When a 66% Return on Property Turns Out to be Worse Than a Term Deposit

I ran some numbers recently for a client who was thinking about selling an investment property.

On the surface it looked solid, about a 66% gain over the time they owned it.

But as we went through the numbers step by step, the story changed.

We factored in selling costs.
We factored in capital gains tax.
Then we worked out the annualised return, the actual year by year performance.

Instead of looking like a strong investment, it dropped to something closer to a term deposit.

This happens more often than people realise. Property feels like it has done well because the numbers are big in dollar terms.

It is hard not to get excited when something has gone up a few hundred thousand dollars. But when you stretch that out over 10 or 15 years, the return can be surprisingly average. And sometimes below average.

Time does most of the heavy lifting. Debt magnifies the size of the transaction. Together they can create the illusion of outperformance.

A detailed example

Let’s use simple figures.

Bought for $420,000
Sold for $700,000
Gross gain: $280,000
Roughly 66% total gain over 15 years

Most people stop there.
$280,000 sounds huge.
But the detail is where the truth hides.

Let’s add some realistic assumptions.

Selling agent fees and legals: $20,000
Repairs and presentation: $5,000
Net sale proceeds: $675,000

Now for tax.

If the owner was on the top marginal tax rate, half the gain is taxable.
Tax on the $140,000 assessable portion is roughly 47 percent.
That is about $65,800 in tax.

So the net profit is now closer to $214,200.

Still a good number, but not as impressive.

Annualised over 15 years, that sits around 2.6 to 3.1% per year depending on the exact cost base.
That is well below the long-term return of diversified portfolio and only slightly ahead of a term deposit.

This is the part most people never calculate. They only see the big lump sum at the end.

What about the alternative?

Let’s assume instead that the same $420,000 was invested in a diversified equity portfolio.

No tenants.
No repairs.
No stamp duty.
Just a long term investment designed to grow.

A reasonable long term return for a balanced global and Australian share mix is around 7% per year before tax.

To show something realistic, let’s convert that into after tax numbers for someone on the top marginal rate.

Step 1: Break down the return

Most diversified portfolios earn returns through:

Income (dividends)
Growth

A simple split for a 7% total return is:

4% growth
3% income

Step 2: Apply tax

Income component
3% income on $420,000 is $12,600 each year.
Tax at 47% leaves around $6,678 after tax.
This is roughly 1.6% after tax.

Growth component
Growth is taxed only when you sell.
With the 50% CGT discount, the effective tax rate is 23.5%.

So the 4% growth becomes about 3.06% after tax.

Combined after tax return

Total after tax return is roughly 4.6% per year.

What does that look like over 15 years?

At 4.6% after tax, $420,000 grows to around $773,000.

That is a gain of $353,000 which is:

After tax
With no borrowing
With minimal ongoing costs
Without the emotional load that property brings

Compare this to the property example from earlier:

Property net gain after costs and tax: $214,200
Shares net gain after tax: $353,000
Same time frame
Very different story

This doesn’t mean shares always win. It just shows that once you compare after tax and after costs, property is often nowhere near the automatic winner people assume.

How gearing distorts the picture

Most Australians assess property returns without factoring in the true cost of leverage.

Debt makes your return look better in dollar terms because you are investing borrowed money.
If the property goes up, the gain is based on the full property value, not just your deposit.

But the same leverage also increases your risk.

You commit to repayments.
Your lifestyle becomes tied to that debt.
And if the return ends up being average, you have taken on a lot of risk to achieve something you could have earned with far less stress.

Gearing isn’t bad. It is just often misunderstood.

You can gear into shares but it’s not for the faint hearted

Most people only think about gearing when it comes to property.
Borrow money. Buy an asset. Hope the long term growth outweighs the repayments.

But you can gear into shares as well.

You can borrow directly through a margin loan (this is something I DON’T recommend to my clients).

Or you can borrow against an investment portfolio.

And increasingly, people are using the equity in their home or investment property to invest into a diversified share portfolio.

On paper this gives you the best of both worlds.

Property gives the stable security banks love
Shares give long term growth and diversification
You spread your risk across more than one asset class
You avoid taking on another physical property with tenants, repairs or stamp duty

It’s a smart idea in theory but it comes with real risks that need to be understood upfront.

Why gearing into shares feels different

Property values move slowly.
Banks give you time.
You usually get years of warning if something is going wrong.

Shares move fast.
Some days the market can swing 3% up or down before lunch.

Using property equity to invest in shares

A common strategy, especially for high-income earners, is to use property equity as the loan security.
It avoids margin calls.
It allows for a long term repayment plan.
And it usually comes with lower interest rates compared to traditional investment loans.

This can work well when:

• You have strong cash flow
• You want growth but don’t want another property
• You’re comfortable investing for 10 years or more
• You treat the borrowing as part of a wider plan

But again, it’s not something you jump into because someone on social media said it’s a hack. It needs to fit into your long term direction, your current lifestyle, and your comfort with risk.

Gearing isn’t good or bad.
It’s just a tool.
The real decision is whether the tool supports the life you want.

For some people this strategy accelerates wealth in a controlled way.
For others it creates stress because the numbers look great but the risk doesn’t match their values or lifestyle.

Knowing which one you are before you borrow a single dollar is the key.

The real point

The biggest mistake I see is people assuming that owning more property is always a good thing.

Property can be useful. It can create wealth. It can support your long term plans.

But only if it fits into the broader structure of your life.

Before adding another property, it is worth asking:

How does this asset help the direction you want for the next 10 to 20 years?
Does the debt load support your lifestyle or restrict it?
What are the opportunity costs?
Are you chasing the feeling of safety rather than the actual numbers?

When you know what role the asset is meant to play, the decisions become easier.

You avoid the frustration of taking on significant debt for a below average return. And you build a plan that grows your wealth but also gives you more options in life.

Want to know more?

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The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.