Property Versus Shares
Property has historically been a popular asset class for investors. However, it is becoming harder for first home buyers to enter then market as prices continue to head higher. In this article we discuss some major differences between shares and property and illustrate how share investors can make money in shares even in a recession.
Gearing
Property has been popular with investors as banks will allow property buyers to borrow 90% of the purchase price of the property. This means property buyers only need to put down 10% and borrow the 90% of the property’s purchase price from the bank.
Share investors can use borrowed money to purchase stocks using a margin lending account but if the share price falls, they may be required to pay a margin call. This means the investor needs to put more money in the margin account to top up the balance and put it back to the required value. There is no margin call on property, the bank does not require a margin call if the current property value is less than what it was when the buyer bought the asset.
Tax
Property Investors can use expenses incurred from this asset as tax deductions which can reduce the tax payable for the investor. This can include interest payments from the loan and property management fees. Share investors can also claim interest expenses if they are using a loan to purchase shares.
Ongoing costs
If the property is negatively geared, the property investor is liable for the difference between the rental payments and the loan repayments and any other ongoing fees associated with the property. Therefore, property investors need to ensure they have enough money to undertake ongoing costs. When a share investor purchases shares, there are no ongoing costs, just the initial outlay so they do not need to pre-empt any future costs.
Income
Unless the property is positively geared, property investors do not receive income. Shares however can pay dividends and share investors can also reduce their tax payable amount through franking credits. If an investor is paying no tax or 15% tax, they may receive a refund from the franking credits. For more information go to the link https://fairmontequities.com/what-are-franked-dividends/.
Initial Costs
Share investors can purchase shares as little as $500, property investors need to save up a 10% deposit and also include stamp study and legal fees on top. Hence property investors may need to wait until they have the initial outlay before investing in this asset class whereas share investors need lower initial costs.
Investing in a bear market
When there is a recession house prices usually decline as confidence in the economy is low. With share investing, investors can make money from a falling market by buying bearish ETFs and also options. Therefore, the share investor can make money in a falling and rising market by implementing different strategies.
Choosing capital gains or income
A property which is likely to generate strong capital growth is generally going to be negatively geared and a property which is positively geared is going to offer low capital growth. Hence property investors need to choose if they prefer capital gain or income. Shares can offer both capital gain and income so investors do not have to choose. Growth stocks over time may increase their dividend yields so the share investor receives capital growth and income.
Lauren Hua is a private client adviser at Fairmont Equities.
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