Should you invest in property or shares?

loan-payment-frequencies-resizedInvesting in property or shares are two of the most common ways to build wealth outside of superannuation and which is best is often subject to debate. But it’s not a debate that advocates of either investment will ever win because it really comes down to which is most suitable for your personal situation.

There are commonly held misconceptions that property is the safest type of investment and that it’s always going up in value. At the same time, many perceive investing into the stock market to be like playing at the casino or that it’s too complicated to understand. None of these assumptions are true. Investing into property or shares will both work as solid investments for anyone that does it properly. To help you decide which is best for you, here are benefits and risks of each.

Why you’d want to invest in shares

  • They’re liquid – if you need to sell, you can have your money in a few days
  • They’re divisible – you can sell just a few shares, or half, or all of them
  • You can start with a very small balance
  • They’re diversified – you can own banks, retail, technology and medical companies in both Australia and overseas
  • They’re relatively hands off – you don’t need to worry about managing the company
  • The income can be tax effective

Why you’d want to invest in property

  • You can borrow a large amount of money against your property, magnifying your potential capital returns up to 10 times
  • Income is paid on a regular basis
  • It’s a tangible asset – which is comforting for some people
  • You can depreciate some properties, allowing you to pay less tax
  • It’s a less volatile asset – values typically don’t fall rapidly

Why you wouldn’t want to invest in shares

  • They are volatile – their value can fluctuate on a regular basis
  • You can’t see or control the asset
  • They are expensive to borrow against and you can’t borrow as heavily

Why you wouldn’t want to invest into property

  • It’s highly illiquid – you need to market and sell the property then wait weeks for the money at settlement
  • It’s a large asset that generally isn’t divisible – you normally can’t sell a portion of it
  • You need a large deposit to start
  • It needs to be managed – you need to find tenants and deal with repairs
  • Transaction costs to buy and sell are high

While nothing is perfect, there should be a scenario that suits you better. Comparing one to the other without taking all the structural, borrowing, taxation and cash flow details into consideration will lead to inaccurate conclusions for you. Ignore the hype, media and other people’s opinions at barbeques and take the time to work out what is right for your unique situation. Keep in mind you may not want to put all your eggs in one basket and take a long term view.