When it comes to building wealth in Australia, the debate between investing in shares and property often takes centre stage. Each asset class has its unique advantages and challenges, and understanding these is key to making informed investment decisions. In this article, we’ll explore the cost of entry, leverage and borrowing, liquidity, tax benefits, costs of holding, and the broader strategic considerations of owning shares and property.
Cost of Entry
Shares are generally more accessible for new investors due to their lower cost of entry. For as little as $500, you can start building a diversified portfolio through exchange-traded funds (ETFs) or individual stocks. This makes shares a practical choice for those with limited initial capital.
Property, however, requires a substantial upfront commitment. A typical investment property in Australia may require a 20% deposit (or 10% with lenders' mortgage insurance), along with stamp duty, legal fees, and other upfront costs. For example, a $500,000 property might demand $100,000 in initial outlay at an 80% loan-to-value ratio (LVR), compared to a much smaller initial commitment for shares.
Leverage and Borrowing
Leverage is a powerful tool in property investment. Australian banks are generally willing to lend up to 80% or even 90% of a property’s value, allowing investors to magnify their returns on capital. While this leverage amplifies gains, it also increases exposure to risk if property values decline.
Shares, on the other hand, can also be purchased using borrowed funds through margin loans, but these loans typically have lower LVR limits, often capped at 50%. This means you’ll need to contribute more equity upfront. Additionally, margin loans come with higher interest rates compared to home loans and carry the risk of margin calls. If the market dips and your LVR exceeds 75%, you may be required to top up your account or sell shares to restore balance, adding a layer of complexity and risk.
Liquidity
One of the significant advantages of shares is their liquidity. Shares can be bought and sold quickly, often within minutes, making them ideal for investors who need flexibility. This liquidity also allows for gradual entry or exit, reducing the financial impact of market timing.
Property, by contrast, is illiquid. Selling a property can take weeks or months, and transaction costs, such as agent fees and legal expenses, can further reduce your returns. However, property investors can access equity in their property through an equity loan. By refinancing or taking out a line of credit, property owners can unlock funds to invest in shares or purchase another property. This capability adds a layer of financial flexibility to property ownership.
Tax Benefits
Both shares and property offer valuable tax benefits for Australian investors. Property investors can claim deductions on expenses such as mortgage interest, property management fees, and maintenance costs. Shares, too, offer tax advantages, including deductions on interest paid on margin loans and a 50% capital gains tax (CGT) discount on investments held for over 12 months.
Property investors also benefit from the principal place of residence (PPR) exemption, which eliminates CGT when selling your home. For shares, franking credits on dividends reduce taxable income, offering an additional layer of tax efficiency.
These tax benefits make both asset classes attractive, though careful planning is essential to maximise the advantages within your specific financial circumstances.
Cost of Holding
Shares have a low cost of holding, with minimal fees for ETFs and no ongoing maintenance requirements. Property, however, can be costly to maintain. Expenses such as council rates, insurance, repairs, and property management fees add up over time. Additionally, periods of vacancy can strain cash flow. Understanding and managing these holding costs is crucial for property investors to achieve positive cash flow and long-term gains.
Improving the Asset
Property investors have the unique ability to add value to their investments through renovations or improvements. These efforts can increase rental yields and capital value, providing a level of control that is unavailable with shares.
Shares, however, do not require active management. Investors benefit passively from the growth and performance of companies without the need to actively "improve" their assets.
Superannuation and Investment Strategies
For most Australians, superannuation provides significant exposure to shares, particularly through diversified investment options that include Australian and international equities. This existing exposure should be considered when making investment decisions outside of superannuation, as it may already provide a base level of diversification.
For those with superannuation balances exceeding $180,000, a self-managed super fund (SMSF) may be a viable option. An SMSF allows investors to hold both shares and property within their superannuation, enabling greater control and the potential to diversify into direct property investments. This strategy can be particularly appealing for those seeking to leverage superannuation to grow wealth in a tax-advantaged environment.
Strategic Considerations
Successful investing in either shares or property requires strategic planning. In property, location, property type, and market conditions play crucial roles. With shares, diversification across sectors, geographies, and market capitalizations is vital to reducing risk.
Diversification is another important consideration. A well-balanced portfolio often includes both shares and property, leveraging the stability of real estate and the growth potential of equities. By holding both asset classes, investors can create a resilient portfolio that balances risk and return over the long term.
The Verdict
The choice between shares and property is not about which is better but about which aligns with your financial goals, risk tolerance, and circumstances. Shares offer accessibility, liquidity, and simplicity, while property provides leverage, stability, and opportunities for improvement.
Both asset classes have unique roles in wealth creation, and incorporating both into your portfolio can provide a strategic advantage. Whether it’s unlocking the power of equity in your property, leveraging the simplicity of shares, or exploring opportunities through an SMSF, a diversified approach can help you achieve long-term financial success.