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Investing in property vs. investing in the stock market

When you want to build wealth, investment can be one of the best ways to do so. But should you focus on investing in real estate, or shift your attention to investing in stocks? Here we’ll go through some of the pros and cons of investing in property versus the stock market.

Something to note with investment and wealth generation is that future performance of your investment is not guaranteed. There are some things that influence the market that you just can’t predict or account for, like a pandemic. This means that there is always going to be a level of risk involved in investing, and it’s often a good idea to speak to a licensed financial advisor or planner before getting started.

Cost to invest

A major difference between investing in property and investing in the stock market is the cost to get started. Real estate has a much higher entry point when compared to buying stocks, especially if you want to buy property in an expensive location. You have to think about:

In Sydney, the median house price is around $1.4 million. If you wanted to buy a home at that cost with a 20% deposit, you’d need to save up around $280,000 - and that isn’t accounting for stamp duty which is another expensive upfront cost.

On the other hand, you can start investing in the stock market with just a few dollars. This is thanks to micro-investing apps like Spaceship, Raiz and Commsec Pocket which have made investing much more accessible. And to invest more directly through a brokerage platform, your initial investment usually just needs to be about $500 (plus a fairly nominal brokerage fee possibly).

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One advantage of investing in shares is that it is easier to diversify your investment portfolio. When you just invest in property, you’re just investing in one industry and likely a very limited number of assets (properties).

Smart stock market investors will create a diversified portfolio. This limits risk by ensuring that you have investments in various industries and asset classes. If you put all your money into just one industry or stock, you run the risk of losing a lot of money if that industry or company experiences difficulties.

Another thing to remember is that you don’t have to decide between investing in property OR investing in the stock market - it’s entirely possible (and often a good idea) to invest in both. As with any investing decision you make, ensure that you have a healthy emergency fund, and that you aren’t investing money that you will need soon. While you may hear true stories of a $500 investment turning into $50,000 within weeks, this won’t be the case for most people. Long term investment strategy is typically the safest route to take to build wealth, rather than attempting to get rich overnight.

The stock market can be confusing

Most people are more likely to have at least a basic understanding of the property buying process, but the same can’t be said for the stock market. There are so many investment options to choose from, tax implications to consider, and a level of uncertainty that can make the process intimidating.

It’s worth taking the time to educate yourself and understand the stock market better before you get started. Alternatively, you can seek out a good financial advisor to guide you, or opt to invest through a managed fund where experts will make important decisions for you. The Australian Government’s MoneySmart website has some good information on buying and selling shares, choosing shares to buy, keeping track of your shares, and more.

The complicated nature of investing isn’t just limited to buying shares - property investment isn’t necessarily a walk in the park either. Here are some resources to help you get confident with investing in property before you look to buy:

‘Safe as houses’ - is property investment the stable choice?

While the stock market is often perceived as a crazy, volatile place to invest (just watch The Wolf of Wall Street), property investment tends to be framed as a more sensible investment. So, is that true?

Well, unfortunately there isn’t a yes or no answer. It entirely depends on the nature of your investments, the economy, and a range of other factors at the time that you are investing. If you spend your time day-trading and investing in penny stocks, you are playing a riskier game and can end up losing a lot of money.

But, a well-diversified share portfolio provides greater exposure to more industries and market sectors than purchasing 1-2 investment properties. And, if property prices are on the decline, shares can potentially be a less risky investment.

Shares are usually more liquid too, meaning that they are easier (and faster) to sell for cash compared to a property. Plus, your stock market investments aren’t usually tied to a loan, unlike many investment properties.

Despite this, Australia is still a property-obsessed nation, and property prices are relatively stable right now (even growing, in many regions). In fact, investing in real estate can actually protect you from inflation given that property values typically rise in accordance with inflation.

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Which is best for income generation?

Property investment

When you have an investment property, you typically have guaranteed rental income. The only thing is that your property needs to be rented out to get this income. This should influence what kinds of properties you consider purchasing. Research the property market in your desired location to see what kind of properties renters are looking for and what vacancy rates are like.

You aren’t always guaranteed to be able to cover your mortgage repayments and property expenses with your rental income. This is known as negative gearing, and while not ideal for investors looking to increase their cash flow, it comes with some attractive tax benefits. While your property expenses may vary slightly over time, you can usually estimate them before you buy and get an idea of whether your property will be negatively geared.

Stock market

Many companies pay their shareholders distributions or cash dividends (usually quarterly, biannually or annually), which is where the company pays out part of its profits. Depending on the size of your investments, this can give you a nice little bit of extra income. Not all stocks offer dividends though, or some will provide stock dividends instead. This is where the dividend is paid in shares rather than cash.

But as mentioned above, shares are a more liquid investment. This means you can sell them more easily. So, if you’re in need of some cash, you can sell just a fraction of your shares if you want.

Comparing tax implications

There is a lot of overlap between property and the stock market when it comes to tax time. There are some deductions you can claim for expenses incurred when earning some kinds of investment income.

One of the biggest commonalities between investing in property and investing in shares is capital gains tax. Capital gains tax (CGT) comes in when you sell an investment and make a profit. Capital gains will be taxed at your marginal tax rate, but if you hold onto your investment for longer than 12 months, you’ll receive a 50% CGT discount.

However, property investors do have a number of extra tax advantages and deductions they can make. Read more about the deductions property investors can claim here.

So, which is better?

It’s impossible to say that one investment strategy is better than the other because there are so many variables to consider. It also depends on what you define as investment success.

If you are a property investor, will you be pleased if your investment generates passive rental income that supplements your lifestyle nicely? Or does success look like making a 40% gain when you sell the property?

Interested in property investment? It’s a good idea to speak to an expert about your home loan options. Lendi’s Home Loan Specialists can provide you with free advice today.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: investing, investment, investment property, new home, new purchase, capital gains tax

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