Should you invest in property or shares?
Successful investing is about looking at the bigger picture. Inside we look at how shares can out perform property and provide superior investment returns for the savvy investor.
- Property and the illiquidity of your money
- The cost of property investments VS shares
Need spare cash? Try selling the spare room
Life delivers curve balls. And when you need cash in an emergency, an investment property is more likely to be a hole in your pocket than a hole in the wall.
Australians love bricks and mortar. Most of us aspire to own our own home. Many back up the family castle with an investment property.
The popularity of property comes as no surprise. No matter whether markets rise or fall, you can see your investment. You can touch it. It's very reassuring to look at a slice of Australia and know it's yours.
What is surprising is that property can be a master, not a servant.
Plenty of expenses, plenty of hassles
Think about your own home. You need to maintain it. Insure it. Things break down, repairs need to be made. It all costs money.
It's the same with an investment property. You may be able to delay repairs on the family home, but landlords are under a legal obligation to provide a safe dwelling. So when the tenant calls on a Sunday morning to say there's no hot water, or the roof leaked during last night's storm, you need to fix the problem.
Moreover, you have to pay for it. Of course the official spin is that these costs are tax deductible. That's true. But you need the cash to foot the bills in the first place - money that may have been earmarked for the family holiday, or the kid's school fees, or the car registration.
Like your family home, an investment property doesn't just involve an upfront purchase cost. It demands ongoing spending. In fact the best way to maintain, and improve the value of your property is by spending more money on it. Funny that. Investments are meant to generate money.
Need cash? Don't look at property
But one of the biggest downsides of property is "illiquidity". Put simply it means if you need cash in a hurry, there's not much point turning to a rental property. Tapping into the funds tied up in bricks and mortar takes time. It could take weeks, even months, to sell. And when the dust finally settles you have the cash but no investment.
That's because property is an "all or nothing" affair. Your funds are locked away behind the front door. You can't simply sell off a bedroom or a slice of the kitchen when you need cash. The only way to access your capital is by selling the entire property. If the market is down at the time, you're cutting yourself short on the entire deal.
If it all sounds like hard work, that's because it is. Being a landlord isn't as easy as "buy now, sit back and watch my money grow".
If that's the sort of investment you're looking for, think shares.
Your stake in a real business
When you invest in shares, you are buying a slice of an Australian business. A piece of BHP Billiton. Your stake in Woolworths. A personal cut of the Commonwealth Bank. And here's the thing. The companies do the hard yards for you. Through market upswings or downturns, they get on with the business of making money. As an investor, all you do is reap the rewards. No calls on a Sunday morning. No unexpected bills. No complaints about noisy tenants.
If one of life's curve balls swings your way, it's not a problem. Unlike property, shares are very liquid. You simple sell sufficient shareholdings to release your capital, the money is in your pocket within days, not months, and the rest of your investment continues to work. Easy.
Superior long term gains
Shares aren't just hassle-free; they also deliver powerful long term gains.
Let's say for instance, that you purchased an investment property in early 1993. With upfront cash of $31,000 you're able to buy a residence worth $200,000. Taking into account rental income and capital growth, less the costs of owning your property, by the end of 2009 your slice of Australia is worth $570,000.
So how do shares compare? If you'd invested that same $31,000 into the share market at the start of 1993, by December 2009, after making regular contributions equal to the costs of a property, and by reinvesting dividends, your investment would be worth $654,000. That's an extra $84,000 in personal wealth and considerably less grey hair.
The bottom line is that shares work just as hard as property. They're just a lot less hard work.
If you like your investments to take up your time - and money - stick with bricks and mortar. If you want to sit back and let an investment do the hard yards, speak to your financial adviser about the role shares can play in your long term plan.
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