What’s a better investment: Stocks or property
Over a long period of time, both real estate and the stock market have proven to be great investments, however, as a new investor, it can be hard to know which one is the best fit for you.
While both can be great ways to build and protect your wealth, it’s worth looking at the advantages and disadvantages of property over the stock market.
Advantages
Leverage: Arguably the most powerful element of property is the fact that you can purchase an expensive asset with very little money down. With the help of different government schemes or different loans, it’s possible to buy a property with as little as just 5%. This means you get the benefit of the long term capital growth on the entire value of the asset after you put down only a small deposit. In the stock market, margin requirements are far higher and typically above 50%.
Tax benefits: In Australia, there are a range of tax benefits that make investing in property incredibly appealing. Owner occupiers are exempt from capital gains tax which can save hundreds of thousands of dollars. Investors are able to take advantage of negative gearing which means they can offset any property-related expenses against their income to save on taxes.
Volatility: Property is normally considered a safe long term investment, with values remaining relatively steady and rising slightly virtually every year for decades. On the other hand, share markets are often subject to large swings and long periods where prices fall or go sideways.
Add value: The major difference between property and the stock market is that investors and owner-occupiers have the ability to add value to their assets. It’s possible to buy a property, renovate the kitchen, subdivide the land or even develop it and increase the value of your asset. For stocks, you are only able to buy at a certain price and let the market forces take over. Property gives you far more control to manufacture equity and not just rely on underlying capital appreciation.
Tapping into equity: Another factor that makes property investing incredibly powerful is the ability to tap into the equity that you’ve built up in a certain property and use that as a deposit on another investment. This is how you’re able to build a large property portfolio from just a single deposit. It’s far more difficult to borrow against a stock portfolio and certainly more risky given the volatility and margin requirements.
Underlying demand: Property in Australia is driven in a large part by strong ongoing demand in the form of immigration. With a fixed amount of land and more and more people moving here every year, demand will continue to rise and values will therefore keep moving higher. Stocks do benefit from a rising population, but the impact is not as pronounced as it is with property, given the time it takes to build new homes to keep up with demand.
A place to live: Another element of property that can’t be overlooked is the fact that a property also serves as a place to live. The family home is typically the largest asset most owner-occupiers have and it also serves as a place to live. This makes a property not just an investment but also something tangible.
Disadvantages
Transaction costs: The main downside of property investing is the fact that it costs a lot of money to buy and sell. For investors and owner occupiers, you will have to pay stamp duty unless you are exempt. You’ll also have to pay high costs to market and sell a property if you’re electing to use an agent. Compare that to stocks where your commissions are incredibly low.
Ongoing costs: Property also has a range of ongoing costs that need to be factored in including things like land taxes, water rates, council rates, strata costs and also things like costs related to valuations and mortgages. There are also property management expenses and maintenance and repairs.
High barrier to entry: Property in Australia is expensive and to purchase it with bank finance, you will need to come up with a deposit. While most lenders will typically want to see a 20%, there are ways to get lower deposit loans, with the help of government grants or with the use of Lender’s Mortgage Insurance (LMI). Stocks can typically be purchased with a small amount of capital.