Investopoly It’s all about gearing, not property. Without gearing, shares are better.
It is often debated which is a better investment, property or shares. It is my thesis that property is an okay investment, but not as good as shares. However, when you factor in gearing (the ability to borrow to invest), property becomes a wonderful investment – better than shares.
Property versus shares
The main advantages of shares (compared to property) include:
§ You can outsource the management of a share portfolio to an advisor. However, as a property investor, you may need to spend time to work with your managing agent to deal with tenant issues and/or property maintenance/repairs.
§ Shares can generate a stable level of income with no (or few) related expenses. For example, the ASX200 index has yielded circa 4.5% p.a. for a long time.
§ Shares are liquid and have low entry and exit costs e.g., no stamp duty, real estate agent fees, etc. This means you can invest and divest in small increments.
The main advantages of property include:
§ Most investors feel comfortable borrowing to invest in property, which means you don’t need to make a large upfront cash contribution to be able to invest.
§ The assets tangibility can make investors feel more comfortable.
§ You don’t need ongoing financial advice after you have purchased the property.
§ Investment-grade property provides most of its return in capital growth in return for less income, which is tax effective.
We can debate the pros and cons of shares and property until we are blue in the face, but I think it’s a meaningless debate. It’s like debating which golf club is better. They are all different and you need more than one club to play well.
How do returns compare?
My thesis is that it’s not property that makes property investing so effective. It’s the gearing that does a lot of the heavy lifting. Therefore, an investors decision is not whether to invest in property or shares. Their decision is whether to borrow to invest or not. If it is appropriate to borrow, and they can do so safely, then borrowing to invest in property will likely generate the highest return.
I financially modelled borrowing to invest in a property, holding the property for 25 years, and selling it to realise the cash proceeds after repaying the loan and paying for capital gains tax (my assumptions are in the footnote[1]). Whilst the investor doesn’t need to make a cash contribution (as they borrow the entire cost of the property), they do have to pay for the holding cos
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/
Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.