Investing in property or shares: Which is better?

Over the years, I’ve heard many variations of this same question: “which is better, property or shares?” Some people love the perceived stability of property and the fact that they can physically see the investment, whereas others feel more comfortable with shares.

In this article, I’ll explain why neither is necessarily the ‘best’ investment and why you are better off aligning your investment to your goals.

What does it mean to invest in property or shares?

It’s important first to clarify what is meant by ‘property’ and ‘shares’. These catch-all terms can in fact refer to several different types of investments.

Property

When people talk about investing in property, in most instances, they mean residential investment properties. These are houses, apartments or townhouses that you buy and rent out to another person to live in.

It is important to note that there are other types of property you can invest in, such as commercial property (property rented to a business). In some cases, you may also be able to invest in small parts of a property, as opposed to buying an entire home, such as via an exchange traded fund (ETF) or a fractional investing platform.

Shares

‘Shares’ sometimes seems to be used as a bit of a catch-all term to refer to all other investments that aren’t residential investment properties. But it’s important to note that shares are in fact a very particular thing, and that is part-ownership of a company.

When the company earns money, you can often earn money (through dividends) and when the company goes up and down in value, your share value should move accordingly.

So, which is better, residential investment properties or shares?

Despite the strong opinions to the contrary which you sometimes hear, generally speaking, neither property nor shares is necessarily a better investment than the other. Historically, it is difficult to identify which investment has performed better. Looking into the future, it is even less clear.

Even if you do pick the ‘better-performing’ investment, it may not be right for your needs. I’ll give you a hypothetical example:

Gary buys an investment property as he wants to save for his children’s private education costs. Gary buys the property and holds it for three years, in which time it goes up in value.

Gary’s first child starts school and Gary realises that he can’t ‘sell a bedroom’ to pay for school fees. He needs to sell the whole house.

Despite the investment going up in value, this is a poor investment for Gary as:

1. The costs of buying and selling the house substantially reduce his profits; and
2. Gary has had to sell the property in year one of school fees. This means that for the rest of the period where Gary needs to save for school fees, he will need to come up with a new solution and potentially face more costs if he wants to reinvest whatever money is left over.

This issue doesn’t just arise with investment properties but with all investments including shares. If the investment you choose doesn’t suit your goals, even if it performs well, it may not provide the best outcome for you.

Why you should invest according to your goals

Before deciding what type of investment you would like to go for, you will want to consider the reason why you are investing. Are you investing for a short- or medium-term goal like children’s education or renovations? Are you investing to perhaps retire early and live off the income? Are you investing so that you can earn ‘passive income’ i.e. money that can grow with little to no ongoing effort required, or are you happy to put in some leg work?

It could be worth your while carefully considering all of these factors before deciding how you want to invest.

When might a residential investment property suit your goals?

There are a few factors I look for in a person and their goals before I would suggest they start thinking about investing in a residential investment property.

1: You have the right expertise

Despite opinions to the contrary, not all investment properties go up in value. I meet a lot of people who cannot fathom that investment properties bought in major cities (such as my home city of Brisbane) can and do regularly go down in value.

If you think a residential investment property may be the investment for you, it can be important to develop the expertise to pick a good investment property, or consider engaging an independent buyer’s agent to help you do so.

Remember, just because you’ve lived in a house, doesn’t mean you understand property. If you don’t have the expertise, you will need to learn them or you may be better off outsourcing it to a professional. The same can be true for shares: Just because you’ve worked for a company, it doesn’t mean you’re automatically equipped to start picking ones to invest in.

2: You have time to devote to it

In terms of investments, residential investment properties can be quite demanding. You generally need to deal with real estate agents, tenants, approve repairs etc. If you don’t have the time, then a residential investment property may not suit your needs.

3: You have a long-term investment timeline

Investment properties are generally expensive to buy and to sell. This is both in terms of money and time. I mentioned before that you can’t ‘sell a bedroom’ so when you sell the property, it is a big decision.

For this reason, residential investment properties generally don’t suit short or medium-term goals like saving for your children’s private school education or saving for renovations.

4: You are willing to take on some risk

When you invest in a residential investment property, you are not only putting your money on the line, you are generally also borrowing money which you will need to pay back, with interest and applicable fees, regardless of how well your investment does.

Understanding your risk tolerance and having an unemotional approach to reviewing the investment is vital. This is another case where it could be worth seeking professional advice, if you need it.

When might shares suit your goals?

These are the factors I look for to identify whether a person may be suited to investing in shares.

1: You are time-poor

There are a number of ways you can approach investing in shares but as a general rule, I recommend investing with a focus on the long-term, a strategy which can be relatively hands-off. Investing in this way means that you don’t need to review your investments daily and you certainly don’t need to be buying and selling shares daily.

This could be helpful for people who have careers, family commitments or other things in their life which mean they can’t take on the added time pressures that, by contrast, can come with managing an investment property.

2: You want the flexibility to be able to change your mind

Residential investment properties are big commitments and once you’re in, you’re in. Shares tend to be more flexible (in the investment world we call them ‘liquid’). This means you can sell portions of your share portfolio, buy more, or pursue several other options at any time (while being mindful of the implications such as any tax you might need to pay if you sell shares for a profit, and the transaction costs of buying and selling shares).

This may suit people who have goals for that investment money, but feel they may change their mind as their life changes.

3: You want to be able to weigh up or down how much risk you take

A residential investment property is just that: one property. If you get it right, you can get great returns. If you get it wrong, the opposite can happen.

If this makes you uncomfortable, shares may suit your needs better. While there is always still risk involved, with shares you have options that enable you to diversify your investments. A properly diversified share portfolio invests across many different companies, industries and countries. If one company in your portfolio goes out of business, it shouldn’t affect your portfolio too negatively if you have diversified your investments.

4: You want to invest a small amount to begin with

Borrowing to invest magnifies your risk of losing money. If this doesn’t suit your comfort levels, a share portfolio could allow you to start investing without borrowing money. The cost of starting to invest in shares can be relatively low and with the invention of ‘micro-investing’ apps, you could potentially start today with just a few dollars. The only caveat I will add to this is that the percentage of your investment that gets eaten up by costs can often be higher when you are investing small amounts so make sure you do your research.

Introducing the concept of the ‘investment portfolio’

Hopefully by now you get the idea that there is no ‘best’ investment, only ones that suit you. Remember that within the world of investing, there are a lot of different options. So there’s a good chance that there’s one that suits you and your goals out there, or even a combination of options.

Instead of thinking about a single investment, you may want to think about an investment portfolio which has a number of different types of investments. In addition to property or shares, an investment portfolio may be made up of commercial property and infrastructure trusts, bonds, cash products and just about anything you can imagine. It may not be the case that one investment suits your goals, so having an investment portfolio could help you achieve a number of different goals at the same time.

Main image source: Monster Ztudio (Shutterstock)

About Ben Brett

Brisbane financial planner, Ben Brett of Bounce Financial specialises in providing financial advice to young professionals who have bought their first home and are wondering what comes next.