One of the most common questions asked of a financial adviser is what is best; property or shares?
The truth is that there are benefits and disadvantages to investing in both property and shares. As always, it is important not to over commit yourself, have a level of diversification and ensure that an investment fits within your overall wealth creation strategy.
A report prepared by Russell Investments compared the long term returns of various asset classes to 31 December 2009. On a 10 year basis Australian residential property delivered an average return of 10.4% per annum, compared to 8.4% per annum with Australian shares.
However, on a 20 year basis the figures were closer with Australian residential property delivering an average return of 9.8% per annum, compared to 9.7% per annum with Australian shares.
It is not always as simple as comparing the headline figures for both investments. Both the property market and the share market have large variances in individual asset returns. Also, the higher transaction costs with property (stamp duty, agent fees, strata fees, maintenance etc.) must be considered.
For example, using the average 10-year return figures on a $500,000 property it will take nearly 3 years to be ahead of an equivalent $500,000 share portfolio due to transaction costs.
Another important consideration is gearing (i.e. borrowing money to invest). With property it is generally easier (and safer) to borrow money to invest. Provided your investments are delivering a return greater than that your borrowing costs, then you are making money not only on your own funds, but the banks as well!
Investment liquidity is another important factor (i.e. how quickly you can sell your investment). In terms of liquidity, shares beat property hands down.
Investment liquidity and flexibility may be important if you are going to need to access funds at short notice, or if you need funds for retirement. After all, you can’t sell the 4th bedroom of a house to provide quick access to funds. With property you need to sell the lot! This can have important tax consequences from an investment planning perspective.
Here are a few tips to help consider an investment in property:
- Gearing provides higher potential returns, however borrowing money always involves higher risk.
- Remember your property will not always have a tenant 365 days per year.
- Don’t forget to consider costs of holding your investments (stamp duty, strata fees, maintenance, agent fees etc.).
- Housing affordability is an issue –how the government may react to this in the future?
Here are a few tips to help consider an investment in shares:
- Don’t just buy one share. It is always better to spread your money around to reduce risk.
- Make sure the business fundamentals are ok. If you don’t have a handle on what the business does then don’t become an owner of that business.
- Share market investments are volatile – can you handle the ups and downs of the market?
- If you don’t understand, don’t invest.