One of the most commonly asked investor questions is:
"Should I invest in shares or property?"
Naturally, the perfect scenario is to have a diversified portfolio with investments in both asset classes. However, this is not always possible due to cash flow constraints and/or the preference of some investors to favour one asset over the other.
Breaking Down The Asset Classes.
As an asset class over the past 20 years, residential property in Australia (average returns 10.2% p.a.) has outperformed the Australian stock market (average returns 8.8% p.a.).
However, it is important to note, property and share markets both experience periods of boom or bust, where one asset class outperforms the other.
When you consider that most property is secured with only 10% of its total value and the return-on-investment (ROI) is representing 100% of its value, that is very handy ROI.
Shares As An Asset.
The benefits of shares:
Entry into the market can occur with relatively small amounts of capital, making it affordable.
Transaction times are relatively fast, usually taking only a few hours/days to liquidate share investments and see the funds in your nominated account, as compared to a property that has a more drawn out transaction time.
Share provides the ability to invest in a diverse range of markets and industries for a relatively affordable price, dependant on the amount selected to invest.
The negatives of shares:
A large downside for share investments is the volatility an investors portfolio can experience in the market under certain market conditions. For example in the recent COVID-19 pandemic recession saw share prices drop to record lows.
Depending on the investor profile - active or passive investor - it can greatly influence the investors' emotions as they experience an 'emotional roller coaster' when stock prices rise and fall second-by-second. Individuals tend to buy high, out of greed, and sell low, out of fear. The best thing to do is not constantly look at the fluctuations, however, this is a common trait of share investors.
Property As An Asset.
The benefits of property:
If a property is purchased in a well-selected market investors will reap the benefits of capital growth over the medium-long term, which sees the value of their home increase, as compared to the initial purchase price.
The property market is more stable than other markets, specifically the residential property market. However, there are many markets within markets meaning comprehensive due diligence needs to be performed prior to selection to ensure all macro and micro fundamentals are satisfied.
Investors can use the existing equity in the property to get another loan or to purchase another investment property. We recommend speaking with an appropriately qualified Mortgage Broker to find out if this strategy applies to you.
Incentives are available for investors in an attempt from the government to stimulate the economy and market. This can be seen in first home buyer assistance and new home building cash rebates.
Tax deduction benefits apply to investment properties, including claiming expenses such as property maintenance, council rate and fees charged by the property manager, to name a few. We recommend speaking with an appropriately qualified tax specifically about the options for you as an investor. Read more about tax depreciation and property investment.
The negatives of property:
Property investment is a long-term game, meaning investors need to be patient and invest wisely into assets that will perform strongly in well-selected markets.
It is generally more expensive to invest in property as compared to shares. With any purchase of property there will always be additional costs for the owner including stamp duty, legal and conveyancing, council and strata (if applicable to building).
Property also has higher transactional costs as compared to shares, when coming time to sell.
Key Takeaways.
They both have their plusses and minuses, however, we as a nation, have always seen property as a safer bet irrespective of the challenges and costs that come with it. We are bricks and mortar type people but choosing the right bricks and mortar when it comes to a good investment property takes a lot of learning.
Whichever strategy you would choose to take, it is always prudent to seek professional advice as to what best suits your circumstances.
The Next Steps
Looking to get the property investment conversation started?
Or, just looking to stay in the loop?
Warren Jacobs - National Business Development Manager at Meridian Australia
P: (02) 9939 3249
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your circumstance.
References:
[1] Source: Russell Investments, ASX
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