normally two big milestones I find.

One of them is having kids. So you realize that you can't just be selfish anymore and there's someone else that you've got to look after and that's probably the biggest one. And you just want to make sure that if you've got a home that if anything happens to you that your kids can still be in that home into the future and you can pay your mortgage or whatever it might be. The other big one is normally when they have a close family or friend go through a major health event. That's the other big one.

And look, I've got in my family, a lot of people have had heart issues, had different things that have happened over time. My family's been touched by cancer, but most people that you speak to would probably know someone similar as well.