Property vs. Shares

Jane Odulio

Dave is an advertising executive. When asked how he sees himself 10 years from now, he said, “I will have my startup company, my own house, a lovely wife, and three beautiful kids.”

We later asked what are the things he’s doing now in order to achieve that. He said he’s working hard and doing a part-time job. “Do you have some form of investment to back up your plan?” we asked. He replied, “Nope. But I have a few savings in the bank.”

In an informal survey that we conducted, we found out that eight out of 10 people have goals but don’t have a concrete plan how to get there. Why is that so? Is the fund management industry successful enough in scaring people because of their complex and dirty schemes?

But since we’re all here now, we owe ourselves a better future whether the market is bullish or bearish. The goal is financial freedom and independence amidst any situation. Because life is just like that. There’s absolutely no shortcut but it pays off big time if we did the first step right.

Here goes the first step. So you finally decided that you want to invest, but you don’t know exactly which asset can provide greater benefits for you. There’s an ongoing debate which is better—investing in properties or shares. According to your capacity to invest and the risk you can afford to take, you can weigh things and decide what works best for you. Below, we will examine who the real winner is.

Are you betting for property or shares?

In terms of capital growth

In this case, shares outperform property, provided that you bought quality shares from companies with strong management and a healthy balance sheet.

In terms of income

It’s really hard to pick who’s the winner here since both can provide a hefty income through dividends for shares and rent for the property.

In terms of tax effectiveness                                                                                         

Again, both property and shares are winners here. Depreciation benefits are awarded to new and recently renovated properties, while dividend can be franked (30 % of the tax is being paid by the company who issues the stock).

In terms of degree of control

Property is the winner here since property owners have a greater control over their asset than share investors. The owner of the share can’t do much if the value of the share is decreasing and he’s not receiving the amount of dividend that he wanted. The property owner, on the other hand can make home improvements or renovations to improve return on the property.

In terms of volatility of returns

 If you are looking for “sleep well at night” factor, you can go for property. Because of the erratic movements of the market, returns for shares are sometimes unpredictable.

In terms of frequency of returns

Again, property wins here. Rent can be paid weekly, monthly, or quarterly while dividends are usually paid every six months.

In terms of financing

Using the real estate itself as a security when borrowing money to buy property is cheaper than having a share portfolio as a security when borrowing money to buy shares. Property wins here.

In terms of leverage

Let’s say you have $40,000 cash. With this, you can buy a share portfolio with a total value of $160,000 (assuming you have an LVR of 75%). You can secure a property worth $400,000 with the same amount of cash. Property gives a knockout here on shares.

In terms of liquidity

Needless to say, shares win here. You can turn each share into cash in three to four business days.

In terms of ease of getting started

With $500 in your pocket, you can already start building a share portfolio. Shares win here because it is more affordable to buy a share portfolio than a property.

With all that said, property and shares have their own pros and cons. Investment advisors suggest diversification (own property, as well as shares) if you want to have the best of both worlds. Provided that you have the fund, property outperforms shares in many ways. But if you don’t have the fund to buy a property now, it’s best to start off with shares, with property as your long-term goal. The ideal is to eventually own a property with few shares in the market to get the maximum benefits these investment assets have to offer.