The Gloves Are Off - Property Versus Shares
When it comes to whether property or shares make better investments, it’s not a simple case of one delivering consistently better returns than another. Different studies show each have outperformed the other over various periods of time.
The truth is that in many cases both have been good to investors and have been able to provide capital growth and an income – rent from a property or dividends from shares.
They are, however, very different types of investments with different risks and benefits.
The bottom line is that your choice will very much depend on your personal circumstances, goals and needs.
Here are some factors to consider before making any decisions:
According to the Australian Bureau of Statistics, the mean price of residential dwellings in Australia is now hovering at $612,200. This means getting into property could involve a fairly large capital investment, even if it’s just a deposit. Added to this will be the costs of stamp duty, legal fees and any repairs or renovations the property needs. In contrast, you can start a share portfolio with as little as $1,000.
Property may be less volatile than shares. The price of shares can fluctuate wildly from one day to the next as the market reacts to economic or political events. In contrast, the rental return you receive from an investment property is less likely to change markedly.
With property, all your eggs are in one basket. If you also own your own home, your financial fate will be totally tied to that of the residential property market. Poor diversification increases your investment risks. With shares, you are able to spread your risks across different companies, industries, countries and regions. While one company or market sector may be in the doldrums, the rest of your portfolio may be doing well, helping to ease the pain of any losses.
Unforeseen expenses – With property, your rental income may not cover your mortgage repayments or other expenses and you may have to put in money to cover these. Expenses could include insurance, rates and taxes, utilities, renting agent’s fees and property maintenance.
A rise in interest rates will increase your repayments and could put you under financial strain. There may also be times when you don't have a tenant and have to cover costs yourself. Also, if the value of the property drops, you could end up owing the bank more than the property is worth. If you hope negative gearing will reduce your taxable income, there’s talk that the federal government, given its budgetary pressures, may scrap this mechanism in the future.
Availability of funds – In addition, it could take time to sell your property if you need cash in a hurry. And, if you only need a small amount of cash, you can’t just sell off one room in a house.
It is, however, relatively easy to sell a few of your shares in a hurry. But with shares, there’s the risk that a company’s value could fall, even to zero. If the company goes into liquidation, you as a shareholder will rank behind the company’s creditors and it’s possible that you could lose some or all of your money entirely. Also, if you are relying on income from your investment, dividends from your shares may vary. The rent you receive from your property can, of course, fall in an oversupplied market, but is more likely to rise, for example, with inflation.
While there is the potential for fluctuations in both investment types, rental returns are far less likely to change in response to economic conditions. When comparing the two options, as a general rule of thumb, an investment property will provide a more stable, dependable source of income.
Lack of investment expertise – Another risk is that you won’t have the time to learn, research and keep up with the share market. Maximising, the value of a share portfolio takes much ongoing work and energy. While you can borrow against both your property or shares if you need to raise capital in the future, the banks are likely to lend you more money against your investment property. You may even be able to re-mortgage it and pay lower interest rates than those on most other loans.
There are several other ways to invest. You could, for example, invest in shares via a managed fund where you can gain exposure to a wider range of companies and rely on the skills and experience of experts.
Similarly, you could invest in listed or unlisted property trusts, where your risks are more widely spread, including among commercial, industrial, retail and overseas property.
There’s no right answer. If you are still unclear about what’s right for you, seek out specialist advice by call us on 1300 861 143
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This information is current as at 07/12/2016 This article has been prepared by Heart1Stop, a social media brand owned by Heart Mortgage Services and Heart Financial Advisers. The information contained in this article is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The views expressed here are not those of Heart1stop, Heart Mortgage Services, Heart Financial Advisers, shareholders, directors or staff and associated contractors and business associates. This article has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this article, consider its appropriateness, having regard to your objectives, financial situation or needs. Any taxation information contained in this article is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual’s situation may differ, and you should seek independent professional taxation advice on any taxation matters. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of Heart1Stop or Heart Mortgage Services and Heart Financial Advisers that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party of Heart1Stop or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties ("Third Parties") who are not related to Heart1Stop. These links are provided for convenience only and do not represent any endorsement or approval by us.