The investment property v stocks debate

For a long time, it has been a hot debate as to which asset – real estate or stocks – is better designed to build long-term wealth. 

Many Aussies seem to be inclined towards investment properties when it comes to investing as the country’s real estate market continues to make the news and present new financial opportunities for investors. 

But investment property’s popularity may be due to its seemingly straightforward nature. Unlike shares, real estate is an asset that everyone is familiar with. However, this quality doesn’t necessarily make it a better investment vehicle than shares. 

The stock market’s volatile nature makes it less appealing to risk-averted investors. But it’s also important to note that some of the world’s most successful investors have made their fortune by betting on stocks. If you play your cards right, the high risk associated with this intangible asset can also result in big rewards. 

When deciding whether to invest in property or stock, there is no simple answer. Aside from the different variables we need to consider when investing in either market, identifying the better choice will also depend on your personal situation and preferences.

Understanding each type of investment is key to choosing the best investment strategy to help build your wealth and attain your financial goal. To that end, let’s discuss what you should consider when deciding whether to invest in stocks or real estate.    

Investing in stocks 

A share or stock is a unit of ownership in a corporation or a business entity. When you purchase stocks, no matter how small, you own that portion of the company. This makes you entitled to a proportionate amount of the company’s profits, paid to you as cash dividends. Another way to earn is by selling your stocks after the value of the company’s shares have increased. 

Shares can be bought on the stock market or exchange, such as the Australian Securities Exchange (ASX). For example, if you bought a share at $10 per unit, you might sell them later at $11 per share for a 10 per cent return on investment.

To learn more about investing in stocks, read here. 

Pros and cons of investing in stocks

Investing in the stock market comes with both advantages and drawbacks.  

Pros of investing in stocks

● Liquidity: Stocks are generally more liquid compared with investment properties, so your money is not locked up for a long time. You can easily sell your shares at a high frequency during regular market hours. On the other hand, it can take a long time to find a buyer for an investment property. 

● Minimal effort: As a shareholder, you are technically a business owner that is not required to make any contributions to a company’s day-to-day operations. At the minimum, you may be required to attend shareholder meetings (which are usually held annually).

● Dividends: Stocks from high-performing companies increase their cash dividends as their profits increase. This means you will get a bigger payout as the company’s earnings grow. If you choose to hold on to your stocks for years, you will have a steady passive income, which will help you grow your wealth in the long term.

● Fast capital gains: If invested wisely, shares can potentially make capital gains at a faster rate than property would.

● Affordability: Unlike investment properties, you can buy shares with a significantly lower starting capital. Usually, buying a property requires a down payment of 20 per cent of the property’s value.  

Cons of investing in stocks

● High volatility: Stock prices can experience short-term fluctuations that can be extreme, which can make new or inexperienced investors nervous. It also makes liquidating a less attractive option. If you choose to hold onto well-valued stocks over the long term, market trends show that these market swings often stabilise. But if you are hoping to make quick money, the volatility in stock value can work against your favor. There can be missed windows of opportunity to sell or you may undervalue your stocks if you don’t know how to time the market. 

● Capital loss: You may make a capital loss and stop receiving cash dividends if a company you hold shares in enters bankruptcy.

● Emotional investing: Successful stock investing requires an unemotional approach. Investing in the stock market can be a very emotional experience due to the peaks and lows in share prices, so it is important to practice discipline. If you are too emotional and undisciplined, you will not get a chance to see the full benefits of investing in the stock market. 

● Stagnation: If you invest in companies that are not growth-driven or are not planning to innovate for more profitability, then your stocks will not give you the returns you desire.

Investing in real estate

Investing in real estate means you are buying physical land or property. A real estate that is bought for income-generating purposes is called an investment property. This includes apartment buildings, rental houses or a strip mall. 

Investment properties are considered as a safer and traditional way of building your wealth in Australia. While it needs a big capital because of the deposit requirements, it has a potential to provide a passive income through rental payments. 

Many first-time investors also find property to be an attractive asset due to its tangibility – it is an asset that they can see and touch. With renovations and with its appreciation over time, you can easily reap returns. Investors can also claim considerable tax benefits from investment properties. 

But there are also downsides to being a property owner. You will need to meet the stricter requirements set by lenders to acquire an investment loan, which usually has a higher interest rate than owner-occupied or residential properties. There are also a lot of downsides to becoming a landlord.  

Pros and cons of investing in real estate

Is real estate the right investment for you? Understanding its advantages and disadvantages will help you decide.

Pros of investment properties

● Familiarity: Australian investors feel more comfortable and confident investing in real estate because most people grew up with basic knowledge of it. Previous generations have emphasised the importance of “owning a home” and how having a property is associated with having wealth. Because of this, more people are more open to the idea of buying property compared with other investments.  

● Cash flow: A properly managed investment property can provide steady and reliable cash flow. If it is a rental property, you can expect a month-to-month rental income. There is also a huge profit to be earned by holding on to the property and selling it once its market value has increased. 

● Protection from fraud: It’s easier to avoid fraud with real estate. It is more difficult to be defrauded in real estate because you can personally see your property, do inspections and other checks. With stocks, your investment’s future is usually in the hands of management.

● Equity: You can use the equity in a property much more safely than you might when borrowing against existing stocks.

● Inflation hedge: Real estate investments have traditionally been a terrific inflation hedge to protect against a loss in the purchasing power of the Australian dollar.

Cons of investment properties

● Greater involvement: Compared with stocks, investment properties need a lot of hands-on involvement. You can hire a property manager to ease some of the workload, but this would only incur additional costs. Even with help, managing your investment will still require occasional meetings and oversight. 

● Continued costs and maintenance: Real estate can cost you money every month if the property is unoccupied. You need to keep your property tenanted to cover rates, insurance, utilities and maintenance. If you find yourself with a higher-than-usual vacancy rate due to several factors, you may lose money.

● Value: The actual value of investment properties hardly ever increases in inflation-adjusted terms. A property market crash could also result in plummeting house prices and increased investment loan interest rates.

Which is the better investment?

There is no simple answer as to which investment is better. Both investment properties and stocks can help you grow your wealth in the long term, but both assets also come with risks. 

When choosing the right investment vehicle for you, the best way is to create an investment strategy that will best work for your situation. 

In a nestegg Podcast, chief market strategist at CMC Markets Michael McCarthy said there is a huge variety of successful approaches to the investment market that depend on a multitude of factors, but they all have one thing in common – an investment plan. 

It is also important to seek personalised financial advice and do your research before venturing into any investment.

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