Thanks to the media attention ‘meme stocks’ have generated recently, there’s been a lot of talk about throwing a big chunk of your savings at the stock market.
But property has always been the most tried, tested, and trusted way to make supplemental income or create a nest egg for the future.
With almost half of Australians being active investors, the debate is arising once again regarding the best place to put your money.
Investing in property in Australia
Property is part of our everyday lives – accessible, simple, and essential. Even the most complicated aspects can be quickly understood, and we have brokers, agents and solicitors to help us understand the rest.
38% of Australian investors own a residential investment property, which is not a trend that will fade anytime soon.
Over time, growing equity and borrowing power can be used to leverage a second property, providing the opportunity to develop a profitable portfolio. Indeed, 10% of Australian property investors choose to allocate their spare cash towards another investment property. Most of these are residential rentals, but some are commercial spaces like offices and shopfronts.
Investing in property comes with some big bonuses:
- A different kind of volatility. To say the property market has low volatility wouldn’t be totally correct, but it’s a different kind of volatility to the stock market. Companies can go bust, and stocks can crash. Although the property market faces significant ups and downs, the implications are usually much less serious over several years of property ownership. Prices have historically risen over time, and when they fall, they generally recover. Holding property long term usually weathers any ups and downs in the economy.
- Ability to increase value. Property is perhaps the only asset where its value is customisable. Through investment and/or your own time and labour, you can extend and renovate your property to increase its worth.
- Profit in two ways. Rental income pays your mortgage, covers your costs, and hopefully delivers a little extra profit on a monthly basis. Capital gains over time deliver returns when you sell the property.
- Gearing. Property is very rarely bought with cash – you’ll usually purchase the majority share with a loan and will only need to put 10 or 20% down to earn returns on the whole value of the property.
According to an ASX report, the average ‘blue chip’ rentals (residential properties in large cities with high demand) have returned an average of 6.8% over the last 100 years in value growth alone.
Much like any investment, there are important factors to be considered, such as deposits, legal fees, maintenance costs and ongoing costs like agency fees for tenant selection.
Stocks and shares
The ASX report referenced above shows an average return of 8.7% on a diversified portfolio of Australian stocks and shares over a period of 20 years.
Advantages of shares include:
- Much less capital is required upfront. You can enter the markets with a few hundred dollars.
- Passivity. Once a strategy has been established and a portfolio built, it requires much less attention over time.
- Liquidity. Most stocks and ETFs come with a high level of liquidity, meaning they can be sold quickly to release cash.
- Diversity. Stocks and ETFs can be used to spread investment across multiple industries and asset classes.
Perhaps the biggest difference between the two is the level of knowledge required. The stock market can be learned, but unlike the skills and knowledge you’ll acquire in developing property (many of which are time-tested and unchanging), time spent ‘learning’ the stock market comes with fewer assurances.
Even stock market experts are vulnerable to making ruinous calls. Learning to read candlestick charts and conduct due diligence can take months to years. Even with a strong understanding of basic operating principles, the stock market doesn’t play to a rulebook.
Daytraders and swing traders often try to ‘buy the dip’ or trade the news – buying into volatile or controversial stocks like Tesla (NDQ: TSLA) or Pelaton (NDQ: PTON) when they’re low and selling when they believe they’ve hit a peak. This is an extremely risky strategy and not recommended without a thorough understanding of the market and the stock itself.
After all, which one is better?
Unfortunately, there isn’t a one-size-fits-all all answer. Choosing to invest in one or the other will depend on your unique situation, goals and risk appetite.
It’s very possible to build and grow wealth with either investing avenue. You might find that both shares and property will have their place in your investment portfolio.
But underlying principles of success apply to both: conduct extensive research and due diligence, take a futures-focused approach, and set your goals ahead of time – whether they’re slow and steady growth or quick returns.
If you need help building an investing strategy, talk to one of our experienced financial advisers. They will work with you to understand your needs and goals and create a plan to help you achieve them.