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Hey everyone, so for decades, the debate has raged on.
Property or shares?
In this video, we look at the pros and cons of each and what you need to consider before jumping into either market, hope you enjoy!
Today we will be discussing one of the most common questions in investing, should I invest in property or shares?
In this video we will walk through the basic pros and cons of each and also which one may be suitable for you.
Everyone knows what shares are, you find a company and buy a share of that company based on its future prospects. Or you look for an exchanged traded fund (ETF) that tracks a market index and put your money into it.
- The pros of holding shares are:
- Liquidity – shares and ETFs are generally more liquid, allowing you to buy and sell when you need to.
- Accessibility – they are also very easy to transact, with low entry and exit costs.
- Affordability – typically you can buy shares and ETFs from a very low starting base, say a few hundred dollars.
- Passive – shares and ETF’s usually just do their thing each day, with very little time and effort involved in maintaining the portfolio.
- Diversification – it’s easy to diversify your holdings and not put all your eggs in one basket.
- The cons of holding shares:
- Volatility – as we have seen in recent months, the price of shares and ETFs can fluctuate a lot in a short period.
- Capital loss – you can lose your money if the company you invest in goes bankrupt, or if the ETF you hold plummets in value.
- What you see is what you get – you can’t control nor add value to the share or ETF.
- Less (and more costly) leverage – typically, if you wanted to borrow against your share portfolio as a margin loan, you can borrow less than property as well as at a higher interest rate.
Now we move onto the pros and cons of investing in property.
As Aussies, we have this cultural obsession with housing, which has fuelled the biggest asset class at $6trillion (shares is approx. $2trillion), so safe to assume that most of us are familiar with property as either buyers or renters.
But what about investing in property? Let’s take a look at the pros and cons of each.
- The pros of buying property are:
- Leverage – one of the biggest is leverage, as typically the lenders can lend you more money to get into the market (leverage does work both ways however) on very cheap rates (low 2%’s currently).
- Add value – another one is the ability to add value to the property, e.g. doing a reno or adding another dwelling.
- Tax benefits – also more tax benefits as a property buyer, from negative gearing, to no stamp duty, to avoiding CGT, myriad of tax benefits for individuals depending on their circumstances.
- Inflation protection – because property is a tangible asset, it is sometimes used as a hedge against inflation (general rise in price of goods and services).
- The cons of buying property are:
- More involvement – typically being a property investor is more hands-on to deal with maintenance and other issues, you can hire property managers but they come at a cost.
- Less affordable – you would usually need a higher capital amount to buy in, as seen with the high prices in Sydney and Melbourne, where a first home buyer would need to save over $100k+ for a median price home.
- Not as liquid – longer to buy and sell, this means if you need money in a hurry, you may need to reduce your sale price.
- Cash flow dependent – most of us who buy property have mortgages against them, which means we are dependent on the rent and cash flow to service these debts.
Which one for me?
There is no right or wrong answer because historically both property and shares have performed quite well.
But here are some things you would need to consider:
- Your capital position – do you have enough money to make the investment?
- Risk appetite – are you willing to cop short term losses for long term gain (with shares)?
- Goals – what are your financial goals and when do you want to achieve them?
- Diversification – do you want to put all your eggs in one basket (with property)?
- Do you want to be a passive or active investor?
Personally, I have invested in both asset classes and have made decent gains in both. but which one would you prefer? Let me know in the comments below!
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