where to invest - shares or property?
Residential real estate has long been a favourite investment with Australians. And while many people now own shares, either directly or through their super funds, the lure of bricks and mortar remains strong, with many still aspiring to build wealth through rental properties. So how do the two asset classes compare?
Looking at the table below, one of the biggest advantages shares have over direct residential property is liquidity - the ability to sell quickly if need be and sell a part of your holding, rather than the whole lot. The other main advantages revolve around the fact that shares don't need regular maintenance and you don't need a lot of money or substantial borrowings to enter the market.
However, there are other forms of property investment - commercial, industrial, retail, industrial - that individual investors can access through listed property trusts or managed funds. These investments offer sound diversification benefits and a better level of liquidity than is available through direct ownership of a home or unit.
your personal goals
Capital growth assets like shares and property will generally provide solid long-term returns. However you should discuss the advantages and disadvantages of each with a financial adviser and work out a mix of asset classes to help you achieve your personal financial goals.
Shares are called ‘liquid assets' because they can be sold quickly if necessary. Property is rarely sold in less than three months so is unsuitable if you think you may need cash in a hurry in the short term. Of course the ease of sale of shares has a downside too. Panic selling of shares in 2008 as markets crashed worldwide is evidence of this!
It is easier to add value to your property by making physical improvements and upgrades, whereas you can't have a direct impact on your shares - they are subject to market fluctuations outside of your control. This can be unsettling, even frustrating, to some investors.
Unlike buying property, purchasing shares doesn't require large amounts of money and your ongoing costs are minimal. Maintaining a property is costly and managing tenants and rent can be time-consuming and expensive. On the other hand, property is a tangible thing - you can see it and visually improve it through renovations or extensions. For many investors this is very satisfying.
typical investment timeframes
Shares
- Typically a 5 year market cycle
- Minimum investment timeframe 3 years
Property
- Typically 12 year market cycle
- Minimum investment timeframe 7 years
at a glance: advantages & disadvantages
| Advantages |
Disadvantages |
Advantages |
Disadvantages |
| Liquid asset |
Difficult to add value |
Potential to add value |
Not liquid |
| Tax efficient |
If geared, risk of margin call |
Tax advantages |
Potential loss of income - tenant vacancy or damage |
| Don’t need large amounts to invest |
Ease of sale makes panic selling easier |
Easy to borrow to invest |
Need large amounts or substantial borrowings to invest |
| Minimal ongoing costs |
Investors may lack knowledge, understanding |
Tangible asset - can see what you have |
Substantial maintenance & ongoing costs |
| Attractive returns over long term |
|
Attractive returns over long term |
Wear & tear on fixtures & fittings |
| Prospect of capital growth - inflation hedge |
|
Prospect of capital growth - inflation hedge |
Can’t sell just a part if money needed quickly |
| Relatively low entry/exit costs |
|
|
High entry/exit/ borrowing costs |
| Easy to find accurate & independent valuation information |
|
|
Difficult to find accurate & independent valuation information |