Both property and shares have served investors well over a number of years but many will argue one is better than the other.
First and foremost, there are barriers to investing in real estate that can work for or against you. The first challenge for new home owners or investors is building up the funds for a deposit. This means that you’ll have to save or invest your money in the meantime — unless you choose to accept a financial product from a ‘special’ lender or your developer, usually for a higher interest rate.
However, the high cost of entry and other barriers like the uniqueness of a particular property can also work in your favour. Having a highly leveraged investment can help investors gear their property and lower liabilities for tax.
Compared to shares, new investors love the fact they can see what they own. Property is tangible. DIY improvements can be made to increase the value of the investment, however improvements can also be a negative for margins. If you decide to let your property, there are management risks associated with it — physical improvements to the house (new carpet, painting etc), real estate agents fees, rates, utilities… the list goes on. All in all there is a much bigger time commitment and, in my opinion, more risks that go into property when compared to shares, but if managed correctly a property investment can reward an investor very well.
Many investors would have heard this saying many times but I’ll say it anyway. A dollar invested into the share market in January 1900 would now be worth around $280,000.
In comparison to property, shares are a more liquid asset and investing in them is much easier to undertake yourself and requires fewer funds. Some online brokers offer trades for under $10 and include information on many of Australia’s most popular stocks and companies. There are no agents, lawyers, builders or surveyors to pay to start investing, and with as little $500 individuals can get on their way to financial freedom.
However, it’s not all positive. Many new investors (and seasoned ones for that matter) may begin to suffer from short-termism. They get caught up on the daily, weekly, monthly or even yearly price movements of their holdings and make decisions they regret, possibly losing massive amounts of money along the way. From the graph above it’s obvious that if investors took their funds from shares after a crash in the early part of the 20th century, they would have missed out on many many years of growth.
The same thing could be said about the stocks in the following graph. If an investor bought ANZ (ASX: ANZ), NAB (ASX: NAB) or Rio Tinto (ASX: RIO) shares back in 2003, he or she would still ahead today (despite a GFC and the Iraq war). Selling in the trough around the GFC would have resulted in losses.
When you’re a shareholder, company executives work for you; when you’re a property investor it’s up to you to create that value. If you buy the right companies not only will you be setting yourself up for long-term gains, you’ll also be rewarded with dividends along the way. You’ve got to consider what’s right for your particular situation and if you can afford to buy both, diversifying is important.
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.