In this article, we’ll look to address one of the most broadly asked questions from budding investors: Is it better to invest in Real Estate or Stocks?
Before we begin, it’s important to note that choosing the right investment type isn’t about choosing which asset class is better overall, but rather, which is best suited to your current needs.
To help investors determine which best suits them, we’ll begin by covering off some basics about both asset classes. Then, on a surface level, look at how they stack up on the points most people care about– growth, cashflow and risk.
Stocks as an investment
When buying stocks, you’re buying shares in publicly traded corporations – typically entirely with your own money.
Investors are betting that a company will be successful and its stock will increase value in the short or long term, which then makes them a capital gain (profit) when they sell.
Real Estate as an investment
When buying a commercial or residential property, most investors take out a significant portion of the purchase price as a loan. Usually 60-90%. They then put down the remaining 10-40% from their own pocket, and lease out the property for a regular fee.
When property values go up, their asset builds equity. Equity is the difference between the market value of the property and the owing balance on the loan. This money can be reinvested elsewhere while still owning the property subject to capacity. If investors choose to sell, they make a capital gain.
How do stocks compare to Real Estate?
One of the leading benefits of stocks is that they are highly liquid. Investors can buy and sell stocks as they please almost instantly, and for a very low cost.
Property, on the other hand can take a few months to trade, and is expensive to sell (it’s normal for the whole process to cost upwards of $25,000.)
The liquidity of stocks gives investors a sense of freedom, in that they can exit their investments and reallocate capital as needed. But also lends the wider market to greater volatility.
The illiquidity of Real Estate on the other hand shields property values from rapid decline. Market drops are infrequent, much slower and usually short-lived, giving property investors stability in their portfolio.
Rate of Growth (or decline)
Stocks
There are many investment strategies that vary in growth prospects and risk. Some investors enjoy significant growth their stock portfolios, doubling their money year on year (or even month to month). But the typical rate of growth is around 6-10% per year.
A downside (or upside depending on your view-point) is that stocks are considerably more volatile than real estate. Macro-economic conditions, the media and investor sentiment can impact the value of shares either negatively or positively extraordinarily fast. Therefore, investors can quickly lose large chunks of money if they find themselves needing to sell when the market is down. But can also grow their money quickly if they manage to buy well.
The typical share is held for less than a year before being traded. But if you look at the performance of any solid company share over 5+ years, many will show healthy growth the longer-term. There are good arguments for investing in shares longer – or else adopting a strategy like Dollar-Cost Averaging (DCA) to counter volatility.
If you’re looking for an investment that’s cheap to trade and has no inherent time commitment, stocks might be the right option. However, make sure you’re comfortable with the level of volatility and take time to plan your investments. Another option is to engage a financial advisor at an additional cost.
Real Estate
Unless you’re flipping homes in a booming market, investing in real estate usually isn’t a rapid growth method. However, it is an excellent strategy for investors seeking mid to long-term reliable appreciation, cash flow, and generational wealth.
It’s typical for residential investment properties in Australia to grow in value by 5-10% per year. It’s recommended that property investments are held for around 10 years at a time. During which most investors will see significant growth.
The risk of overall decline with property is generally low. Residential and commercial real estate is slow to replicate and their value is preserved in the market for longer periods. Wider-economic conditions have a minimal and slow impact on property values.
If you’re looking for a mid to long-term set-and-forget investment to build reliable capital growth, provide decent cashflow – and/or act as a future home for yourself or family members, property is a great option.
However, it’s not uncommon for buyers to unknowingly purchase properties that need high-cost repairs, located in saturated markets, have high outgoing costs or are overvalued at the time of purchase. It’s advisable to seek professional guidance when buying real estate.
Cash flow
Stocks
Stocks can offer cashflow in the form of dividends. But not all do. Instead, many companies choose to reinvest profits for future expansion, so investors need to choose carefully based on their cash flow requirements.
Companies that are new or growing rapidly, typically won’t pay dividends. But more established and mature companies will pay dividends as it conveys a message of confidence to investors. Dividend-paying stocks will generally grow at a slower rate, but are more reliable and less impacted by overall market declines.
A typical yield sits somewhere between 2% and 5% depending on the market.
Real Estate
Investment properties offer cash flow in the form of rental yields. A rental yield is essentially the annual profit you make from your investment property expressed as a percentage of your property’s overall value.
A typical yield for a good residential investment in Sydney, for example, is circa 3%+. On the Gold Coast at the moment you’re looking at 4-6%.
Commercial properties on the other hand offer much longer leases and typically generate yields of 4-7.5% depending on location, tenancy structure & upside potential.
Negative Gearing
Investment properties offer tax benefits in the form of negative gearing. If an asset is negatively geared, the property’s costs are higher than its income.
While this may seem counterintuitive, most of these costs are tax-deductible, which can help investors save significantly on tax while the property’s overall value appreciates.
Wrapping up
Both Stocks and Real Estate make fantastic investments when done well. Real Estate investment carries a higher inherent cost of entry and exit, but lower overall risk.
Ideally, investors should work towards having a diverse portfolio of shares and real estate that’s balanced for their individual cashflow and growth objectives.
For property investors, it’s recommended to work with a good buyer’s agent when building your portfolio. They understand the market, run calculations on each property’s offering and will lead you to investments with the best mix of yield and capital gains for your needs. Plus, help you purchase safely within your budget, minimise your expenses over time and reduce overall risk.
Getting the purchase right in the first place can make an enormous difference to your bottom line. This is especially true they you’re investing in a commercial property.
We hope this article was helpful to you. If there’s anything we haven’t covered or if you’d like advice on your situation and property search – you can write to us anytime at enquiries@roseandjones.com.au.
