Let's say you have $200,000 to invest: How do you spend it? Real estate or stocks?
You might be on a quest for financial freedom or you might want to retire early. No matter your goal, what you should invest your money in isn't an easy answer. We think a property is the clear way to go, but luckily, both property and stocks have a proven track record of historical returns and low risk which you can look at before deciding what's best for you.
In this article, we break down the benefits of investing in property as opposed to stocks, give a comparison of their respective historical returns and risks, as well as some additional things you should keep in mind. That way, you'll know whether you want to join over 2 million other Australian investors who already own a rental property, or if you should invest in shares.
Keep in mind that this article is not financial advice. You should always speak to a qualified financial advisor about your specific situation before you make a decision.
7 Reasons why you should invest in property
We'll admit that we're a bit biased here, but investing in property is an amazing gateway to unlocking value and financial freedom for yourself, with very little risk.
Here's 7 reasons why we think investing in property is the better option.
1. Tax benefits
There’s no question, one of the big benefits of investing in residential property is that even if the rental income doesn’t cover all of the expenses, there’s still a tax concession to take the edge off. This makes the tax benefits of investing in property a huge allure.
When it’s the end of the financial year, everything you’ve had to pay out of pocket like loan repayments, council rates, and utilities – all that can be used to offset your taxable income.
Read our in-depth guide to investment property tax to see exactly what you can claim on your investment property.
2. Capital growth
The great thing about real estate, especially in Australia, is that it’s very likely to rise in value as long as you have patience. The Australian property market has exploded by 412% in the last 25 years and is continuing to rise.
A common myth these days is that "a property will double in value every 10 years". Of course, this does happen, but if you enter the property market with those expectations you'll likely be disappointed. Still, earnings are substantial given time, which is part of the reason why getting a loan for a home is quite easy since it's considered a very safe investment by banks.
What's better is that when you have a strategy of spending time in the market, any time is pretty much a good time to invest as long as your financials allow it. Always remember that time in the market beats timing the market.
Read our article on how to tell when it's a good time to invest in property to understand why time in the market is how you should approach your investing journey.
3. Earlier retirement
One of the benefits of investment property is that it’s possible to live out the dream of quitting your job and living off your rental returns. If you own multiple properties you can accumulate a sizable monthly income to live off of.
Roughly speaking, you’ll have to own $3 million worth of real estate to have an after-tax stream of $75,000 a year. You could buy a larger value property, hold it, then sell it years down the line and live off the capital gain. But, planning ahead is key when it comes to retirement planning and this isn't the safest option.
You’ve got to track a few things:
- How long it will take to pay off your mortgage (this will tremendously open up your cash flow)
- How long it will take house prices to rise the amount you want them to
4. Hire a property manager to take the hassle out of it
A perk of investing in property is that if you hire a property manager, it really doesn’t take up much of your time. You can leave the hands-on stuff like setting up inspections, vetting potential tenants, and following up rent to a professional for a relatively low price at a few hundred bucks per month at most.
The only thing is that property managers vary a great deal in their quality of service. Read our guide for finding a good property manager before you hire someone.
If you're a bit unsure about what a property manager actually is and what they do, read our comprehensive guide on everything you need to know about property management.
5. Passive income
Another one of the benefits of investment property is that you can turn it into an additional income stream. If you choose to positively gear your property, then you’ll be looking at pocketing extra cash each month without having to do much at all.
An additional stream of income goes a long way in feeling more financially free.
6. Leveraging your equity
Once you’ve got one investment property under your belt, expanding your portfolio becomes easier and easier when you use this simple tactic: leverage.
Say your first investment property has risen in value, meaning you have more equity. You can then refinance the property and use your new pool of equity as a deposit on another investment property. It’s a great way to get around the ordeal of scrimping and saving for a down payment.
You can read our guide for building a property portfolio to learn more about how this works.
7. Increase its worth
Another reason to buy an investment property over something like stocks is that you can have a personal hand in increasing the value of your investment.
You can bump up your property’s worth in all sorts of ways.
- A new paint job
- Changing tired floors
- Kitchen or bathroom renovations
- Building a granny flat
- and more.
If this sounds interesting, read our article on increasing property value with rental renovations.
Real estate vs stocks comparison
Australian real estate has essentially quadrupled in value over the past 20 years. So, the odds are very much in your favour when you decide to sell down the line.
Perhaps the property version of dividends; positive cash flow means you’ll be making a return every time you collect the rent.
Sydney suburbs like Caddens and Bonnet Bay have clocked profits of $4522 and $3973 a year on a 20% deposit, according to Propertyology.
Not all companies do this, but the ones that do will pay their shareholders a certain amount of money per share that they own. But only if the company is doing well, otherwise the dividend could be reduced or ceased entirely. This happens typically 4 times a year.
Stocks have a fairly good historical return. All Ordinaries, alone, have risen over 100% since 2001. But if you are going to buy now and sell much later, you really need to put down a substantial amount if you’re going to make a big profit.
Whether or not your investment is good really depends on your research and if your investment was a good one.
As good as it would be to have your property rented out all year, every year – this practically never happens. There’ll be times when you won’t have any tenants. And finding them can end up taking longer than expected. When this happens, you’ll have to use your salary or savings to cover the mortgage repayments.
Something to factor into your real estate risk analysis is that it isn’t the easiest thing to turn into cash, quickly. Advertising your property, holding inspections, waiting for interested buyers, and everything else can take ages. So, when it comes to needing money in a hurry, it’s safe to say that real estate isn’t ideal.
When the question of “Should I invest in property or stocks?” comes up, there’s a clear winner for which is the high-risk investment. Stocks are tied to inflation, the market, and the wider economy. So, don’t be surprised when you experience some wild fluctuations in the value of your holdings.
If the company you’ve invested in hasn’t done too crash hot in the year, you can probably kiss your dividends goodbye. Also, because stocks are so volatile, you could end up losing money if you need to sell your stocks in a hurry.
A drawback of real estate is that you can’t sell off one room at a time - if you want to sell, you have to sell the whole property.
So, when you’re asking yourself “Should I invest in property or stocks?”, there’s one metric that definitely makes up for stocks being the comparatively high-risk investment: flexibility!
Unlike real estate where you can’t sell off your property bit by bit,, with stocks you can! If your stocks are on the rise, you want to make some profit, you can go ahead and sell as many or as few shares as you like.
Another big difference between real estate vs stocks is that when it comes to property, it’s going to cost you tens of thousands to get your foot in the door of that down payment.
This is where stocks start to look a bit more attractive. Even after you factor in the broker fees, you can start buying shares for mere single dollar digits.
How much does it cost to invest in real estate?
A major drawback to investing in property is that it comes with a lot of associated costs along the way, both in the process of buying and selling and just owning and maintaining an investment property, for example, rental lease costs, which can be difficult to avoid. This makes it harder to save up to compared to stocks.
It can be easy to just look at the purchase price of a property and forget about all the other not-so-obvious costs that come with it. Some of the upfront costs you’ll have to pay on a property worth around $1,000,000 are:
- Valuation fee: $300
- Stamp duty: $42,000
- Legal fees: $100
- Lenders mortgage insurance: $20,000
- Loan fee: $700
Say you’ve done the research, bought the investment property of your dreams and filled it with tenants. What’s next? Well, the holding costs of course. If you’re going to make your investment a lucrative success, you’ll have to take care of the ongoing expenses. You can expect you pay:
- Mortgage repayments (apprx. $3845/month, borrowing 80% on a $1million property at 3.1% interest)
- Electricity: $1627 p.a.
- Water: $984 p.a.
- Gas: $904 p.a.
- Home insurance: $1117
- Council rates: $708
- Maintenance: Using the 1% rule, operating costs should equal 1% of your property’s value each year.
- Property manager: 5%-11% of your weekly rent
These numbers are NSW averages. The price in your state might vary slightly, but should still be around these prices.
The verdict: Is it worth investing in property?
If you're after early retirement or financial security in the long-term then yes, real estate is a very wise investment. The high up-front costs can be challenging, but it's a very secure investment that comes with a range of benefits like easy access to property finance, tax benefits, and more.
If you've got money to invest, them buying a property and hiring a property manager with the intention of holding it for 7-10 years is a great way to go, but stocks have their merit as well for being less capital intensive.
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