Property vs Shares – Your Definitive Investment Guide
The debate between property and shares has been ongoing among investors due to the advantages and challenges each option presents. Because of this, it is crucial for investors to carefully consider their financial goals, risk tolerance, and investment timeline.
In this guide, we explore the key differences between property and shares to help you determine which investment option might be better suited to your financial situation.
Why Do You Want to Invest?
Before anything else, it is important to consider why you want to invest. Are you looking to:
Build a comfortable lifestyle in retirement?
Grow your wealth using your income?
Pass wealth down to your family?
Reduce taxes?
Make your finances more secure?
When it comes to investing, the first step is to clearly define your financial and personal goals. These decisions will guide you in making the best investment choices for your situation.
Your available capital will also play a role in determining what you can afford to invest in. Considering all these factors will help you make informed decisions that align with your long-term objectives.
Property vs Shares: Which Is Right for You?
Comparing property and shares is challenging because they are fundamentally different asset classes that respond differently to economic conditions. However, you can determine which suits you best by considering your investment style and risk appetite.
If you prefer tangible assets and are willing to actively manage your investments, even if they are less liquid, property may be a good fit.
If you value flexibility and are comfortable with market fluctuations rather than dealing with tenants, shares might be a better option.
Both investments come with their own risks and rewards, depending on factors such as market conditions, financial goals, and risk tolerance. Let’s explore the key differences in more detail.
What Is Your Investment Timeline?
Both property and shares can be suitable for short-term and long-term investment strategies, though they operate differently.
Property is typically a long-term investment. Over time, you may benefit from rental income, tax advantages, and capital growth, which can help build equity for future financial strategies like debt recycling.
However, property can also be a short-term investment. Some investors engage in property flipping, renovating and reselling for a profit, or buying in high-growth areas with the intention of selling once values increase.
Short-term investing in shares often involves market timing and active trading, where investors buy low and sell high. This approach carries high risk and requires significant research and time commitment.
Long-term investing in shares, on the other hand, benefits from compounding returns over many years. Investors often start with a high-risk strategy and transition to a more balanced approach as their portfolio grows. This method is typically more passive, relying on overall market trends for returns.
Capital Growth and Return Potential
Australian property, particularly in capital cities, has historically delivered strong returns. Over the 20 years leading up to 2017, residential property recorded the highest returns among different asset classes, averaging 10.2% annually, followed by Australian shares at 8.8%, according to Russell Investments.
Shares, however, generally offer higher growth potential as they require lower initial capital and are easier to buy and sell. Vanguard’s 2023 Index Chart reported annual returns of 9.2% for Australian shares and 10% for US shares.
While past performance does not guarantee future results, these trends offer insights into the historical performance of the Australian stock market.
Property values tend to increase over time but move in cycles influenced by local economic factors. In contrast, share prices fluctuate daily based on company performance and external influences such as political and economic conditions.
Income Generation
Property investors earn income primarily through rental yields, which can help cover mortgage payments and other expenses. High rental yields typically come with higher risks but also provide the advantage of potential rent increases over time.
Shares generate income through dividends: profit distributions paid to shareholders. Dividend returns vary depending on the company, exchange-traded funds (ETFs), or managed funds you invest in.
Choosing between property and shares depends on whether you prioritise steady rental income, capital growth, portfolio stability, or high dividend returns.
Timing is also crucial. Property requires a significant upfront investment, while shares offer more flexibility in terms of entry and exit.
Time and Effort Investment
Shares provide flexibility as they can be managed either actively or passively. Active share trading requires frequent research and transactions, making it time-intensive and potentially risky. Passive investing, such as index funds or ETFs, requires minimal effort while still allowing for diversification.
Property investment demands more direct involvement, including property maintenance, renovations, and tenant management. Investors must also comply with legal and regulatory obligations.
Diversification
Property investment can provide diversification within a portfolio, though it often requires significant resources. Shares, in contrast, offer an easier way to diversify by spreading investments across different companies and industries with relatively low capital.
Flexibility and Liquidity
Shares offer greater flexibility and liquidity than property investments. They can be bought and sold quickly, which is useful in volatile markets.
Property, as a physical asset, lacks the same level of liquidity. Selling property involves significant time, effort, and transaction costs, making it less ideal for investors needing quick access to funds.
Tax Benefits and Leverage
Both shares and property offer tax advantages and leverage opportunities.
For shares, one of the main tax benefits comes from franking credits, which allow investors to claim tax rebates on dividends and prevent double taxation. However, future policy changes may affect the availability of franking credits.
For property, tax benefits include negative gearing, where rental expenses exceed rental income, reducing taxable income. Investors can also claim deductions for maintenance, depreciation, and interest costs.
Both asset classes offer ways to offset capital gains tax on investment profits.
Market Volatility
Property investments generally experience lower volatility than shares, making them attractive to risk-averse investors.
Shares, on the other hand, tend to be more volatile but offer the potential for higher returns over shorter periods. Investors with market knowledge and trading expertise may be able to capitalise on these fluctuations.
Pros and Cons of Property vs Shares
Property
Cons
High upfront costs
Requires ongoing maintenance and management
Limited flexibility and liquidity
Subject to market cycles and local economic factors
Pros
Tangible asset
Strong long-term capital growth potential
Offers control over investment decisions
Generates passive rental income
Historically lower market volatility
Significant tax benefits
Shares
Cons
Higher market volatility
Intangible asset with less direct control
Returns fluctuate based on market conditions
May require significant market knowledge for active trading
Pros
Lower entry costs
High liquidity and ease of trading
Potential for high capital gains
Dividend income provides cash flow
Strong diversification potential
Minimal ongoing maintenance
Investment Strategies for Property vs Shares
Property Investment Strategies
Location matters – Buying within 15km of a capital city generally provides better returns.
Negative gearing – Investors can use rental losses to offset taxable income.
Leverage equity – Home equity can be used to finance additional property investments.
SMSF property investment – Some investors use Self-Managed Super Funds (SMSFs) to invest in property.
Share Investment Strategies
Dollar-cost averaging – Investing a fixed amount at regular intervals to smooth out market fluctuations.
Active investing – Involves frequent buying and selling based on market conditions.
Passive investing – Buying ETFs or index funds for long-term growth with minimal management.
Choosing between property and shares depends on your financial goals, investment horizon, and risk tolerance. Both have advantages and challenges, so it’s important to assess your situation before making a decision.
