Property or Shares?
This article highlights some of the advantages of investing in property and shares with you some reasons why investing in real estate can be worth it. The main advantages gained from investing in property are:
Capital growth
Rental income
Degree of control
Lower volatility
Tax benefits
Hedge against inflation
Touch and feel it
Depositing your money in the bank or investing in fixed interest products does not provide you with any capital growth. If you buy property (or shares), however, you do so expecting that the property will grow in value over time.
Rental income One of the advantages of owning investment property is that you can start to receive an income almost immediately. Once you have put a tenant into your property, you should receive a couple of weeks' rent in advance upon signing the lease and then regular payments of rent into the future. Degree of control In my role as the Coordinator of the Property and Share Investment at TafeSA, I interact with many share and property investors on a daily basis. Without question, one of the main reasons people decide to invest in property rather than shares is that they have greater control over their asset. For example, if they want to receive a higher rent, they can upgrade the property. If they want to increase the value of their property, they can renovate, landscape or possibly even sub-divide and create new allotments. Lower volatility The other main reason people will buy property instead of shares is that there is less risk in property. They understand that there is also a lower return in purchasing property but they are willing to forsake potential high returns from investing in shares for a stable return from property. They can sleep well at night knowing that the price of their property is very unlikely to plummet overnight, which can happen to the share market. Tax benefits Tax is very topical at this time of the financial year (check out our End-of-financial-year investor checklist). There are several tax benefits available to property investors. Using property as security to borrow money to purchase other property allows you to leverage to a greater extent than if you were using a share portfolio as security. Most lenders will lend up to 90 per cent (and sometimes 97 per cent) of the value of the property being purchased (mortgage insurance may be payable at this level of leveraging). However, if you are interested in buying shares, they will generally lend up to 70 per cent. One of the tax advantages with this greater leveraging is that you can claim a greater tax deduction on the interest charged on the loan. Any legitimate expense incurred in running your investment property should also be tax deductible. These include travelling to your investment property to collect rent or money paid to a property manager to manage your property on your behalf. Depreciation of the building may also be claimed as a tax deduction. Buying brand new or a relatively new property allows for the greatest amount of depreciation. Claiming building depreciation is a clever way to increase your cash flow. You should never buy property (or any asset) just for the tax benefits. Getting a tax benefit should be a bonus, not the sole reason for purchasing. Hedge against inflation It has been shown historically in Australia and all over the world that property increases at a greater rate than inflation. Periods of growth can vary but generally speaking in real terms (without inflation) property growth outstrips increases in inflation. Touch and feel it I have already mentioned that some of the main reasons people invest in property is that property provides them with a greater degree of control and there is lower volatility in returns and capital growth compared to investing in shares. When you have a chance to speak to property investors at length, somewhere in the conversation they will state that they like to invest in property because they can see it, touch it, feel it and drive past it. For many people, investing turns out to be an emotional decision rather than one based on pure numbers and these are the sorts of emotions that make people feel better about investing in property rather than shares. I believe investors should have a diversified investment portfolio, which includes some property, some shares and some cash. The weighting of the portfolio will often be decided by the knowledge (or lack of it) in a particular asset class. If you want to earn more, you need to learn more!
