The comparison of property versus shares has been around for many years. Property investment has been popular for many Australians. However, there are hidden costs and large initial outlays involved compared to shares. In this article we compare eight characteristics between the two and discuss the differences.
Over a period of 30 years, shares have outperformed property. Vanguard have tracked the performance of different asset classes for the last 30 years and have presented US shares as the top performer with 10.3% per annum, Australian shares came in second with 9.4 % per annum and third was listed property with 9.2% per annum. https://static.vgcontent.info/crp/intl/auw/docs/resources/2019_index_chart.pdf?20201016|181708
Saving up the house deposit has always been the biggest hurdle when it comes to property investments. The median home price for all Australian capitals combined is $637,701. For Sydney it is $872,934 as of Feb 2020. As most loans require a 10% deposit, that would mean a home buyer would need to save $87,293 for home in Sydney. Hence it has been increasingly difficult for first time home buyers to get into the property market as prices have kept rising. There are also stamp duty costs, solicitor fees, lenders mortgage insurance, pests and building inspections, registration of title and other fees which are compulsory on a purchase of a property.
In contrast, the minimum cost to purchase a share is $500 so the entry level to purchase shares is significantly lower. The only initial cost is the brokerage. The investor can start investing in shares right away instead of saving for years for the deposit.
Property investors need to pay ongoing cost such as council rates, water rates, investment loan fees, strata fees, repair cost and other fees. If the property is cash flow negative then the investor will be required to pay a gap between their mortgage payments and the rental income they receive. If their rental property is vacant, the investor will be obligated to cover the whole mortgage payments.
With shares, there are no ongoing costs to own the stock.
Property investing is recommended for long term investors because the transactions costs are so high. The average length of property ownership is 11.3 years for houses and 9.6 years for units. Property investing traditionally has been a long term hold as historically housing prices have only risen slightly each year.
Share investors have a choice of being long term holders or short-term holders. There are different types of stocks to cater in the market for all types of investing horizons. Share investors can choose companies that offer different capital gains capabilities and can choose to hold their shares for the long term or sell for in the short term.
Property investors who need money quickly will find it difficult with this asset class. It can take months to sell property and then there is a waiting period of 6 weeks for property settlement as well.
Share investors can liquidate stock positions immediately and receive funds in two days times. They can also sell part of their holdings, whereas if your investment is tied up in one property, you can only sell the whole property at the same time.
Stock investors have the option to invest in different industry and sectors within their share portfolio. As there is such a high cost associated with property, these investors cannot diversify as much as share investors. For example, an investor with $100,000 can diversify in 10 holdings of $10,000 parcel size in different industries. A property investor would need the entire $100,000 to be invested in one property.
Shares have traditionally been seen as a riskier asset class compared to property. However, investors have a choice of choosing low risk shares such as investing in mature companies that have been around for year, or higher risk shares such as newer companies which haven’t made any money as yet but have high growth potential.
There is also risk when investing in property as investors can lose their entire investment or equity (if purchased with leverage) if the investment turns out to be bad. If a share investor makes a bad decision on one stock, it would only affect a portion of their portfolio and if they have been watching their shares, they could have sold the position before losing their entire investments. If a property investor makes a poor investment, it may be very difficult to liquidate. For example, if an investor needs to sell a property that has fallen in value, then they may be lucky to make enough to pay back the mortgage and therefore they lose all of their equity. On a more extreme example, owners in Opal Tower in Sydney (a residential tower with major structural issues) would struggle to find buyers for their units and may find their tenants vacating the unstable building.
8.Growth vs Income
Property investors need to choose between growth or income. Investment properties which provide good income and are cash flow positive tend to exhibit lower capital gains. These properties are usually in regional areas or areas with cheaper housing. Investment properties which have high capital gain potential are usually cash flow negative so the investor is out of pocket at the end of the year. Hence property investors need to choose between properties which are income generated or properties with capital growth.
Share investors can in some cases have both income and capital growth. We have demonstrated in one of our recent articles that stocks that commenced as low income stocks, have increased dividend payments over time so the investor ended up receiving capital gains for the stock as well as increased dividends (income). An example is Aristocrat (ASX:ALL). For more information click on the link Income investors should invest in growth stocks, not income stocks.
Lauren Hua is a private client adviser at Fairmont Equities.
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