Property Versus Shares – what’s best for building your wealth?
Property in Australia has made a lot of people a lot of money over the past decade or so. Property prices stunned analysts and reached all-time highs, particularly in Sydney and Melbourne. But, like any market, property moves in cycles and we’re now experiencing a ‘cooling’ of prices. Sometimes this is referred to as a ‘downturn’ or a ‘slowdown’.
Because prices are falling, some people may be considering purchasing an investment property while conditions are currently a bit more favourable for buyers. But there are some important considerations for would-be property investors at this time. Firstly, banks have tightened the lending criteria for investors, making it more difficult to get finance. Secondly, the tax regime that has long been favourable for landlords is now under scrutiny. All in all, it could be a wise move to just take a ‘wait and see’ approach to property investment right now.
Property has always been considered a stable long-term investment and it is, but when you consider the cost of property, rental yields alone – as an average across the nation these are around 4% – don’t make property a high performing investment.
Added to the property price, there are upfront mortgage fees and stamp duty straight away when you purchase, and thereafter a steady stream of ongoing costs such as property management fees, rates, insurance and maintenance. When all these expenses are taken into account, net yields are even lower. For this reason, astute investors wait for capital gain, but given the current state of the property market, growth in property value is particularly hard to predict right now.
A share portfolio
The other investment opportunity is shares. Based on past results, over the long term, share market returns have been steady.
Shares come with a perceived higher risk – but to be honest, this is a bit of a misnomer. Yes, there are risks in investing in the share market, (just as there are risks investing in property) but a diversified portfolio can mitigate these risks.
Proper and considered management by a qualified and experienced financial planner will also hold you in good stead – market information is available moment-by-moment, and shares are flexible – they can be moved around with ease if you prefer one stock over another. Or if, for example, you want higher returns over a shorter time frame, you can structure your portfolio to aim for this.
Shares are also much less time-consuming than owning a property. Shares can also be ‘cashed-in’ far more quickly than a property too, if you need your money. The other good thing about shares is that they are accessible. You can start a managed fund with as little as a few thousand dollars. A property, on the other hand, requires a much higher deposit to secure.
Property will always appeal to many people. After all, owning our own home or an investment property is part of the Australian psyche – it’s culturally embedded within us and there’s also something quite comforting about ‘bricks and mortar’. But shares are also a good performing asset – far superior to leaving your money in the bank.
Diversification is the aim
The key to wealth creation is investing across a number of different areas – shares give you the opportunity to do this. Because the share market also runs in cycles, when one particular sector is not performing well, other sectors may be, which means that your risk of loss is considerably lower, and you will achieve more balanced financial returns across the board.
Everyone is different – we each have different financial commitments and priorities, and therefore we need to make decisions that work for us as individuals. It comes down to personal preference and what you want to achieve.
If you’d like help exploring investment options, talk to us.
This is general advice and should not be treated as personal advice. Tyron Mitchell is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.
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