*Please consult a professional if you’re confused or not sure about anything when filling out a W-8BEN-E form
Do you own a US domiciled ETF or share? I own 2. VTS and VEU.
If an investment derives its income from the US, it has to pay tax to Uncle Sam. But What happens when I get the dividend from my US ETF or share? The company has already paid tax to the US and now I’m expected to pay full tax on the dividend?
Oh Hell Naw!
This is the purpose of the W-8BEN-E form. It stops double taxation so you don’t pay tax twice in two countries. You need to fill this form out for every ETF (or investment) that is domiciled in the US. If you don’t fill it out, you will get tax twice!
Here is a video of me recently filling out my W-8BEN-E form. I had to fill it out again because I switched my broker account from Commsec to Selfwealth and created a new HIN.
I’m sometimes asked why I own these two instead of just buying VGS (or VDHG but that will be covered in an upcoming post).
In a nutshell, I go with VTS+VEU because it offers:
– Lower management fees
– Greater diversification
– Exposure to emerging markets
– Unhedged against the Australia dollar (I think the AUD is high at the moment)
Don’t be put off investments because you need to fill out a very simple form every 3 years! I understand that it’s a little bit of extra work but seriously, we are trying to reach financial independence here! What’s a couple hour extra filling out a form and doing a little more come tax time for a superior investment.
The FIRE community is constantly recommending putting in a little bit of extra work and taking things to the extreme where others won’t, to enjoy a life other can’t!
Preface: When I talk about shares in this article, I really mean ETFs. I don’t buy individual shares or day trade.
Collingwood vs Carlton
Sydney vs Melbourne
Magic vs Bird
Just some of the biggest rivalries the world’s ever seen.
But in the investing world, there is not a more hotly debated topic among avid investors. Property vs shares is a topic that everyone seems to have an opinion on, no matter how ill-informed they are.
Owning 3 investment properties and nearly $90K worth of ETFs (shares), I feel I have tasted the best of both worlds (and the worst) and can give you perspective to what I’ve learned over the last 5+ years of investing in these two asset classes. Both are great when used right, with pros and cons for various financial situations/types of investors.
But which one is right for you?…
Contestant 1: Property
The hometown favorite. This guy has been around longer than the stock market has existed!
You can touch and feel him, and your mum most likely loves the idea of you being with him. He has a strong track record in Australia and there is a firm belief that his value never goes down.
Now for realz:
Property is a great investment class but you need to be the right type of investor and have the financial stability for it to be used correctly. It’s an active investment. You’re going to have to do some sort of work to keep this investment running. You can minimize the work needed by hiring people but there are still headaches trust me.
However! Property has BY FAR the most potential to accelerate your wealth compared to shares for three reasons.
Ability to physically add value to your asset
Skill and experience actually mean something (more on this below)
Cheap leverage is often misunderstood. Too often an article is published with statistics on how shares have outperformed property by comparing the % of capital growth and rental/dividend returns.
This is a dumb way to compare the two because I don’t know any property investors that buy real estate outright. It’s almost always bought with a loan. Which means the asset is leverage.
But what does this have to do with returns you might ask?
Here’s an example (for simplicity we are ignoring buying and selling costs and tax):
Property 1 is brought in 2016 for $500K with a 20% deposit of $100K. That same investor also buys $100K of shares in 2016 too.
Fast forward 1 year and the house is now worth $600K and the shares worth $150K
Let’s make it simple and say that the shares have no dividends and that the house had $0 net gain/loss factoring in everything.
The shares made a whopping 50% return in one year. The property on the other hand only made a 20% return.
Which investment did better?
Going percent wise the shares beat the pants of the house. More than doubled its return. But hold on.
If we actually compare how much money each investment made, it tells a different story.
It cost the investor both $100K to buy each asset. Property made a total of $100K in a year whereas the shares only made $50K.
This is because of the power of leverage. You technically can leverage with shares but not for the same cheap rate and you get nasty margin calls which you don’t get with property.
The ability to physically add value to your asset is where I would say active investors have a clear choice with which investment they choose.
Sweat equity is a proven wealth building technique that’s been around for centuries. You would have to be extremely unlucky to physically add value to your property and not have it go up in value.
Experience and skill is a very interesting point to look at when comparing shares and real state.
The entire premise of index-style investing goes something along the lines of:
“It’s impossible to beat the market over a long period of time unless your names Warren Buffett. Even if you do manage to do so, it’s almost always luck. People spend all day every day studying stocks and graphs and still get it wrong. So what hope do you have as an ordinary Joe Blow? Don’t even try to become a master of the stock market because there is only such a very very small percent of humans alive that seems to be able to get it right the majority of the time”
Now, here’s the difference. Skill and experience actually matter in real estate.
A skilled and experienced property investor has a very good chance of repeating his/her success over and over again. In fact, they most likely get better at it as times goes on. The same cannot be said for the stock market (except for those very rare people like Buffett). A skilled and experienced property investor will beat the pants off a skilled and experienced stock trader over a 7-10 year period 9 times out 10.
You can’t really be skillful in picking stocks. You definitely can’t be skillful in picking ETFs either. Sure, you can be smart about your allocations to reduce risk. But it’s not like an ETF investor of 30 years is going to blow out a brand new ETF investor in terms of returns. In fact, they should get relatively the same return. And that’s not a bad thing either.
Contestant 2: Shares
Low buy in and selling costs
Easy peasy with hardly any management required
Have you ever heard the phrase ‘don’t keep all your eggs in one basket’?
The stock market gives you the ability to buy things called ETFs which is a slice of a lot (>200) of companies bundled up into one very convenient share. So instead of buying 200 individual shares. You can just buy things like ETFs and you get that vast diversification in one transaction. Couldn’t be any easier.
And the good thing about the stock market is the low buy in and sell costs. I pay $20 for around $5K of ETFs. Times that by 40 and I would have paid $800 for $200K worth of shares.
Think about how much it would cost you to buy a unit for $200K. Probably around $10K if we use the 5% rule.
And then you would have to sell it for anywhere between 2-3%.
When you want to sell shares there is another brokerage cost of around $20 per sell (depending on how much you sell).
This low buy in and sell costs are very convenient when compared to real estate.
And the last point I want to make is also one of the most important points. How little of your time and effort you have to put in for it to make you money.
‘The defensive investor is unwilling, or unable, to put in the time and effort required to be an enterprising investor. Instead of an active approach, the defensive investor seeks a portfolio that requires minimal effort, research, and monitoring.’
My rough guess is around 95% of people are passive investors.
That’s because the majority of everyday people don’t really care for finance in general and would rather be doing others things they find interesting.
But since you’re on this blog, it means you find finance stuff interesting. What a sad bunch we are ?!
If you’re a passive investor I think the answer is clear.
Shares are clearly suited for the passive investing style while still giving the investor a great return.
Coupled with great diversification, low buy-in and selling costs, no loan stress, liquid asset (can get your money out in 2-3 days), it makes for the ultimate passive style investment!
But if you’re in that very small group of investors that want to take an active approach, you’ve gotta ask yourself.
Are you REALLY an active investor? Do you REALLY want to manage your investments for potentially the next 10-15 years? Will your circumstances change? What happens if you have a few kids? Do you still want to be managing your investments on 4 hours sleep?
Do you have a lot of capital lying around for a deposit?
How’s your cash flow position? Could you afford to pay an extra $1,400 a month when you don’t have a tenant in?
Is your job stable?
Do you have a big cash buffer in case anything goes wrong?
If you answered yes to all the above then maybe you are suited for investing in property.
I have made money using both investment classes. They each have their own merits and downfalls.
Whichever one you choose to invest in, just make sure you educate yourself before taking the plunge.
If you’re on the path to financial independence and follow a few bloggers as they save and invest their way to freedom. You no doubt have come across an investment vehicle that just keeps on popping up everywhere you look.
Exchanged Traded Funds (ETFs)!
The holy grail of investing, according to most in this space. I’m more open to other types of investment classes such as real estate (I can almost hear the boos and hisses) and believe that each asset class has its strengths and weaknesses. But honestly, ETFs are recommended by so many people (Warren Buffett included) for very good reason:
Extremely low management costs (one of my ETFs charge 0.04%)
Low buy in and exit fees ($20 a pop depending on how much you buy/sell)
Can start investing with little capital (investment properties, on the other hand, require considerable start-up costs)
And there’s more but you get the idea.
So ETFs are awesome right! But how does one actually go about purchasing these little bundles of investment goodness?
Directly through Vanguard vsBuying ETFs
This is the most confusing part of the whole thing. So you decide that you want to buy Vanguard ETFs because you’ve been hearing how awesome they are so you naturally do what any computer literate person would do.
You go to Google.
You punch in Vanguard, head to their site expecting it to be awesome and have them basically walk you through buying their product.
Errrrrr not so fast muchacho’s!
Vanguard’s site is crap. Yes, it has all the information you need on there in the form of whitepapers. But they have absolutely no funnel for a user to purchase their product. You sorta have to figure it out on your own. And to be honest, Vanguard doesn’t really need to rely on a fancy website or app (they don’t even have an app ffs). Their product is so good they don’t waste time and money on advertising and marketing.
Back to the point. You have two choices when it comes to buying a Vanguard product. You can either buy it directly from them (called managed funds) or you can purchase an ETF through a broker.
In a nutshell:
Good if you make large or irregular investments
Requires trading flexibility
Good if you make ongoing, small contributions
Does not require trading flexibility
The biggest factor is probably cost. Because depending on how often you’re going to make contributions, will dictate which method is right for you. There is a really good article that goes into detail about the costings of investing directly through a mutual fund vs ETFs on the Betterment website.
I have never purchased Vanguard products directly from them becuase it works out better for me to buy ETFs, so I can’t comment. But I have seen videos and it’s basically a signup, get your details, pick your fund type deal. If you have experience please comment below.
I do have experience buying Vanguard products through a broker though (see the video below to see me literally buying some).
Buying ETFs Walkthrough
Log into your broker (I use Commbank) and head to trading
Select your account that you want to buy (or sell) for
Select the ASX (Australian Stock Exchange) code that you want to purchase (a list of all Vanguard listed ETFs can be found here)
Enter in how many units you wish to purchase
Select at market value or list a price you’re happy with
Set an expiry for the transation
Review your order and hit submit
This is what mine looked like yesterday
It’s that simple. Proceed to the next screen and confirm the order and you’re done. It will take a few days to process and the money will then come out of your nominated account and boom. You have now bought some ETFs.
If you have any specific questions please let me know and I’ll answer them to the best of my abilities.
Now go forth and fear not the simple process of purchasing ETFs!
P2P lending is a topic I have been wanting to do for a long time but I never had the experience or expertise to write about it. I’m the kinda guy that actually likes to do something before I claim any knowledge on the subject. There are people out there believe it or not, that actually give seminars and speeches about how to become master in topic X without ever actually have been a expert in the first place.
Anyway, peer to peer (P2P) lending has been an interest topic of mine for about 2 years now. And when a reader emailed me with their experience with P2P lending I thought it would be a good opportunity for a guest post.
Chris has been investing in P2P lending platforms for over 2 years and he was kind enough to share his experience with us.
So without further adieu, here is the post. Enjoy 🙂
P2P Lending Guest Post
Several years into my FIRE journey I was seeking more diversification, more yield, and more interesting ways I could take control of my investments. Already I had delved into the share market, given managed funds a second chance (a story for another day). Then, one dark & stormy night, while searching across the digital internet on my electric computing device, I came across something called Peer-to-peer (P2P) lending.
Reddit and Whirlpool, where all the cool kids hang out, wasn’t much help in terms of details – just a few mentions here and there about UK company, RateSetter, entering the Australian market.
Magnets, How Do They Work?
I was able to discern that P2P lending, broadly, involves lenders/investors, being able to choose where their money is invested using online platforms. This is in contrast to a Real Estate Investment Trust, or index fund, where the investor’s money is managed by someone else. ASIC has a nice little write-up here (https://www.moneysmart.gov.au/investing/managed-funds/peer-to-peer-lending).
Each P2P provider does things in their own way, but it seems common across all platforms that these investments are very risky, often uninsured, unsecured, and can have a very delicious return.
At the time (December of 2015) the major players were RateSetter and SocietyOne.
SocietyOne is only open for the “sophisticated” investor – with a hefty minimum investment of $500,000, while RateSetter had a minimum
investment of $10… So, ugh, RateSetter it is!
My Experience With RateSetter
RateSetter operates both personal loans and business loans. Lenders elect what rate of return they want, what amount of money to lend at that rate, and for how long (1 month, 1 year, 3 years, 5 years). Then, they are matched to a borrower, who is seeking the lowest rate they can get. This makes the market a bit competitive as lenders undercut each other in order to get their money matched to a borrower.
In this competitive market borrowers can snag rates better than what a bank would offer them, if the bank would lend to them at all. I’m going to paste in two screenshots now. The first is from December 16th 2016, and the second is from January 12th 2017. You can see how competition and demand can affect the rates over the course of just one month.
1 – December 16th 2016.
2 – January 12th 2017.
After assessing the PDS and reading about the risks involved, I decided that $5k was appropriate for me to start lending. I watched the 1-year market, selected a 5.9% rate (which was slightly above the last match) and I got matched in a few days.
This turned out to be a good rate, as competition pushed the rates down a full 1% a few months later.
Given the Peer-to-peer nature of the platform, I was expecting a little more involvement on my behalf in the matching process, and later I’ll discuss MarketLend which has exactly the level of control I was expecting. Then again, I can see how some people might prefer the ease of RateSetter’s automatic matching.
The 1-month and 1-year markets in RateSetter are structured very straight forward. Your returns are paid once per month at the rate you were matched and at the end you get your principal back.
In the 3-year and 5-year markets, however, both the interest and part of your principal are returned each month.
None of RateSetter’s loans are secured but there is a “provisional fund” from which they can compensate lenders for losses at their own discretion. Information on how often this happens is hard to come by (my Google-fu failed me).
Over the course of the investment, here are my interest payments:
So… what to do now that’s finished?
Well, I delved straight back in again and got matched in the 5-year market at 9.5% 🙂
And RateSetter provide a nice little schedule of payments for the life of the investment.
As you can see, this time, in the 5-year market, a portion of my principal (“Capital” column) will be returned each month, and my interest earned is reduced accordingly.
When these payments start rolling in, I will give the “auto-bid” feature a crack. With the auto-bid, payments made to your holding account can automatically be reinvested in the market and rate you specify – either a set rate, or the current market rate. Very handy!
My Experience With MarketLend
My good experience with Ratesetter made me a little braver when I decided to try out MarketLend. I threw $10k at it in August 2016 and payments started in September.
This is a platform which focuses on business loans.
Some loans are insured, some are uninsured. Some loans are for supply chain financing – where MarketLend will own the supplies – and some are simply a line of credit. One of the more interesting loans I’ve seen was for a short-term money lender. I was an investor, lending money to a business to lend money to a business to lend money to people… Hold on while I go watch “Inception” again….
MarketLend advertises these loans to investors in the form of units, each valued at $100. I.e. if i want to lend $1000, I would bid on 10 units at the rate I want. At any time another investor can undercut my bids, introducing a competitive element here as well.
Those high percentages might look amazing but hold on… because I should tell you about utilised versus unutilised parts of the loans – which will affect your return.
In these loans, the borrower might not access all of the capital which is on loan. The money which HAS been accessed, is the “utilised” amount. The rest is “unutilised”. This is important because your return (of say 18%) only applies to the utilised amount. So, even though you might be lending out your money at an amazing 18%, your gross return will be much less. Then MarketLend takes out their fee and your pre-tax return might be %8 (this is my actual average return so far across all my units).
Borrowers could also back the loan early. In which case you get your principal back early, the loan ends, and you are free to carry on your merry way – maybe withdraw the money, maybe invest in more units.
What I really like about MarketLend, is that credit checks and financial statements from the borrowers are available, so you can get very acquainted with them before deciding to bid.
This is the level of control and information I was looking for in a Peer-to-peer lending platform.
In the interest of diversification, I spread my $10k around many different borrowers at many different rates and levels of risk. Here’s a sample:
And here’s my returns so far:
I have used my returns to buy additional units, so I currently have $10,300 invested.
Finally, MarketLend features a secondary market where lenders can sell off their units to other lenders. This is useful if you no longer wish to carry the investment, or just need some liquidity.
I’ve picked up a few discounted units here – it’s definitely worth a look if you decide to go down this path.
P2P lending is cool. It’s high yield. And comes with high risk (so read those PDSs).
I like how MarketLend lets me choose who to lend to and the ability to make an informed decision – but RateSetter is also nice so I will continue to use both.
Website looks and feels more professional.
Provisional fund may reduce risk of loss.
More information and more control and over lending.
Easier to diversify investments.
Secondary market allows selling/buying units.
Australian owned & operated.
Little control over matching process.
Did not notify me when my investment ended.
The queue-like structure delays matching.
Utilised/unutilised was confusing at first.
No Bpay facility.
Did not notify me when one of my investments was repaid early.
Another P2P platform caught my eye recently; Brickx. These guys break down a house mortgage into 10,000 units, which investors can bid on, buy, and trade with each other.
Returns come from cash-positive rental income, or capital gains in a sale. I have a bit of saving to do, and a couple of impending financial commitments to get past, before I’m ready, though.
For now, my P2P returns will continue to be reinvested. Due to the nature of the investment, I should expect some losses over time, as borrowers default or make late payments, but that’s why we manage our risk.
Wow, what a quality insight into the world of P2P lending. I would like to thank Chris again for putting that amazing post together. If you have any questions about it please feel free to comment on this article. Chris has agreed to answer your questions in the comment section below.
Enter death blissfully knowing your financial situation will not follow you to the afterlife
I kid I kid.
But the point I’m trying to make is that the old school conventional way of buying a house in our two biggest cities doesn’t work anymore for the majority of people without financial help from their parents or inheritance.
This is because the game has changed! It ain’t what it used to be when ma and pop were hunting for a house.
And if you live in either inner Melbourne or Sydney, this becomes 110% of the time.
So instead of taking on a mortgage in either of these two cities, why don’t you rent for a few years and invest where it makes sense to do so.
Rentvesting can get you into the housing market without the financial stress when buying in inner Melbourne and Sydney.
How Does It Work?
One rentvesting example might be ‘Harry Hipster’ from inner city Melbourne complaining that the housing market is rising faster than he can save for a deposit.
Harry desperately wants to enter the property market but cannot save enough for the deposit and is unsure if he will be able to make mortgage repayments without at least a 20% deposit. Caution Harry is also extremely hesitant about the Melbourne market being in a bubble and is worried that prices could come crashing down just after he has bought.
He has been very cautious of a potential crash for more than a decade now and year after year he has seen friends and family around him buy real estate and increase their wealth. He’s sick of being on the side lines but can’t afford to buy in inner Melbourne.
Harry discovers rentvesting and decides to take his savings and invest interstate where the property market is more affordable. The collected rent would cover the majority of costs associated with the investment with plenty of upside for capital growth.
Rentvesting has allowed Harry to get into the property market without the mortgage stress he would have had if he had bought in inner Melbourne. Furthermore, if Harry’s financial situation changes he can adapt quickly.
If Harry gets a raise, he can move into some place more luxurious. Maybe he loses his job? No worries, he can move somewhere more affordable until he finds his feet again. None of these luxury can be had once you lock yourself into a mortgage that you’re paying for. The investment property is an asset not a liability. The mortgage on the IP is not paid for by Harry, he has tenants that are paying that loan off for him.
After a few years Harry may decide to sell the IP getting back his savings plus whatever capital growth occurred during the years and use this money as a down payment for an inner Melbourne house. The entire time, Harry was in the property market and benefiting from whatever gains occurred instead of missing out on the sidelines. Harry was also not under financial stress and had the flexibility to live wherever he wanted to based on the circumstances he was in that year.
No mortgage stress
You won’t be paying off your home to live in. There is a psychological connection to be paying off something that’s yours. Renting can feel like dead money
Ability to save and invest more
No security in renting. Can get kicked out anytime
Exposure to the property market sooner
Rentvesting is for the disciplined! A mortgage can act as a forced savings mechanism. Rentvesting relies on you having the discipline to stick to a budget and not blow the extra cash.
Flexibility to change your biggest expense (living costs) when it suits you.
Start building your wealth now not later
Invest on your terms. 9/10 the place you want to live in is not the best investment. Rentvesting allows you to live where you want and invest where it makes sense.
Frees up cash flow for more smashed avocado on toast ??
With the two biggest cities in Australia being more expensive than ever, more and more Australians are struggling to get their foot into the property market. Rentvesting can be used to get into the market without having the stress of paying a mortgage yourself.
Rent where you want to live, invest where it make sense.
My partner and I are rentvestors and have no plans to buy a house to live in anytime soon. This gives us the flexibility and freedom that we want this time in our lives. When circumstances change, we have the flexibility to adapt.
Are you currently rentvesting? Why? Why not?
Thoughts and feelings in the comment section below.
Part two of my Pay Less Tax series which focuses on various strategies for lowering the amount of tax you pay here in Australia. You can check out Part One – Buying Assets In A Trust if you missed it. This strategy is pretty straight forward, you buy stuff with pre-taxed dollars lowering your taxable income which results in you paying less tax that year.
What Is Salary Sacrifice?
Salary sacrifice, also know as a salary package is an arrangement between an employer and an employee. The employee sacrifices part of their salary or wages in return for the employer providing them with benefits of similar value.
The key thing to remember here is that you’re using pre-taxed dollars when you sacrifice.
Lets consider someone who is earning $80K and needs to buy a new computer worth $4K. At $80K per year, this person would receive $60,853 dollars after income tax.
They could pay for the new computer out of this post taxed income of $60,853 which would then bring them down to $56,853.
If their employer let them salary sacrifice the computer to bring their taxable income down to $76K per year, they would receive $58,233 dollars after income tax PLUS their computer.
That’s a difference of $1,380 dollars saved. Imagine if you did this or something similar for 30 years. That starts to become a serious amount of saved taxed money that could be invested or spent elsewhere.
There are no restrictions on what your employer can package for you so it’s really best to check with them. I know a place that allows their employees to salary sacrifice their home loan! Yes that’s right, their bloody home loan. I’m not sure of the details but can you imagine if you could pay off your home loan using pre tax dollars every year. Unfortunately my work only lets you salary sacrifice super which is no good to me for now. So go check with your employer. You might have an expense coming up soon that you could potential pay for using pre taxed dollars.