Property and shares are two popular choices when it comes to starting an investment journey. Each have their unique pros and cons and much needs to be considered before making a decision.
When someone invests in property, they purchase it for the purpose of producing income (i.e. renting it out). You can invest in all types of property across the residential and commercial markets.
While investing in shares involves purchasing a share (also known as ‘stock’) in a publicly listed company on a stock exchange, such as the ASX. Investors make money from shares through capital growth (selling the share once its value rises) and dividends.
What’s a better investment choice?
It’s important to consider the pros and cons of each. There is no straight forward answer to this question. Instead, it’s important to consider the pros and cons of each and how they align to your own investment goals. We recommend you speak to a financial adviser before you make any investment decisions.
Property investment pros and cons
- Capital gain
Property historically grows in value over time even in the hardest of economic times. Currently economists from the major banks in Australia are predicting that Australian housing values will show annual growth by 18.5 per cent by the end of 2021.
There are two key benefits of owning a property with capital growth. Firstly, it helps you build your equity which can help you reinvest. The second (and more obvious) way is selling the property at a profit.
- Reliable cash flow
Attracting quality tenants to the property means you will have a reliable cash flow almost guaranteed for the lease term. The rental rate usually stays the same throughout a lease agreement which means you know how much money to expect and when.
- Increased tax deductions
A key benefit of investing in property is the tax deductions that are unlocked. Essentially, most ownership costs associated with the property will become tax deductible. Examples are interest repayments, insurances, land taxes and real estate fees.
This is all in addition to lucrative depreciation deductions that may be available. Unlike other deductions these can be claimed without an out-of-pocket expense which is why depreciation is often referred to as a non-cash deduction.
The rental income from an investment property is offset by these tax deductions and any subsequent loss is further applied to reduce your overall taxable income, including your salary. Which means in this overall circumstance, you would pay less tax, saving you money.
Getting a step on the property ladder itself is expensive. Not only do you need the deposit at a minimum, but you also need to cover additional upfront costs. These can include stamp duty, conveyancing fees, lenders mortgage insurance if required and inspection costs.
The upfront capital that is needed to get into the property market is the biggest roadblock for anyone, whether an investor or an owner-occupier. Understanding this when looking into your investment options is crucial.
- Tenant-related risk
Like any investment, property has its risks. The most common one is those that are tenant-related.
Even the most comprehensive tenant search can’t guarantee that accidents won’t happen. While a bond and landlord insurance can mitigate the risks, it doesn’t necessarily mean you’re covered for everything.
Selling an investment property is a long process. Even in a hot property market, the process from obtaining a property valuation to settlement can stretch out for months.
This means that the liquidity of an asset like property is very low, it can’t just be converted into cash instantly and many variables impact how this occurs.
Shares investment pros and cons
- Ease of entry
You can start investing in shares for as little as $50 through providers like Commsec pocket. While the bigger the investment, the bigger the risk and potential return, having the option to start off small can be a positive way to get started in the share market.
For example, you can invest in what is called Exchange Traded Funds (ETF). An ETF is a passive, low-cost form of a managed fund which looks to gain exposure to specific areas through diversification across multiple shares or assets in that area to lower risk. ETFs are available for a wide range of tradable asset classes including Australian shares, foreign currencies and bonds.
- Capital gain
A smart share investment choice can result in a big capital gain with little work. When you purchase a share at a lower price, hold onto it for a period of time and then trade it (sell) back on the share market at a higher price, you make a capital gain. However, a lot of patience can be required when making a significant capital gain on a share.
You can become a shareholder in diverse range of listed companies. From tech stocks, the banking sector to health and retail players.
Share portfolio diversification allows you to minimise risk and spread your investment across a number of profitable sectors.
Unlike property, shares have the added benefit of having high liquidity. This is because they can be sold very easily any day that the share market is open.
This doesn’t guarantee that they can be sold at a higher price than what they were purchased for, but they can still be turned back into cash easily.
- Shareholder rollercoaster
Share prices can change significantly within a short period.
Prices can go up and down due to internal or external macroeconomic factors that are impacting the company you hold a share in. Prices can also fluctuate with no reason at all which can make the process of investing in shares very stressful.
- Making a loss
When you sell an asset at a lower price than you purchased it for, you are making a capital loss.
The share market can be turbulent and you may be caught in a situation where you need to offload shares at a price lower than their original purchase price.
- Lack of or no dividends
A company’s success, or lack of, can drastically change the amount of dividends shareholders are paid.
If a company makes a significant loss shareholders are unlikely to be paid any dividends at all.
The bottom line
Deciding whether to invest in property or shares is primarily based on your personal situation and investment goals. It’s always recommended to discuss your options with a financial adviser before deciding.
If you do decide to invest in property, a tax depreciation schedule from BMT can help you maximise its return. To learn more contact BMT today on 1300 728 726.