Shares vs. Property

The age old question which has been argued a hundred times before.

Should you invest your money in the stock market or real estate?

This is a question I have and still grapple with myself, the returns from both of these forms of investment are compelling. Why I eventually landed where I did though is hopefully enough to sway you.

I could get into specific returns and overall costs of ownership but there is something more intrinsic about these two forms of investments that makes a more interesting argument, to me at least.

Coming from someone whose net worth is primarily a property you would probably think I come down strongly on the side of real estate but you wouldn’t be completely correct.

Although I have enjoyed very strong capital gains from my own home the reality is a property doesn’t do a whole lot.

What do I mean by that?

When you purchase a share in a good company you are buying a part of an organisation with talented individuals who are capable of innovating competing and developing new products. Best of all you get to share in the profits of this company.

When you purchase real estate you are buying a block of land on which you can charge rent. You can increase the rent or invest more money to improve the property or redevelop but there is eventually a hard limit on how much extra growth you can create.

Australia for the most part has a love affair with property investment and I would have a guess that this is mostly because as an investment it is simple and straightforward to understand.

You can touch it, feel it and most importantly point to it at the family BBQ and say “that’s my investment property”.

No one is quite as proud to point out their 0.0000000001% ownership stake in Coca Cola.

Below are some of the specific advantages and disadvantages of both types of investment that stick out to me:

Advantages of Property Investment

  • Lower Volatility1
  • Leverage
  • Physical
  • Stronger Ownership2
  • Rent
  • Negative Gearing (or tax offsets)

Disadvantages of Property Investment

  • High cost of entry
  • Subject to interest rate changes
  • Maintenance and upkeep costs
  • Not easily sold
  • Tax penalties (land tax and stamp duty)

Advantages of Share Investment

  • Low cost of entry
  • Dividends
  • Easily sold
  • No upkeep or maintenance costs
  • Simplified taxation3
  • Franking Credits

Disadvantages of Share Investment

  • Higher Volatility
  • Weaker Ownership2
  • Difficult to pick good companies
  • Unable to leverage as much

One key disadvantage of shares is a lack of easily available leverage. Banks will not lend someone $500,000 to invest in shares when you only have $50,000 as a deposit. They certainly won’t do it at the same interest rate for property.

I tried hard to think of some more disadvantages of shares but so long as you are investing in solid companies that have been around for 50+ years there just aren’t that many drawbacks that spring to my mind.

What really decided shares over property for me was the fact that your investment property is never going to invent the next Facebook, iPhone or Bitcoin. Companies can invent or acquire those things and by being exposed to them through share market investment you get to share in those profits which can potentially be unlimited.

1 – This is controversial because real estate can be just as volatile as shares in certain suburbs, generally speaking though, if you purchased a property in a capital city it is unlikely to fluctuate in price as much as a share.
2 – It is quite difficult for an external party to acquire your property legally (at least in Australia) without compensating you. Shares on the other hand can be taken from you with a court order (just ask me about my Channel 10 “investment”!!!).
3 – I will probably still continue to do my own tax returns because it is relatively straightforward, to maximise your returns on a property investment would likely involve an accountant to ensure you are getting your maximum deductibles.

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