Property vs Shares

I recently read a book called “Property vs Shares” by Peter Koulizos and Zac Zacharia. Below is an excerpt from the book which provides a really great summary of the advantages and disadvantages of each asset class for investments.

The book itself gives a much more in depth look into each category and is definitely worth a read. I will say that I may not agree 100% with everything that is said below, a lot of it is quite outdated (published in 2013) but overall it is a good book for people who are looking to start investing and not sure if they should do shares or property.

I have written a bit more of a summary and review of the book HERE

Capital Growth

In general, shares as an asset will outperform property as an asset class. However, this does not mean that every share will outperform every property. There are many things to consider. When it comes to shares, you should aim to buy undervalued, quality shares. That is, you should buy into companies with strong management, a healthy balance sheet, a good business model and the potential to grow earnings. The timing of your purchase and subsequent sale of shares is critical. For property, you need to ensure that you buy the right type of property in the right location. A property with a valuable land component in close proximity to the city or the sea is what you should be looking for.

Income

It is too hard to pick a winner in this instance, so we’ve called it a draw. There are shares that provide great income, just as there are properties that earn a relatively high rent. Overall, property and shares are both good assets if you seek a moderate to high income.

Tax Effectiveness

Both property and shares are winners here. Owning Australian stocks has the great advantage that their dividends can be franked, which means that 30% of the tax has already been paid by the company issuing the dividend. If your investments are held in a SMSF and you are retired, you will receive the franking credits back as additional income – tax-free! Property’s advantage is the depreciation allowances that can significantly lower an investor’s liability. New property or recently renovated or upgraded property will provide the best depreciation benefits. But be careful! You should never buy a particular property or shares JUST for their tax benefits. Tax effectiveness should be a bonus, not the sole purposes of buying the asset.

Degree of Control

Property is the winner here. This is one of the main reasons investors buy property. Property investors have a greater degree of control over their asset than investors who own shares. If the value of a share is plummeting, or if their dividend is less than they wanted, what can a share investor do? The answer is not much. However, what can a property investor do to life the value of their asset or increase their rent? For a start, the property investor can improve their property by upgrading or renovating. Even a simple clean and tidy-up can improve the overall return on a property.

Volatility of Returns

At a glance, it is obvious that the returns on shares are much more volatile than returns on property. The price of shares can rise and fall dramatically over a short period of time. The same cannot be said for property. Most property is owned by people that live in it, and they are very reluctant to sell just because there is a rumour that the property market is about to slump or because property prices are already dropping. If you are looking for that “sleep well at night factor”, property is the answer. This factor is particularly appealing to risk-averse investors.

Frequency of Returns

This is not a big factor, but property wins here. Rental income can be paid weekly, fortnightly or monthly, whereas share investors usually receive dividends every six months. Unlike property returns, your share dividend payments can vary: if the company has a bad year there is a risk that it will reduce its dividend payment to shareholders, if not suspend them altogether. This is a risk particularly for companies that are involved in cyclical sectors, such as mining companies.

Finance

Borrowing money to buy property and using the real estate itself as security is much cheaper than borrowing money to buy shares if all you have as security is the share portfolio you’re buying. In early 2013, the cheapest variable mortgage interest rates were around 5.5%, whereas the cheapest margin loans had interest rates over 8%. In addition, the loan-to-value (LVR) on a share portfolio is lower than the LVR you could get on a home loan, and property has no margin calls.

Leverage

This was almost the knockout blow that decked shares. The ability to have greater leverage to buy property can make a HUGE difference to your wealth creation. With $40,000 cash you could buy a share portfolio of $160,000. This assumes a LVR of 75%. On the other hand, $40,000 could secure you a property worth $400,000, on an LVR of 95% (allowing $20,000 for purchasing costs). That is a HUGE difference. What would you prefer? Your $40,000 buying you an asset worth $160,000 or one worth $400,000? Property is the clear winner here.

Liquidity

Shares win by a mile! One of the greatest advantages of owning shares is that you can turn them into cash very quickly. Another benefit is that if you only need a small amount of money, you can sell just some of your shares; but generally speaking you can’t sell a room of your house. Sure, you may be able to subdivide your property and sell part of that, but if you need, say $50,000 urgently, it may be rather difficult to achieve because it will take time to get the approvals in place. Try to sell quickly sell property! First you have to get the property ready for sale; then you have to market the property; and even if you sell it relatively quickly, you still have to wait until settlement to get your hands on the money. Assuming that you are willing to sell at market value, it might be up to three or four months before you can turn your property into cash, whereas it will only take three or four days to turn shares into cash.

Entry, Holding and exit fees

Entry fees (including stamp duty and conveyancing costs) are approximately 6% of the purchase price to buy property. When you are holding the property, expect that approximately 25-30% of the gross rent will cover expenses. When you sell, budget for approximately 4% of the selling price to pay for costs, including sales commission. Compare that with buying shares, which attract no stamp duty; you pay as little as $9.95 to make a trade with a discount stockbroker; and management or administration fees of between 1-2% of the portfolio. If entry, holding and exit costs were the only consideration, investors would never buy property.

Ease of Getting Started

To buy even the cheapest property in Australia, you will still need a sizeable deposit. Whether some of that money comes from a government incentive or all of it comes from the investor, you need thousands, and more likely tens of thousands of dollars, just as a deposit to buy the property. Then you have to borrow the remainer, which would be hundreds of thousands of dollars or more. Compare that with buying shares. As little as $500 will be sufficient to help you start building a share portfolio to which you can add over time. It is far more affordable to buy a share portfolio than a property.

Information

There is far more detailed and reliable research and market price transparency information in relation to shares than there is for property. Not only is there a plethora of data on the share market and its performance, but there is also a lot of research available about almost every company listed on the ASX. This includes information in annual company reports. This volume of information does not exist for properties. Most of the paperwork in property is in the contract, which deals with legal issues. In addition, there is no regulation over who can provide property investment advice, whereas shares are classified by ASIC as a financial product, meaning that only licensed financial advisers can provide you with financial advice. If you’re looking for fast, reliable and detailed information before you invest, shares are the winner.

Diversification

Shares are a clear winner. As property costs so much, it is very difficult to buy two or more properties in order to diversify and reduce risk. This is much easier with a share portfolio. With just a few thousand dollars, you can invest in numerous companies in a variety of sectors. For risk-averse investors, this is a big attraction. Shares win.

Legal Issues

Most of the paperwork that a property investor will come across is the legal documentation involved in buying and selling property. If you don’t want to get involved in signing copious amounts of documents and involve lawyers or conveyancers in the deal, stick with shares; it’s much simpler!

Hassles

Looking for a relatively hassle-free investment? Buy shares. Even if a property investor has their property professionally managed, they will still need to deal with (and pay for) repairs, maintenance, council rates, water rates and other taxes and, possibly the biggest hassle, ‘the tenant from hell’. There are ways to avoid bad tenants and many of the hassles associated with being a property owner but, in the end, share investment I much less trouble than property investment.

Make Money From Falling Markets

You can’t make money from property when property prices are falling. Other than buying in at a cheap price, there’s not much chance of making a profit on the downward slide of the property market. However, you can make money in a falling share market by short selling, and achieve it in a relatively short period of time.

Advanced Investment Opportunities

There are many more advanced investment opportunities to make money in the share market than by investing in property. Options are common to both property and shares, but you have a variety of alternatives when it comes to shares, such as warrants and contracts for difference (CFDs) – and the list goes on. If you are looking for some variety in your investment life, seek out the advanced investment opportunity.

Summary

There are both advantages and disadvantages inherent in investing in either property or shares. The great disadvantage of shares are the lack of leverage and the high volatility; whereas shares are much better than property when it comes to liquidity and diversification issues. Property has the advantage of providing the ‘sleep well at night’ factor for the risk-averse investor, but owning property can be more complicated than owning shares.

The bad news is that is no one asset that can provide you with everything. The good news is that all of this can be achieved by buying both property and shares. The ability to use the advantage of both asset classes, while at the same time minimising some of the disadvantages of each, is possible when you buy and hold some property and some shares.

We are not saying that you should have 50% of your money in property and 50% in shares. The weighting of property versus shares will depend on a variety of factors, particularly your risk profile.