The age-old question of “Is property or shares a better investment?” is one that we return to frequently with our members because it’s important you consider all your options and understand the pros and cons of both!
Before we get into this article, take some time to ask yourself this question as well. Which do you think is the better investment? And why? As with many things in life, our understanding and relationship with money often come from what we observe growing up. You may have found that you swayed more towards team property or team shares simply because that is what your parents did, therefore, you have had more exposure with that particular investment.
In Australia, it is especially common for people to think wealth accumulation equals property because we are told throughout our lives (by family, friends and media) that owning property is the ultimate “Australian dream”. This is evidenced in Australia’s housing boom which has left many millennials questioning whether they can afford to enter the property market without drastic measures like saying goodbye to avo on toast.
However, these unconscious biases we have towards what we know and what is familiar can be dangerous if left unchecked. Financial decisions, especially ones involving large sums of money, should always be made after you have informed yourself so far as possible on all sides of the equation. This ensures that your actions align with a logical strategy leading to the achievement of your goals, instead of making emotional or rash judgments that you may regret later on.
The Most Important Question
So you have done your due diligence and saved up enough money for either a property deposit or a share portfolio, but you’re still not sure which is the better investment for you.
Here is a question you need to ask yourself before you do anything else:
WHY are you investing this money? WHAT GOAL are you trying to achieve?
Without this guidance, it will be difficult for you to truly make a call on whether property or shares is the most appropriate investment for you. At the end of the day, both of these are just vehicles used to get you from point A to point B.
For example, if your goal is to build a passive income stream that will allow you to travel around the world without a job, you might decide that a share portfolio is more appropriate for you because you can travel freely without feeling tethered to any physical location or having to worry about tenants.
Meanwhile, if your goal is to minimise your yearly tax while building wealth for early retirement, you could choose the right investment property to facilitate both your current financial needs and long term aspirations.
I’m sure by now you have worked out that our original question (is property or shares a better investment?) cannot be answered with a one-size-fits-all response! For the purposes of our discussion, we have covered some extra points you should consider before investing in property or shares.
Property – Why, or why not?
Upfront Capital Requirement
A survey done in 2019 on Perceptions of Housing Affordability, showed that the number one impediment for young Australians entering the property market was having an adequate deposit saved.
Although this sentiment may have shifted with the government’s new First Home Loan Deposit Scheme (which we have previously covered on our blog) it is still a valid point of consideration. Unlike other forms of investments, there is a larger barrier to entry with buying a property because you need to have at least a 5% deposit saved. If you live in Melbourne or Sydney, it’s not uncommon for first home buyers to spend around $500,000 to $650,000 (or more!) which means you need to have $25,000 to $32,500 saved from the get-go.
Liquidity
Liquidity is how quickly you can turn your security back into cash. Although many people prefer property for its tangible quality – you can see, touch and feel your investment – this means you must physically sell your property if you want to release your funds. Property is considered to have low liquidity because if you need money urgently it could take up to months to receive cash in the bank.
High Leverage
As we have previously discussed, if you want to enter the property market, you need to have a 5-20% deposit saved. This also means that you would need to borrow the remaining amount from the bank. Borrowing to invest is described as ‘leverage’, and unlike other investments, banks are more willing to lend for investments in property.
This can be both positive and negative. Using borrowed funds to grow your own wealth can be a smart move when property values are increasing and you have sufficient cash flow to pay off your mortgage, however, a lot more is at stake if you fail to service your debt. With the advent of Covid-19, we have seen that the risk of losing tenants and being without rental income is very real.
Ongoing Costs & Time
We sometimes hear people say that renting out property is a “low maintenance” way of earning passive income. This can be a dangerous understatement and you shouldn’t consider investment property if you think it’s going to be “easy” or a “set and forget” approach to building wealth.
When turning your place into an investment property, you need to consider the ongoing maintenance costs, paying for landlord insurance, and having to liaise with property agents and tenants. Issues with your property can turn out to be very expensive and timely to fix.
Security
The major upside of property is that growth rates are generally more stable than other investments. The value of your home is less likely to tank overnight compared to shares, and because of this, you can use your home as security on other purchases. Having property can also create a sense of inner security for many people, and this peace of mind is hard to put a price on.
Shares – Why, or why not?
Upfront Capital Requirement
In contrast to property, the amount you need to start investing in shares is only $500! And if you want to start through micro-investing platforms or with managed funds, the initial investment can be much lower than that. Similarly, your ongoing investment can be very low as well which greatly reduces the barrier to entry and allows more people to start investing earlier on.
Liquidity
A strong argument for shares would be that it is highly liquid. If you needed your funds urgently, you could sell a portion of your investment portfolio and expect to have the cash in your account within three days. Even though investing in shares is a long term game, having liquidity is still important if your other assets are difficult to access (remember, don’t put all your eggs in one basket!)
Volatility
The concept of ‘high risk, high reward’ is most pertinent when investing in shares. As a shareholder, you become part-owner of a company which has the potential to go bankrupt the day after you buy its stocks. Usually, this risk is mitigated by ensuring your share portfolio is highly diversified across multiple sectors, geographic regions, and investing in companies of different sizes.
Investments that are more volatile pose both an opportunity and a threat to your wealth. Unlike lower-risk options, the world of shares can provide abnormally high returns when a company performs exceedingly well, however, this might come at a cost of abnormally poor returns in some parts of the year. Even for investors ‘playing it safe’ through passive investing are susceptible to price drops when events like Covid-19 impact the worldwide economy. If you are going to invest in shares, you need to get comfortable with your portfolio fluctuating in value every day.
Low Leverage
Borrowing to invest is also possible with shares! This is called margin lending and allows an investor to use their shares as security to borrow more money for greater contributions into their share portfolio. Similar to an investment property, this provides tax benefits to the investor and can be a useful tool for building wealth in the right circumstances. There are risks involved with this including potential margins call(s) so we suggesting talking with a professional to ensure this right for you.
Where property buyers can leverage up to 95% of their security, equity investors can only borrow up to a maximum of 70% and often times this loan to value (LVR) ratio is actually capped much lower. This is because shares are considered more volatile (therefore, riskier) than property.
Hassle-Free (Mostly)
Perhaps the greatest benefit of owning shares is how little maintenance is required on your behalf once you have an appropriate investment strategy implemented. It’s really up to you how hands-on you want to be with your portfolio, and you could choose to hire the right professionals to look after your investments for you. We know that this freedom can be invaluable for an investor that prefers flexibility and doesn’t want to think too hard about how their money is working for them, as long as it is working!
We hope you learnt something new about investing in property and shares in our blog post this month. If you are ready to start investing or would like to chat with one of our advisers about this topic in more detail, you can use this link to book in for a 15-min consultation.