The Real Story on Investing in Property vs. Shares
In Australia, the contest between shares and property is an ongoing one. While the two are often presented as alternatives, the fact is that they’re very different investment vehicles. Which one is best for any individual or entity will depend on the particular circumstances.
For investors, tax can be considered a cost of investing. While considerable tax breaks exist for property investors, there are generally fewer tax exemptions and deductions available to share investments.
Depreciation, mortgage insurance, repairs, bank charges, advertising, cost of purchase, rates, management fees, interest, and capital works are just some of the expenses that can be deducted on an investment property. If you’re a developer as well, further deductions may apply which can be calculated with the assistance of real estate development software.
For shares, the range of tax deductions available will depend on whether you satisfy the ATO’s definition of ‘share holder’ or ‘share trader’; the latter are able to offset trading losses incurred over the financial year against other assessable income, and able to claim a deduction for costs incurred when trading.
Shares tend to offer investors a more liquid form of investment. They’re easily purchased and disposed of. Investors can start trading with an inexpensive internet-based account, and it’s relatively easy and fast to find a buyer for shares when compared with property.
In contrast, purchasing property is more costly, with borrowing costs, stamp duty, legal costs, and inspections in addition to the cost of the property itself. However, in the majority of cases, the capital and rental returns yielded on property vastly outperform dividend payments and growth potential of share investing.
One of the key advantages of investing in property over shares is that of leverage. Banks are generally able to lend anywhere from 70 to 80 per cent for property purchases.
This provides very high return on investment as investors are able to put up just a fraction of the total of the property to buy, and watch it double by holding it for 7 to 10 years (the historical doubling rate of property in Australia).
Share investing, on the other hand, can also be leveraged using margin loans. However, the rate of growth of shares generally averages only a 60 per cent return on investment. Furthermore, margin calls apply to margin loans, where a share broker may demand an investor using a margin loan to deposit additional money or securities into the margin account.
While property tends to double on average every 7 to 10 years in Australia, the share market is more volatile, fluctuating by as much as 30 to 40 per cent in one year on average.
It’s possible for share values to fluctuate close to zero, in which case the investor would have effectively lost everything. This is far less likely to happen in the property market.
Property tends to offer more control to investors than shares. In most cases, investors can redevelop or renovate their property, or work directly to boost the value of the property.
With shares, the investor is a passive bystander in most cases (unless they’re a majority shareholder in the company), and unable to influence the direction of the shares.
There’s no single perfect vehicle for investors. Whether property or shares is the better choice for any person or business depends on their resources, objectives, and financial goals.
At a general level, property will suit longer term investors who are not looking to sell in order to reap profits in the short term (under five to seven years).
Shares come with a higher degree of volatility but with a relatively lower barrier to entry. However, this advantage is somewhat diminished when compared with the ability for Australian investors to leverage existing equity in property in order to fund property investments.