Shares are 9 times better than Property as an Investment

Below are 15 different categories or perspectives I’ve considered in arriving to the bold statement in the title of this article.  I’ve tried my best to objectively weigh up the pros and cons but I’ll let you be the judge.

Please note that by “property” I am specifically talking about the most common scenario of buying a single house or apartment as an investment (but the outcomes also apply if it is a Principal Place of Residence, as for most home-buyers their PPoR ends up being their largest asset!).  So just be aware I am not talking about REITs or other types of diversified property investments.

# Consideration Shares Property Winner
1 Ability to Diversify – Simple and cheap
– Products already exist (index funds, ETFs, etc.)
– Diversification (suburb, city, state, commercial, country, etc.) is limited by your wallet size Shares
2 Transaction Costs – Low costs for buying and selling – High costs for buying and selling Shares
3 Liquidity and Opportunity Costs – You can quickly sell some or all shares for a low fee if this capital can be better applied to another opportunity – You cannot quickly sell a house if another opportunity comes up
– However you can use existing equity in house to borrow money against (a bit quicker than selling) for another investment
Shares
4 Leverage – Most brokers are ready and willing to lend against your existing portfolio
– Leverage is not recommended with shares as it can quickly backfire in a sudden market down-turn (i.e. broker automatically sells part or all of your portfolio at a lower price to recover all or part of money lent to you – depends on your overall LVR% agreement)
– Loan rates for shares are much higher than property to reflect the higher risks involved and as such using leverage only really works in a raging bull market
– Leverage is the defacto way to buy an investment property for the vast majority of individual and institutional buyers
– Leverage can backfire in a high-interest rate environment, stagnant wages and rising costs, a recession, or some combination of these
– As an individual you need to have a steady income otherwise the banks may repossess your property in order to recoup lost interest and any outstanding principle
– A “benefit” to some people from being “stuck” paying off their investment loan for 10 or more years and not investing in anything else is that they get into a solid habit of saving and investing
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5 Tax on Income – Franking credits can help shield some of the tax payable on dividends (i.e. reduce “double taxation”) – Maintenance costs, depreciation, interest payments on the loan, etc., can all be used to offset any tax payable on the rental income Tie
6 Tax on Selling (Capital Gains Tax) – If you hold shares for less than 12 months your CGT = your marginal tax rate
– If you hold the shares for greater than 12 months your CGT = (1/2)*your marginal tax rate.  Not too shabby!
– There are many rules around property CGT but generally speaking the first consideration is whether the property is your Principal Place of Residence or is an Investment.  Sometimes it can be a split between PPoR & Investment and that will affect the tax on any realised profits from a sale
– The 12 month rule also applies to investment properties as it does to shares
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7 Cash Flow Reliability – Can vary widely at times, especially with individual shares which can halt their dividend for years at a time during difficult times
– Uncertainty can be taken out of the equation by diversifying your investment away from individual shares to a majority of ETFs
– Cash flows are either bi-annual or quarterly, which can be an issue if you rely on the income for your day-to-day expenses
– This depends on location and the landlord’s experience in judging people
– Sometimes you can have a property in a poor location (not close to transport, schools, or shops) and yet find yourself with good tenants who stay for many years
– If you get a bad tenant who damages the property, the repair costs, legal reparation costs, loss of rental income, can set you back for many months if not years
– High tenant turnover can be prevented by accepting families in a good school district.  The extra cost of the property is your insurance against high turnover and long periods without tenants
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8 Inflation Considerations – Companies automatically control for inflation by trying to make a profit under all circumstances: i.e. as their raw costs increase they can pass this onto consumers via higher prices in order to meet their profit target – Usually can be passed onto the tentant but is done infrequently and too many uplifts in a year can cause the landlord to lose a good tenant.  That relationship can make it way more pesonal with property so you could be leaving a lot of money on the table, compounded over the years Shares
9 Competition – There is fierce competition in all industries; we don’t need to worry about this so much if we hold excellent companies or better yet we hold ETF’s with hundreds of the top companies only: i.e. the losers fall off the index and new winners join the index, thus ensuring a “self-cleansing” of sorts – There can be fierce competition for rental income from property owners for the best tentant, based on certain socio-economic levels
– This competition can result in a few landlords picking up the best tenants while the rest are left with the “undesirables” who ‘bounce from place to place’ because these landlords refused to invest in the right level of house upgrades for that level of socio-economic renter
Shares
10 Management Efforts – Managing your portfolio is easy so long as you do not hold too many different securities (10 to 20 is ideal across all asset classes and world markets)
– All of your share holdings can be kept on a single brokerage account and their real price is updated daily, thus giving you a precise understanding of where you stand
– With all of the online education out there, you do not need a financial adviser to tell you what to invest in; better yet, once you’ve set up your portfolio it is a simple thing to manage it (only an hour at the end/start of each month)
– Managing your property portfolio can be simplified by hiring a property manager but she or he will eat into your margins so much that you are really forced to manage things yourself, until you have enough properties and the economies of scale make sense to you
– Managing can take lots of time (interviewing new tenants, organising tradespeople to come and fix things, filing paperwork, protecting yourself with insurance, etc.)
– Understanding the value of your property can be very difficult as there isn’t another property with the exact same charactertics which is bought/sold on a regular basis; as such there will always be some level of uncertainty as to what your property is worth
Shares
11 Value Discovery – Under low-volatility market conditions it can be difficult to find an undervalued stock as there are hundreds of professionals and thousands of retail investors scouring the market for bargains all the time
– Using simple metrics like P:E, dividend yield, or assets:debts to evaluate the “value of a stock” can be misleading and lead you very easily into a “value trap”
– When you buy a stock, no one cares.  As a small shareholder in a behemoth company you really can’t sway the company’s management in any meaningful way, not unless most shareholders are publicly swayed on how to vote by a 3rd party corporate raider or fund manager with intent to make some sort of dent in that company.
– Some investors say it is relatively easy to buy an undervalued property if you have three things: 1) a good network with real-estate agents as there is what’s called a “local advantage” or “first-mover advantage”, 2) Patience and the finance “ready to go”, and 3) luck or good timing.
– Evaluating the value in a property can be done with some very simple metrics (it it in a good location?, local rental yields, school catchment zone?, etc.)
– The ability to realise more value from a property depends to a large degree on your ability to upgrade its features and improve it (i.e. you can “roll up your sleeves” or pay someone else to roll up theirs and realise significant gains in the overall value with a few simple investments: fresh lick of paint, landscaping, new kitchen, bathrooms, etc… if you get the basics right, most people are easily impressed)
Property
12 Volatility – Individual shares can experience great volatility over short periods of time
– Well-diversified ETFs also experience significant volatility but not the extent of individual shares, and cannot go to 0 (while individual shares can)
– Price volatility of an individual property is largely determined by local factors
– Significant price volatility in overall property prices, say “across the country”, is only really apparent during prolonged and severe economic crises, during periods of loose monetary policy or during rapid demographic changes / immigration
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13 Ongoing Maintenance Costs – Your stocks are managed by people who run the company.  You just need to stay on top of the company’s performance and how that fits within your overall portfolio and strategy.  In short, this ongoing “maintenance cost” is the time you spend researching.
– Operational and maintenance costs are a company expense.  So while you, as a shareholder, bear these costs, ultimately you will never need to manage them!
– Properties have a baseline maintenance cost each year (plumbing, roof leaks, power, etc.) and also have one-off significant maintenance costs (i.e. NBN, underground power lines, upgrades, etc.)
– These maintenance costs not only cost you in dollars but also in time spent managing the repairs and dealing with required paperwork
Shares
14 Living Expenses – Building up a healthy, diversified, and dividend-paying share portfolio can eventually cover your rent and other expenses.
– Having a share portfolio gives you geographic flexibility to pursue new opportunities or to escape situations you aren’t happy with (i.e. some “bad” neighbours move in)
– A lot of people argue that rent is “dead money” and that you are helping someone else build their equity.  Well, that’s partly correct.  Technically you’re paying for a roof over your head AND helping someone else build their equity.  If you are a renter and DO NOT SAVE any excess funds, you’re really falling behind.  But if you’re a rentvestor, like me, then over a long period of time you should outperform property-only investors Shares
15 Historical Verdict – Between 1980 and 2015, stocks on the ASX had an average annual return of 8.5% – Between 1980 and 2015, an average property in Australia yielded an average annual return of 7.1% Shares