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Property vs Stocks


Property vs Stocks

A common discussion among investors over time is property vs stocks and which asset gives a greater return. When investing your hard-earned cash it can be difficult to determine which type of investment is best suited to you and your circumstances.  Both asset classes require different degrees of understanding and levels of risk. Moreover, each asset class has a range of advantages and disadvantages in contrast to one another. But which asset gives the best return on investment (ROI)?

Real estate and stock investing have shown to be two of the most profitable and reliable assets over time. Within property investing the investor aims to generate capital growth and/or cash flow. Similarly, property and stocks follow the same suit and provide investors with a similar approach. This is the backbone of investing, purchasing an asset that over time will have greater value and provide a cash return. Given these two asset classes are the most common form of investing it would be worthwhile to investigate the pros and cons of these two asset types and why one may be better suited to a particular investor than the other.

The Benefits of Property

Property investment have been used as a wealth-building tool for many investors for a long period of time. It has proved over the long term to be a relatively stable asset class that provides great returns for educated investors. There are numerous advantages to investing in property which can be seen as the following:

  • Utilise leverage to magnify growth over time.
  • Can provide a consistent rental return.
  • Generally, lower risk investment and has seen to avoid major crashes.
  • Lower volatility compared to other asset classes.
  • Can provide capital growth over time.
  • Being a physical asset means investors can add value to a property through renovations.
  • Can be bought below the perceived value of the property.
  • Numerous tax benefits can be used to reduce overall tax paid.
  • Allows investors to tap into the equity of properties for other purchases.
  • You have control over the property and how it is run.
  • You can’t create more land which increases the scarcity of properties.
  • Can allow for future development.

The Benefits of Stocks

Similarly, stocks have been an extremely successful wealth-building tool for many years. When purchasing stocks, the investor is essentially purchasing a small part of a larger company. The stock price is derived from the growth of that company and the perceived value of the stock in the market. There are numerous benefits to stock market investing which can be seen:

  • Can provide capital growth over time.
  • Can provide dividends to investors.
  • Has high levels of liquidity.
  • Diversification across numerous stocks in different industries.
  • Small entry and exit costs.

Property vs Stocks: Comparing the Two

Property vs stocks is a common discussion because both have so many advantages. Each asset class can be extremely powerful in wealth creation if understood correctly. Although, the main differences between the two asset types can dictate the asset class in which an investor may wish to pursue.

The property market appears to buffer volatility more than the stock market as price fluctuations aren’t as prominent. This is mainly because property is an illiquid asset meaning it takes time to buy in and out of a property. In addition, property has entry and exit costs that are a lot larger than stocks meaning there are fewer transactions and subsequently less price volatility. Stocks can be bought and sold on the same day making it easier to access invested money. However, the stock price listed is the stock price paid so an investor can’t manufacture growth without the market moving. While, a property is a physical asset which means it can be renovated, bought below market value, or developed for capital growth.

As illustrated both asset classes have benefits that may predominantly suit an investor to one particular asset class. One of the biggest difference which can be illustrated between these two asset classes is the power of leverage. When comparing property to other financial assets one key advantage which property has is the ability for an investor to leverage their money. Leveraging money can increase the risk of an investment as the value of an asset is magnified, however, it can also be an extremely powerful wealth-building tool. Take the following example for instance:

Investor A has 100k saved and is looking to invest their money into a financial asset. He has narrowed down his investing approach into two asset classes: Stocks and property.

Scenario One

If he place’s his money into the stock market, he may see 10% growth over the course of a year. In addition he may receive a 3% dividend paid quarterly. He may end the year with a profit of roughly 20-22k should he reinvest their dividends, this is a 20-22% ROI.

Scenario Two

If he purchases a 400k property he will pay approximately 14k in stamp duty, 2k in soliciting fees, and building and pest inspection. This leaves him with a remaining 84k for the 20% house deposit meaning he won’t pay lenders mortgage insurance (LMI). His annual repayments are $16,200 per year (30-year P&I loan at 3%) plus additional expenses of around 4k for insurance, rates, and property management fees, a total of 20.2k annually.

His rent for the property is $450 a week which equates to 23.5k annually and property management fees have already been accounted for. This leaves him with a Positive cash flow of 3.3k per year should there be no additional maintenance expenses. If the property grows by 10% over the course of the year, he will make 40k plus the 3.3k cash flow equalling 43.3k. This a 43.3% ROI and far greater than that of the stock example.

(This is not to say property is a greater investment tool than stocks but illustrates the power of leverage).

The Verdict

Both property and stocks have been seen to be life-changing for many investors who have made educated investment decisions. When comparing property vs stocks the investor can see the numerous benefits each asset class possesses. Ultimately, an investor’s decision to adopt a particular asset class should be dictated by their ability to understand that particular asset and how to successfully invest within that market. Moreover, an investor’s risk appetite and goals may drive an investor towards a particular asset class over another. Choosing an asset class that the investor is knowledgeable within and that aligns with the investor’s goals may be the best avenue to pursue to generate wealth.

Want to see other examples of significant property growth elsewhere in Australia?