Property versus shares

By webmaster 09 February 2012 | 1 minute read

There is a great divide between investors who favour property and those who favour shares.

In reality, however, there are pros and cons to both asset classes.

Both certainly have a good track record in terms of returns, with shares and property beating more conservative asset classes such as cash or fixed income for the past 10, 20 and 25 year periods, according to research by global financial services firm Russell Investments.

Russell Investments’ research highlights that in the longer term, shares and property deliver similar returns and chosen well, both can provide very lucrative returns at that.

That said, fundamental differences between the two asset classes can have a major impact on their overall investment potential.

One major difference to keep in mind is the opportunity for leverage.

Generally, loan to valuation ratios (LVRs) for property are much higher than those for shares. For property, you can borrow as much as 100 per cent of the property’s purchase price while for shares it is much harder to borrow at a high LVR.

For some blue chip shares, investors can borrow up to 75 per cent LVR, but for many shares the opportunities for leverage will be significantly lower or non-existent.

In other words, the power of leverage is much greater with property, which means you can maximise your dollar further.

For example, with $30,000 and a 95 per cent LVR loan, you could potentially purchase a property worth $600,000. Without the opportunity for leverage your purchase potential for shares could be limited to just $30,000.

Another significant difference is the high transaction costs associated with property, which makes it a much less flexible asset than shares. A share transaction can cost less than $20 a pop and can be executed in a matter of minutes.

Shares might therefore be a better choice for investors who want or need access to their cash at a moment’s notice.

But while property may have limitations due to its transactional requirements, it does offer greater freedom and control in terms of being able to add value.

The value of a share is at the mercy of a company’s performance and the market’s response, but savvy investors can use renovation to add value to an investment property.

Moreover, property’s high transaction costs make it less subject to volatility.  In just one day, a share portfolio can shrink dramatically. Because shares are so easy to buy and sell, investors are often quick to offload them during times of uncertainty.

At the end of the day, your own individual goals and timeframes should influence your asset selection, as will your comfort and familiarity with each asset class and your motivation and ability to learn more about both.

Irrespective of your preference, you’ve got to select well. This means due diligence to ensure you get the best possible return, taking into account your risk profile, financial position, timeframe and personal goals.

Property versus shares
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