Property vs shares: What is the better investment?

Property vs Shares

Have you ever asked yourself the question should I buy a property or invest in shares?

This is a common question raised by Australian investors wanting to grow their passive income to reach financial independence. When holding profitable shares or highly sought after property for the long-term investors can generate a passive stream of ongoing revenue and ultimately compounded capital growth.

Shares

Investing in the share market is a popular strategy for retail (individual) investors seeking to build their wealth. Investing in shares offers low-cost entry with the potential for a positive return on investment. I have summarised some of the key benefits and shortcomings when investing in the share market:

Shares Pro’s

• Potential for high dividend yields
• Highly liquid asset
• Low upfront costs
• Easy to diversify share portfolio

Shares Con’s

• Brokerage fees when buying and selling shares
• Subject to risk and market volatility
• May lose your investment in a downturn
• Competing against experienced stockbrokers

Shares offer an opportunity to diversify your income and compound your returns. Dividend reinvestment, capital growth, and regular contributions to an index fund can provide an effective strategy to build wealth in the long term. I have summarised the different options available to investors looking to build wealth through passive income here.

Property

Owning property is not just a young person’s dream but also the ambition of most Australians seeking financial independence. Firstly, most investors want financial security during times of instability and volatility. secondly, they can hold against the impacts of events such as COVID-19. Moreover, bricks and mortar provide this stability as investors can later use the equity in their investment to grow the asset portfolio. On the other hand, investors may prefer a more liquid asset that has a lower cost to enter the market. Therefore, I have provided a summary of the benefits and drawbacks of investing in property as follows:

Property Pro’s

• Stable and tangible asset
• Potential for capital appreciation
• Passive investment from rent received
• Ability to draw down equity if required
• Government incentives and tax concessions available

Property Con’s

• High transaction costs to buy and sell
• Illiquid asset
• High purchase cost needed to enter the property market
• Risk of vacancy or difficult tenants

However, the main drawback of acquiring property is the high costs associated with entering and exiting the market. For instance, property costs can include expenses such as stamp duty, insurances, and real estate managing costs. These outlays can eat into the profits of your investment if not carefully managed. Cashflow positive investments such as commercial real estate can offer better liquidity through higher rental yields. For information on commercial property investing have a read of Rethink Property Investing.

Long Term Passive Income

Property can provide a long-term passive investment option with the tenant paying off your mortgage. There are a number of incentives that can offset lower your taxable income. For example, deductions such as interest deductions, plant and equipment depreciation, and ongoing costs of rates and insurance. These expenses can reduce the taxable income to provide relief when lodging your tax return. Most importantly, ensure that you do your research before making a purchase. Investing in property may be beneficial for tax purposes but could be detrimental to achieving your overall financial goals. For instance, negative gearing may offer tax breaks but tighten cash flow when servicing a loan. To find out more about growing your asset base have a read of Rich Dad Poor Dad..

Whether to invest in shares or property is an investor’s personal choice and neither can be categorised as being better than the other. Consider your investment timeline and speak to a financial advisor who can guide you in creating a tailored approach to achieving your financial independence. Considering investing through a family trust? Have a read of the advantages of family trusts that you need to know.