Deciding whether to invest in property or shares is one of the most common dilemmas for investors, particularly in Australia where there exists a deep interest in and love for property investing. Each asset class has its pros and cons, and the choice often depends on your financial goals and personal circumstances. Before making a decision on which asset class to invest in, it’s important to understand some key considerations for both property and shares to help you make an informed decision.
Advantages of Property Investing
Tangibility: Property is a physical asset that you can see and use. Many people find this reassuring compared to the abstract nature of shares which may seem harder to understand simply by the fact that you can’t physically see or touch the assets that you’re purchasing.
Leverage: Banks are often willing to lend a higher percentage of the property’s value, allowing investors to leverage their capital and amplify potential returns. For example, if you have $50,000 to invest, you could put that into shares which might return 10%, leaving you with a pre-tax profit of $5,000. If you were to put that $50,000 towards property combined with a mortgage of $450,000 to buy a property for $500,000, a 10% return would result in a pre-tax profit of $50,000.
Tax Benefits: Property investors can access tax benefits like negative gearing and depreciation deductions, which can reduce taxable income. In basic terms, if you’re expenses to own the property are more than the income you receive from the property (i.e. rent), you can claim the difference as a tax deduction.
Disadvantages of Property Investing
High Entry Costs: Buying property involves significant upfront costs, including deposits, stamp duty, legal fees, and potentially lender’s mortgage insurance (LMI) if your deposit is not sufficient. For example, a $800,000 property in NSW will cost at least $30,000 in upfront costs.
Lack of Liquidity: Selling property can take weeks or months, making it a less liquid investment compared to shares. This can present a challenge if you need quick access to funds. Selling the property will also incur costs such as agent fees.
Ongoing Costs: Maintenance, council rates, insurance, and management fees can erode profits. Furthermore, if something goes wrong with your property, you may find yourself forking out a considerable amount of cash for repairs.
Advantages of Share Investing
Low Entry Costs: Share investors can start with as little as a few hundred dollars, sometimes less, making shares accessible to those with limited capital. Furthermore, brokerage can be as low as a few dollars per trade, which compared to stamp duty on property is a far lower transaction cost.
Liquidity: Shares can be bought or sold quickly, providing flexibility if you need access to your money. Shares in Australia take two days to settle, so you have your money in your bank account only a couple of days after you sell your shares.
Diversification: It’s easy to spread your investment across industries, regions, or asset classes by purchasing different shares or funds comprised of several shares. This diversification may minimise your risk, minimising the impact on your total wealth if the value of one asset was to fall.
Disadvantages of Share Investing
Volatility: Share price fluctuations are often more dramatic than property prices, influenced by market sentiment, economic conditions, and company performance.
Complexity: Understanding and analysing the stock market requires knowledge and time, especially if you choose individual shares over managed funds or ETFs. That being said, prudent property investing also requires a considerable amount of research, time, and knowledge.
No Leverage: While margin loans are an option, borrowing to invest in shares is generally less common and riskier than leveraging property.
Combining Property and Shares
Instead of choosing one over the other, many people opt for a diversified approach. By holding both property and shares, you can balance risk, liquidity, and growth potential.
There’s no one-size-fits-all answer to whether property or shares are better for investment. Your decision should align with your financial goals, lifestyle, and risk appetite. At Northhaven, we can help you align your investments to your goals and personal situation, creating a tailored strategy for you.
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