What are the pros and cons of investing in a commercial property?
What are the pros and cons of investing in a commercial property? Read on to learn more. ...
When it comes to building wealth for the future, which asset class is safer and more sustainable? Are shares considered a property? Will shares or property better help you reach your investment goals?
Investing in property
A lot of investors prefer property as it is a tangible asset. You can see it and touch it, and it is a physical representation of your money. People tend to feel more comfortable with such a significant financial commitment when they have something physical to show for it, as opposed to a piece of paper.
Property investment is also said to be less of a risk, as there is less frequent fluctuation in the property market – cycles tend to take longer. Shares can go up and down in value every day, but in the property market values move a lot more slowly. On top of this, shares expose investors to the risk of losing everything in the case of a company going into liquidation.
Investors who prefer property tend to believe it’s harder for them to lose everything, as the physical asset remains on the land despite value fluctuations or changing market conditions. Regardless of the position of the market, a property will always be worth something and, if you purchase well, its value will continue to increase over time – even if it moves at a glacial pace.
You can borrow a larger percentage of your property value from lenders than you can to invest in shares. This helps with the bigger financial commitment that comes with property investment.
Investing in shares
When you have a share portfolio, access to certain information is readily available. You are able to check every day to see exactly how much your shares are worth. This level of accessibility of information is restricted for property investors, as an exact asset value can’t be known unless the investor lists the property for sale.
Owners of shares can also access specific amounts of their money in a relatively fast and easy manner, by selling off part of their shares to the amount that is required by the investor. This is more difficult with property because you can’t simply sell a portion of a property off – and even if you do decide to sell the property, it is a long, complex process.
There are not a lot of extra fees involved with buying shares. Buying property incurs thousands of dollars of initial and ongoing costs in addition to the purchase price. Buying shares only requires brokerage fees to be paid.
An aspect of investing in shares that is particularly appealing is that you can invest in shares even with a limited amount of money – which makes this form of investment a much more achievable goal for many people. Investing in property requires investors to save a large lump sum before purchase.
Which offers better long-term returns?
Working out whether shares or property investment will bring in better long-term returns is anything but straightforward, and in the end has a lot to do with the duration of the investment.
According to the 2013 report on long-term investing released by the ASX and Russell Investments, shares continually outperform property in terms of capital growth across both the 10- and 20-year time frames. The 20-year growth, however, showed a very close result between shares and property, suggesting that time plays a big part in capital growth for properties.
It is possible to generate income from both types of investment. Property investment brings with it cash flow from rental payments, and shares pay dividends.
A strong argument in support of property offering better long-term returns is the comparison of returns with the initial investment amounts. Even though over a 20-year period the returns from both shares and property are in the same ball park, investing $100,000 in shares will give you a different result to investing $100,000 in property. This is because home buyers typically take out a home loan to purchase property, while it is less common for investors to take out a loan to invest in shares. Therefore, if you have a $100,000 deposit towards a $500,000 property purchase, the return will be a percentage of the $500,000. Meanwhile, the return on $100,000 in share investments will simply be a percentage of $100,000, meaning there is a much greater return on property over time.
Is one safer than the other?
Neither investment comes without some level of risk, but you can minimise risk in both property shares by doing your due diligence.
The biggest argument in support of property investment is that property is a tangible asset. You will always have something to show for your investment. Shares, however, are subject to the success of the company in which the shares are held. If a company goes into liquidation, you could lose everything. The value of a property will also always be relative to those around them, whereas shares fluctuate regularly across different industry sectors.
When you buy a property, you typically borrow a large portion of the purchase price. When the property is purchased as an investment and is tenanted, the tenant pays rent that essentially pays off the mortgage. If, for example, you buy a $500,000 property with 20 per cent deposit, once the mortgage is paid off, you have a $500,000 asset from an investment of only $100,000 – and this is before capital growth.
If you buy in the right area, a property will always have demand, and will in turn grow in value over time. The same can’t necessarily be said for shares.
It is not all smooth sailing with property investment, though. The bigger your deposit on a property, the better, as this will provide fall-back should anything unfortunate occur.
Negatively gearing a property in the short term, in the hope that its value will increase over time, can be a risky approach to investment, and inexperienced investors should be very cautious before making decisions based on this tax policy.
Advantages of investing in both property and shares
Where possible, it is a smart idea to spread your risks and have a portfolio of both shares and property. Diversifying your portfolio means that if one of your investments sees poor performance over a certain period of time, other investments may help to balance out your portfolio by performing well, as they are unlikely to be affected by the same factors. Factors that could affect the performance of your investments include:
• Currency markets
• Interest rates
• Current market conditions
• Supply and demand
• Lending policies
As well as diversifying your investments across different asset classes, it is also advisable to spread your capital within asset classes, such as by buying shares in different industry sectors. Each sector will likely achieve different results over the same period.
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.