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Shares vs property: which investment option should you consider?

Alex Ritchie avatar
Alex Ritchie
- 7 min read
Shares vs property: which investment option should you consider?

Whether you’re looking to make your first investment or considering expanding your portfolio, two of the most recommended investment options in Australia are property and shares. Both investment options have their advantages and risks, and it’s worth comparing your options to determine which one to invest your hard-earned cash in.

Investing in shares simply refers to when an investor purchases shares – or a percentage of ownership – of a company or asset. For example, a retail company may sell shares in the business to raise capital, and these shares are listed on the Australian Securities Exchange (ASX).

Over time, these shares will fluctuate in value, based on market conditions and general macroeconomic factors. If you sell your shares at a higher value than when you purchased them, you may earn a profit on your investment. Australians can purchase and sell shares through the stock market or stock exchange, and shares are typically acquired via an online broking service, or full-service broker.

Investing in property sees you purchasing a property, such as a house or unit, for the purpose of renting it out to tenants, and/or selling it at a profit. The rental yield you earn, or the difference in property value when you purchase versus when you sell, can be considered the profit you make from said investment. Due to the relatively high cost of property in the Australian housing market, investing in property may have a high buy-in cost, but the potential for strong returns.

Shares vs property: which investment option is better?

According to the Motley Fool, these are the categories in which either shares or property come out on top as a potential investment opportunity:

  • Which is the most liquid? Shares – As you can more easily buy and sell shares, and spread risk across multiple companies, than purchasing property.
  • Which is the most tangible? Property – Property is a brick-and-mortar investment that you can renovate to potentially increase its value.
  • Which is the most tax efficient?Both – There are a multitude of potential tax deductions and tax strategies offered by both shares and property.
  • Which is the most hands-off? Shares – Keeping a property in liveable condition requires constant ongoing maintenance and investment, with shares considered to be much more passive, requiring little input outside of deciding to buy or sell.

Ultimately, the best option for investment will depend on your appetite for risk, your forecasting of potential profitability, as well as the current market conditions. It’s crucial that you instead compare your options, including the pros and cons, and decide based on your own financial needs, budget, and investment goals.

For example, if a suburb is in a phase of low vacancy rates, rising rental prices, and high demand, it could be worthwhile diverting your funds to property to capitalise on the potential rental income you may earn. However, if you’re the type that wants a hands-off approach to your investments, shares may offer that flexibility as your involvement begins and ends at monitoring the market. And even that aspect of managing your portfolio can be outsourced if needs be.

Let’s explore some of the advantages and potential downsides of investing in shares, versus investing in property, in more detail.

The benefits and risks of investing in shares

There are several benefits to investing in shares that Australians may want to consider, including:

  • Earn dividends – Shareholders are generally given dividends for their investment in a company’s equity. This is a distribution of its profits, and the larger your investment, the greater your dividend yield may be.
  • Liquidity – You can typically buy and sell shares swiftly through exchange platforms and online brokers, as opposed to the lengthy process involved in purchasing property, which generally takes weeks to reach settlement.
  • Less active investment – If you’re researching low-fuss opportunities, shares are a very ‘hands-off’ option, especially compared to the costly ongoing maintenance required for property ownership. You may be able to outsource the entire process of buying and selling shares, as well as market research and new growth opportunities.
  • Shareholder benefits – It’s not just dividends that you could earn as a shareholder, with some companies offering additional benefits, such as voting rights, bonuses, discounts with said company, or gifts related to the company.

Some of the disadvantages of investing in shares include:

  • Subject to volatility – There are many factors outside of your control that can impact the value of your shares. For example, Tesla CEO, Elon Musk, once tweeted that the company’s shares were priced “too high” and Tesla shares closed down 10.3%. A rogue tweet, or other volatile market conditions, can impact your potential share return much more than property prices, as you have the option of increasing your property’s value through renovation if need be.
  • Capital loss – If the company begins performing badly, and you decide to offload your shares, you may find it challenging to find a potential buyer for the price you want. Further, if the company were to claim insolvency, shareholders are generally listed after creditors, and may struggle to see some, if any, money back from their investment.

The benefits and risks of investing in property

There are several benefits to investing in property that Australian buyers may want to consider, including:

  • Long-term growth – Historically, investing in property in Australia may be considered as less risky option than other investments, as there is a strong pattern of value growth. CoreLogic data shows that over the 30 years from July 1992 to July 2022, national dwelling values increased 382% - an average of 5.4% each year.
  • Rental income – You won’t just see a return on your investment when you sell the asset. There is an opportunity to earn an ongoing rental income that, as you pay off your mortgage, will only increase your income potential. For retirees, owning an investment property outright may provide you with enough passive income to live on full-time.
  • Opportunity to increase value – Unlike shares, which are subject to market volatility and out of your control, as a property owner you have the option to potentially increase a property’s value through renovations and repairs. This will involve additional investment on your part, but the returns may be substantial, depending on the work undertaken.
  • Tax advantages – There are several tax benefits offered from investing in property, including the opportunity to deduct your mortgage interest charges, as well as the potential of negative gearing.

The potential disadvantages of investing in property includes:

  • Cost of a mortgage – As homeownership can be a costly exercise without a home loan, many investors will need to apply for and service a mortgage for their investment. This means you will need to factor in monthly repayments towards your expenses, as well as fees like upfront, ongoing and exit fees for the home loan.
  • Returns aren’t guaranteed – Investing in property is still considered risky as the aforementioned CoreLogic value growth trend line may have risen over 30 years, but it did fluctuate, depending on market conditions. If interest rates were on the rise, property values were expected to fall, and you were relying on a mortgage for your property investment, you could find yourself facing ‘negative equity’. This means that if you were to sell the property, you’d likely not earn a profit as the property may be worth less than the mortgage at this point.

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Product database updated 20 Jun, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.