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Investment Property vs Shares: Which is Better?

March 3, 2023 | Investment

While purchasing property has long been a popular investment choice in Australia, with many believing that its value never goes down, others argue that shares offer greater liquidity and higher profit margins over a shorter time horizon.

However, one must make informed decisions based on their financial strategy and preferences. Both investment options have pros and cons, so investors must weigh the risks and rewards based on their financial position, risk tolerance, and investment time horizon.

In this article, we will explore the pros and cons of investing in both property and shares and how to make the right investment decision for an individual’s personal circumstances and wealth creation.

Investment Property vs Shares:

When choosing between the two, the first step is to compare the advantages and disadvantages of shares versus property.

Investment Property

Property or Real Estate Investment refers to real estate purchased to earn a return on the investment. It is a tangible asset that can sometimes be less volatile than other investments, depending on the market and personal circumstances.

The Australian Accounting Standards Board defines property investments as assets held for rental or capital appreciation (or both), generating cash flows independently from other assets, distinguishing it from owner-occupied property.

Pros and Cons of Investment Property

Investing in property in Australia may provide advantages such as capital growth, tax deductions, and rental income. However, it also comes with disadvantages like high entry costs, low liquidity, and ongoing maintenance and management.

Advantages and Disadvantages of Property Investments

Pros:

Sole Management

You can do anything you want with the property as long as it falls within council rules and regulations. You may customise designs, plants, styles, and colours- and rent or sell your property to whoever you choose.

Capital Growth Potential

Investing in properties in developing locations can lead to capital growth, which may potentially increase the value of the property over time.

Tax Deductions

Expenses on maintenance, management fees, and property value depreciation can be claimed as tax deductions, possibly reducing the overall tax liability.

Tangible Asset

Owning a property provides a tangible asset, possibly offering a sense of comfort and control due to its physical nature.

Property Income

Properties can generate rental income, which can help cover expenses and property loans, providing additional personal income, and potentially offering a steady cash flow.

Stable Investment

Depending on the property chosen, the Australian property market can be less volatile than other investments, providing a relatively stable investment option.

Cons:

High Entry Costs

Buying a property requires a significant amount of money, and saving for a deposit may be challenging.

Low Liquidity

When compared to other types of investments, real estate is not as liquid, which makes it more difficult to sell quickly.

May Not Appreciate in Value

There is a possibility that the value of certain properties may either drop or remain the same over time.

Maintenance Costs and Property Management

When you own a property, you are responsible for its continuing maintenance and management, which can be both time-consuming and expensive.

Difficult Tenants

Finding and managing renters who are a good match for the property may be challenging, especially if you live far away from the rental property itself.

Negative Gearing

It is possible that the property may be negatively geared, which means that you will need to personally fund any expenses shortfall if the rental income is not sufficient to cover the costs.

Shares

Shares, also known as stocks or equities, represent ownership in a company by dividing ownership into units sold to investors.

Shareholders do not directly operate a corporation but have a claim on part of the company’s assets and earnings. For example, if a company has 10,000 shares outstanding and you own 500 shares, you would own 5% of the company’s assets and earnings.

In Australia, shares are traded on the Australian Securities Exchange (ASX), which lists over 2,000 companies.

Pros and Cons of Investing in Shares

Investing in shares may be a way to potentially build wealth over time, but it is essential to understand the risks and benefits before making a decision. Shares are considered a growth asset due to their potential for higher returns over time, but this also implies that they can carry a higher level of risk compared to other types of assets. It is crucial to research companies, compare returns, and diversify your portfolio to manage risk effectively.

Pros:

Capital Growth Potential

Shares can be a sound long-term investment, allowing investors to benefit from any increase in the value of their shares.

Dividends

Companies have the ability to provide shareholders with dividends, which may serve as a source of revenue.

Liquidity

The top 200 businesses on the Australian Securities Exchange (ASX) are among some of the most liquid in the world, which enables investors to purchase and sell shares quickly.

Capital Gains Tax Discounts

It is possible for some investors to take advantage of capital gains tax reductions on shares that have been held for more than a year.

Franking Credits

When dividends are paid out, shareholders may be eligible to obtain franking credits, which can help offset the amount of tax that is owed on the dividends.

Cons:

Market Risks

Shares are subject to market risks, such as fluctuations in stock prices and economic conditions, which can impact the value of an investment.

Diversification

It is vital to diversify your portfolio over a variety of business sectors to reduce the amount of risk exposure. However, maintaining diversification across a variety of industry sectors may be costly and time-consuming.

Monitoring and Research

Investors need to stay up-to-date with the changes in the economic and financial markets, do research and comparisons of companies, and monitor the performance of their investments. It’s a time-consuming process and very few are up to the task.

Returns and Income Generation

Investment returns and income generation are also important factors to consider when comparing shares and property investments.

How Shares and Property Generate Income

Investment Property Returns

Investment properties in Australia can generate returns through various means, including rental income, property appreciation, and potential tax benefits. Here’s a brief overview of each:

Rental Income: Rental yield, which is the income received from tenants as a percentage of the property’s value, is a significant source of return. The average rental yield in Australia is around 8%.

Property Appreciation: Property investment in Australia has traditionally enjoyed high capital gains returns, with the average real estate return on investment being around 6.8% over the past 100 years. This means that the property’s value may increase over time, providing a source of return when the property is sold.

Tax Benefits: There are potential tax benefits associated with investment properties in Australia. A property investor may be able to claim tax deductions on expenses such as interest, maintenance, and repairs. However, it’s important to be aware of the tax implications, as positively geared investments may attract tax on rental income.

Share Returns

Share investments generate returns through capital appreciation and dividends. Capital appreciation occurs when a share’s value increases over time, resulting in higher sales prices. Dividends are payments made by companies to shareholders out of their profits.

Australian shares have experienced relatively stable and consistent growth over the past century.Reserve Bank of Australia (RBA) research found that the average annual growth rate of the Australian stock market has been approximately 6% over the past century.  The growth rate is around 2% when adjusted for inflation.

Market Conditions and Economic Factors

It would be best if you also considered market conditions and economic factors and how these affect shares and property investments.

Property Market Conditions

Economic factors and market conditions have a significant impact on the property market in Australia. Several key factors influence the decisions of property investors, including:

Interest Rates: The property market is influenced by interest rates. Falling interest rates lower monthly loan repayments, increasing demand and property prices. However, rising interest rates reduce demand and property prices.

Economic Conditions: Economic growth depends on housing prices. Incomes rise during economic growth, boosting home demand and the real estate market. In a recession, property demand drops, lowering the market.

Housing Demand: Factors such as population growth, economic conditions, and government policies significantly impact the supply and demand dynamics in the property market.

Regional Trends: The real estate market is influenced by regional trends, such as population growth, employment opportunities, and infrastructure development.

Stock Market Conditions

Economic factors play a significant role in influencing the shares market, including interest rates, company performance, and global economic conditions. These factors can be observed through the following scenarios and resources:

Interest Rates: Interest rates set by the RBA affect the stock market. If the RBA raises interest rates, borrowing may decrease, which could hurt company performance and the shares market.

Company Performance: Individual company performance can greatly affect the stock market. Strong earnings growth may boost a company’s stock price, while a decline in earnings may lower it.

Global Economic Conditions: Australia’s trade is open, so changes in foreign demand for its goods and services can have a big impact. An increase in global demand for Australian exports, if not matched by an increase in supply, will raise export prices, which can boost the share market.

Exchange Rates: Exchange rates affect the stock market by affecting the price of Australian goods and services compared to other countries. A depreciation of the Australian dollar can boost exports and lower imports, which boosts the share market.

Economic Uncertainty: The share market can be affected by economic uncertainty. The Australian shares market had a “technical correction” in October 2023 due to war, economic uncertainty, and higher interest rates. Due to uncertainty, the share market can be volatile, making predictions difficult.

Conclusion: Investment Property vs Shares: Which is Better?

Property and shares have their own unique advantages and challenges. Shares can offer liquidity and are better for short-term investments, but property can offer more control and higher returns.

Property is a tangible asset that provides a less risky alternative than other common investment strategies, and it offers tax-efficient benefits due to tax relief on costs and mortgage interest.

On the other hand, shares offer greater liquidity, and higher profit margins over a shorter time horizon, and are easier to diversify through mutual funds and exchange-traded funds (ETFs). However, they are more volatile and subject to market fluctuations.

Ultimately, it is essential to consider your financial situation, risk tolerance, investment strategy and goal when choosing between real estate and stocks, or both. Many investors choose to invest in both asset classes to diversify their portfolio, as this can help build wealth – because each helps achieve different financial goals.

Ready to Build an Investment Portfolio? 

While investing can seem complicated and time-consuming, it doesn’t have to be that way with knowledge and expert guidance. Whether you’re young or old, it’s never too late to start investing, so you can achieve your goals.

Need investment advice? Coastal Advice Group can work with you to tailor your investment plan and build your portfolio. Our financial advice team can help you establish direction for your investments to achieve your financial and lifestyle goals.

Call us or book online to secure your first consultation today!

References:

DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.

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