Is it better to invest in property or shares?

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Many Australians have built long-term wealth through investing in property, while others have done the same through shares. So, which is better?

The short answer is that it depends.

There are several factors that come into play when deciding on the most appropriate investment strategy in any situation.

To that end, there’s no magic formula for investment success, but rather some key considerations to make before deciding one way or another:

  • Your financial standing: Do you have enough money to invest in property, shares or both?
  • Your goals: What do you ultimately want to achieve by investing, and how long can you wait for it to happen?
  • Your risk tolerance: How comfortable are you with making short-term losses if there’s the potential for a long-term gain?
  • Your age: Do you plan on retiring soon, and, if so, how much time do you have to make gains before you stop working?
  • Your other financial obligations: Would it be smarter for you to settle other debts first before investing?

Potential pros and cons of investing in property

Leverage: Even though the lender might own 80% of the property, you get to pocket 100% of the rent and 100% of the capital growth.Expense: Investing in property can come with higher upfront costs than shares, depending on the situation.
Low volatility: Historically, Australian property has delivered strong annualised returns, meaning the right home is likely to be a safe long-term investment.Maintenance: You may need to be more ‘hands-on’ with property than shares.
Familiarity: People tend to be more comfortable with the concept of property as an investment rather than shares.Potential property market crash: In the unlikely event that the Australian property market takes a significant, long-term decline, you could be left out of pocket.
Tax benefits: If you’re renting out a property, you may be able to benefit from negative gearing.Negative cash flow: You only get to do negative gearing if your investment is running at a loss.
It’s a tangible asset: Some people feel that an investment they can see and touch is safer than one they can’t.Liquidity: Property can take several months to sell, which could be a problem if you need to cash out quickly.

Potential pros and cons of investing in shares

Liquidity: Share investments tend to be more liquid than property, so it’s easier to access your money.Volatility: The share market tends to be more volatile than the property market and can lead to short-term losses.
Financial gains: Depending on the shares and the state of the market, you may benefit from your shares going up in value and paying dividends.Capital loss: If a company goes bankrupt or your shares fall significantly in value, you may not get any of your money back.
Flexibility: You can choose the type of shares you want to invest in and the level of risk you’re willing to assume.It’s a complex market: Most people aren’t experts in the share market – and that can lead to poor investment decisions.
Passive income: Depending on the situation, you might be able to ‘set and forget’ your investment and still make a good return.You need your own money: Although you can technically borrow to invest in shares, it’s extremely risky. That means you usually need to have your own money to invest upfront.

Are you putting all your eggs in one basket?

Keep in mind that most Australians already own a significant number of shares through their superannuation account. So, if you’re looking to diversify your investment approach, it might be a good idea to consider investing in property as well.

Median house prices in Australia’s seven biggest capital cities grew by an annual average of about 7.5% between 1973 and 2019, which is a good indication that property is a solid long-term investment.

But as with any financial decision, choosing where to invest comes down to weighing up what’s best for your individual situation.

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