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Property vs. Shares: Which Investment is Better for You?

Property vs. Shares: Which Investment is Better for You?

Investing can be a powerful tool for building wealth, but the choice between property and shares often perplexes both novice and seasoned investors. Each asset class has its unique characteristics, benefits, and risks. In this article, we will explore various facets of investing in property and shares, helping you to have better informed conversations with your financial planner, tax advisor, or making your own decisions to achieve your financial goals.

Please note, we are not licenced to give tax, financial or accounting advice, this is for educational purposes and we always recommend speaking with a licenced professional before making a decision.

Volatility

Property:

  • Property investments are generally considered less volatile compared to shares. Real estate prices tend to be more stable, with gradual appreciation over time.
  • Market downturns can affect property values, but these impacts are often localized and slower to manifest.

Shares:

  • Shares are inherently more volatile, with prices fluctuating based on market conditions, economic factors, company performance and investor confidence.
  • The stock market can experience rapid changes, leading to potential gains or losses within short periods.

Liquidity

Property:

  • Real estate is less liquid than shares. Selling property can be time-consuming, often taking months to finalize a transaction.
  • The illiquidity can be a double-edged sword; while it protects against impulsive selling, it also means you cannot quickly access your invested capital.

Shares:

  • Shares are highly liquid, allowing investors to buy and sell within seconds during trading hours.
  • This liquidity can be tempting, especially during market downturns, potentially leading to panic selling and losses on the capital that was invested.

Leverage Options

Property:

  • Mortgages are a common form of leverage in property investment. Banks typically offer favourable loan terms for real estate purchases, allowing a borrower to access up to 95% of the property value depending on the purpose and transaction.
  • Leverage amplifies both gains and losses, but the stable nature of property makes this a relatively safer bet.

Shares:

  • Margin loans allow investors to borrow money to purchase shares, increasing potential returns.
  • However, the volatile nature of shares makes margin loans riskier, as losses can be magnified.

Risks of Margin Calls

Property:

  • Property investors do not face margin calls. If property values decrease, investors are not required to sell or provide additional funds to maintain their investment.

Shares:

  • Margin loans come with the risk of margin calls. If the value of the shares falls below a certain level, the investor must deposit more funds or sell assets to cover the shortfall.
  • This can lead to significant financial strain, especially during market downturns.

Dividend Payments vs. Rental Income

Property:

  • Rental income provides a steady cash flow, which can be particularly appealing for retirees or those seeking regular income.
  • Rental yields can vary based on location, property type, and market conditions. They generally range from 3-4% but can be higher or lower depending on the property type, location and use (long-term vs short-term rental).

Shares:

  • Dividends are payments made by companies to shareholders, usually from profits.
  • Dividend yields can be attractive, but they are not guaranteed and can fluctuate based on company performance.

Tax Deductions

Property:

  • Property investors can claim various tax deductions, such as mortgage interest, property management fees, repairs, and depreciation.
  • These deductions can significantly reduce taxable income, enhancing overall returns.

Shares:

  • Share investors can deduct expenses related to managing their investments, such as brokerage fees and interest on margin loans.
  • However, the scope of deductions is generally narrower compared to property.

Capital Losses vs. Capital Gains

Property:

  • Capital gains tax (CGT) applies when a property is sold at a profit. Holding property for over a year may qualify for a CGT discount.
  • Capital losses from property can offset capital gains from other investments, reducing overall tax liability.

Shares:

  • Capital gains from shares are also subject to CGT, with potential discounts for long-term holdings.
  • Capital losses from shares can offset gains and be carried forward to future tax years.

Investment Strategies

Property:

  • Successful property investors often focus on location, property quality, and long-term potential for appreciation.
  • Strategies include buy-and-hold, renovation for value addition, and property flipping.

Shares:

  • Share investors may adopt various strategies, such as value investing, growth investing, dividend investing, or index fund investing.
  • Diversification across sectors and geographies is key to managing risk.

Additional Considerations

Inflation Hedge:

  • Both property and shares can act as hedges against inflation. Property values and rents typically rise with inflation, while companies can increase prices, leading to higher revenues and dividends.

Management Effort:

  • Property investment often requires active management, including tenant relations and property maintenance.
  • Shares, particularly through managed funds or ETFs, can be more passive, requiring less day-to-day involvement.

Conclusion

Choosing between property and shares depends on individual financial goals, risk tolerance, and investment horizon. Both asset classes offer unique advantages and can complement each other in a diversified portfolio. A well-rounded investment strategy often includes both property and shares, balancing stability with growth potential.

By considering these factors, investors can better understand the nuances of property and share investments, ultimately making more informed decisions. For personalized advice, consulting a financial advisor is always recommended.

We invite you to share your experiences and preferences in investing. Do you lean towards the stability of property or the dynamism of shares? Please share your thoughts in the comments below.

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