Deciding whether to buy a property or invest your capital elsewhere can be a little daunting. Bricks and mortar have different qualities and performance when compared to shares.
Property is a tangible asset that has the potential to increase in value while providing a steady income. This has led millions of people into property ownership over the past few decades.
However, analysis reveals that while the property market has done well, the stock market has been the best long-term performer.
Key differences between investing in property or stocks
Both asset classes have the potential to provide healthy yields, but each have very different processes for buying, maintaining and selling.
Balancing risk and return
Shares can have a much higher return â providing capital growth when the market is good. However, due to intermittent stock market volatility, buying property is often perceived as the lower-risk investment. Between rental yields and capital appreciation, property can be a stable long-term investment, but this is dependent on external factors that can have a major impact on the property market.
Considering liquidity
When we talk about liquidity, we refer to the speed at which you can buy and sell your asset.
Shares are highly liquid, and with the modern way we utilise digital platforms, accessing and navigating the stock market has become much easier.
While there has always been a reasonable demand for property, the process can take time to complete. Those looking for a steady return on their property investment over an extended period typically opt for the buy-to-let option.
Maintenance
Shares require very little management after purchase. Employing the services of a financial expert will offer expert insights and strategies to your portfolio and help you avoid acting on short-term market movements.
On the other hand, property involves responsibilities that come in the form of general repairs and maintenance. A property management company will typically cost between 10%-15% of your rental income.
Diversification
You can own property across different locations to mitigate the impact of badly performing regions, though this would involve a significant capital outlay, and you can invest in stocks across a variety of industries and regions to balance performance.
Tax efficiency
Real estate investment presents significant tax benefits, although tax changes have eroded some of these benefits in recent years. Similarly, dividends and capital gains from stock investments are typically subject to lower tax rates compared to ordinary income.
Property or investment â comparing the numbers
Property is seen as a stable market when compared to shares, and with the right advice, you can reduce your tax liabilities to a minimum. As a tangible asset in relatively short supply, the long-term returns that can be earned from a well-diversified property portfolio have attracted many investors in the past.
However, owning multiple rental properties increases the stamp duty and any income from rent received is taxable. The eventual sale of the real estate will likely be subject to capital gains tax as well, which could be as much as 34% depending on where you are resident.
Stocks and shares certainly take a lot less time to manage and, with the help of a professional fund manager, require hardly any involvement at all. You can more greatly diversify across a mixture of active and passive funds to spread the risk and ensure your investment portfolio is less impacted by market volatility.
However, the investment market is very much an environment for the experts, and while the hands-off approach of utilising a fund manager can be a benefit for those who simply want their money to work for them, stocks and shares can be an ill fit for those who wish to be involved in the day-to-day decision making.
Consider more than market movement
Time in the markets is often a safer and more lucrative path than an attempt at timing the markets, although risk can be found in either case.
Property is a tangible asset that you can see and touch, but comes at a cost. You may have to invest money into repairs, as well as time and energy.
Shares are more easily bought and sold, but you are dependent on the funds, or companies that you are invested in. Whichever direction you choose, you should seek professional advice to guide you toward an investment that best suits your situation, objectives and risk tolerance.
Summarised tax information is based upon our understanding of current laws and practices which may change. Individuals may seek personalised advice. All advice received from Blevins Franks is personalised and provided in writing. This article, however, should not be construed as providing any personalised taxation or investment advice. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
By Christopher Moore, Partner, Blevins Franks
