Property Vs Shares

Microsoft Vs Mac, Tomato Vs BBQ, Samsung Vs iPhone, Ford Vs Holden, Chicken Vs Beef. Each have their own positives and negatives, their own place in the world, however all seem to have the same divisive nature as Property Vs Shares. I'm often asked "what should I invest in? Property or shares"? to which I often respond with "it depends..." What I really want to say is "why not both?"... Lets focus on some differences and how these can be both positive and negative in their own way.

Entry/Exit Costs

Shares are most certainly the cheaper of the two to enter into. Online broker options such as Commsec can be as cheap as $10 per transaction for a $500 purchase. Commbank have even launched a new Pocket app which allows investors to start with as little as $50 with a $2 brokerage fee that invests in broad range index funds (ETFs) which are slightly different to shares in an individual business. Selling is the same. Property on the other hand can be expensive to start. Deposits, stamp duty, solicitor fees, etc can run into the tens of thousands of dollars as a minimum. Selling property also incurs much of the same costs including agent and solicitor fees. There is also significant ongoing costs with rates, utilities, management and repairs. Whilst the minimal entry/exit costs of shares is mostly a benefit, it can also cause a greater level of speculation with investors having "less skin in the game" so to speak.

Leverage

Leverage in Property is much more common. When buying property most of us take out a mortgage. Banks and lenders also see property as relatively "safe" and will therefore lend to high LVRs (loan to value ratio) of 80-90%. Leverage in Shares is a little less common. Investors will sometimes use lines of credit facilities however these are often subject to margin calls. Margin calls exist when the underlying asset falls below a certain valuation (say 70% of purchase price) and the borrower must tip in the extra cash to make up the shortfall. These margin calls are common in a share market crash however I am yet to hear of a margin call in property. With regards to property, the borrower will only have an issue if they are unable to make their mortgage repayments.

Risk

Property is often seen as the less "risky" (however this too is debatable). Investors attract to property's "tangibility" as it can be touched, felt and lived in. Shelter is fundamental to our survival so there will always be a need for housing. "They aren't making anymore land" is a saying most property investors would be familiar with. Property with a quality land component will always be worth something. Shares in individual business have in the past dropped to zero so there is an element of risk. However, the idea with shares is to focus on investing in companies that have longevity, profitability and are largely essential to our everyday livelihoods.

Effort

Both require some form of "effort" to invest in. A good investor should do quality research and due diligence when investing in shares or property. Company balance sheets and management should be studied prior to investing in a company and likewise property specifics and suburb analysis when buying a house. The real difference is after purchase. Outside of compiling details at tax time, there is really no other requirements whilst holding shares. Property on the other hand requires constant input with repairs, maintenance and dealing with tenants. A good property manager can mitigate this somewhat. The benefit however with property is the ability to "add value". There is really no option to improve the valuation of a share however with property you can renovate, subdivide, add a dwelling, shed, pool, etc.

Liquidity

Shares are far more liquid. Shares can be bought and sold at the click of the button. Property is a much longer process to both buy and sell. Settlement times, obtaining finance, listing campaigns means property is far more difficult to enter and exit quickly. Liquidity can worth in both a positive and negative way. If an investor requires an immediate cash injection then shares are much more beneficial due to their immediate sale nature. On the flip side, during volatile times such as these, liquidity can mean that investors are more likely to "panic sell" which is difficult to do with property. We often see highly liquid asset classes like shares react in a negative way during difficult times whilst non-liquid assets like property are slightly more "robust".

Whilst I am very bullish on property as a long-term wealth creation vehicle, I do believe shares should form a fundamental part of any investors portfolio. I personally hold shares alongside our property assets and will continue to add to both in due course.

- The Tattooed Investor