Which is a better investment – property or shares?

As our economy moves into a new cycle the sharemarket has moved out of the doldrums and performed very strongly over the last year (even though it is prone to its usual ups and downs). At the same time the property markets are also booming – you just have to open the papers and the fact that we are in a mini-boom is plastered all over the headlines.

So the question I am posing today is: which is a better investment – property or shares.

If you asked Donald Trump he would say property is the only road to riches. On the other hand if you asked Warren Buffett he would tell you that you could become financially free by investing in the right shares.

Who is right, and which investment is right for you?

I recently took part in a debate with leading stock market author and trader Louise Bedford on exactly this topic – you can listen to the replay here.

It should be fairly obvious by now that I believe income producing residential property is the best option for the average Australian to develop financial independence and in my opinion I won the debate – but that’s only my opinion. Listen in and leave your comments below – I’d love to hear yours.

In essence, I said that while it’s really hard to outperform the long-term averages in the sharemarket (that’s why many managed funds try just to track the averages), it’s really very easy to outperform the averages when investing in property. You do this by buying well and buying the right type of property, one in a high growth area and one to which you can add value.

Let’s look more carefully at the reasons why I like property as an investment:

1. Property is an imperfect market. When I look to invest, I want to invest in an imperfect market. This means that I’m more likely to be able to buy an investment below its true value, or I can sell above its true value.

Let me explain this in more detail…

The world of shares is not a completely perfect market, but it’s about as perfect as it gets. That’s because it is a liquid market where investors are well informed. I can buy stocks at the same price as anybody else can. In general, the overall marketplace has the same information as I have, because for the most part the information is equal. This shared knowledge creates a more ‘perfect’ market.

On the other hand, real estate is what I would call an imperfect market. I know many people who have bought properties at 10, 15 or even 20% below real market value. If property was a perfect, liquid marketplace, you would not be able to buy a property considerably below its intrinsic value. I can do this every time, and so could you, because information, contacts and expertise help you get an insider’s edge in an imperfect market.

2. You can add value to your properties. By adding value to your property, through buying well or through renovations, you can accelerate its rate of capital growth. On the other hand the fate of the value of your shares is completely out of your hands – it depends on how well the company, and the directors who run it, perform.

3. Property is a fundamental human requirement, but companies (and their shares) come and go. Unlike a business or corporation in which you can buy shares, property is a fundamental necessity. Everyone needs a roof over their head, whether they rent or own their own home, but let’s face it – companies come and go all the time. As a basic necessity, housing will always be in demand – it will always have value because we simply can’t live without it, which gives property the advantage over shares with less risk and greater stability over time – in other words, property is as “safe as houses”.

4. Australians love property and it will always remain popular, whereas the sharemarket downturn scared many away during the financial crisis. Aussies seem to love property – this is partly because property, unlike shares, is a tangible commodity. You can touch it, see it and yes – live in it – and people like the security associated with property. Almost 70% of us own our own home and recent surveys show a huge number of Australians are considering purchasing an investment property over the next few years.

Additionally, everyone understands residential property – they have either owned, rented or lived in a home. It’s familiar and things that are familiar naturally feel safer. Shares on the other hand – well they represent unchartered waters for many. Considering the panic many investors experienced with huge sharemarket losses during the recent financial crisis, more and more investors will turn to the safety of property as we move into better times.

5. It is easier to become an expert in property – there are fewer unknowns than with shares. While you might like to think that you can master the world of shares, on-line trading and corporate legalities and structures, the simple fact is that it is much easier to gain a sound comprehension of property investment than it is of shares. Sure it will require some learning to become an expert in property, but this is far less daunting for the beginning investor than trying to comprehend how the corporate world or the share market works.

6. Property can be leveraged via a mortgage. No other investment vehicle provides you with the opportunity to leverage 80 to 90% of its value in order to acquire more of it as a part of your portfolio. Not only that, if the value of your property investment falls (as may happen in the downward phase of the cycle), the bank don’t come knocking on your door asking for their money back as they do with margin calls on shares (unless of course you can’t meet the repayments). Even better, once you own property, you can leverage off of the growing equity you have in it to buy even more property.

7. Property has a proven rate of return. Property is a proven stable strong investment. When you can look back over 10, 20, 30, even 50 years, you get a picture of exactly how much property has increased in value. Historically, well located properties double in value every eight to 10 years, with an average capital growth of 8 to 10% and around 4 to 5% rental yield (totalling around 15% return per annum).

8. Property values are less volatile than shares. Think about it… residential property is the only investment market not dominated by investors, and this effectively gives investors a built in safety net. Even if all the investors were to leave the market at once, it would not totally collapse.

9. Property is more tax effective than shares for investment. When you set up your property investment business, a raft of legal tax deductions (I like calling them loopholes) open up to you.

Still need convincing? If you do I will give you 11 reasons why I think you should invest in property in an upcoming blog.

In the meantime, if you look at the results others have achieved, you have to say that property makes pretty good investment sense. According to the BRW Rich 200 list, property has consistently been the major source of wealth for Australia’s multi-millionaires. And it’s the same all over the world. Those that haven’t made their money in property generally invest their surplus funds in real estate.

With a new property cycle upon us, maybe now is a good time for you to get into the property game?

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.