You've got to spend money to make money, as the saying goes. Although most people think of purchasing shares in a public company when they consider investing, there's another way to put your funds to work for you: buying property as a long-term investment.
Purchasing shares certainly has its benefits, but the stock market can be difficult to navigate and monitor. For a number of reasons, investing in property may be the better choice for you, offering strong returns while minimising the risk. Here's an overview of why considering this financial strategy should be high on your list.
Property vs. shares: Which is better?
Do shares or property give you a better return on your investment? Naturally, many factors come into play for both categories, all of which will affect how much money you end up making from your financial endeavour. That said, it's worth examining some data about how these strategies perform in Australia as a whole.
According to the ASX/Russell Investments 2015 Long-term Investing Report, there has not been a drastic difference between the rates of return for shares and property in recent times. The data showed a declining performance of the Australian stock market, especially as the Aussie dollar falls against foreign currencies. At the same time, interest rates for home loans can't get too much lower, but the 50-basis-point drop so far in 2015 has fuelled the market.
Bottom line, the 10-year before-tax return on Australian equities was 7.1 per cent in 2014, only marginally more than the 7.0 per cent return for 10 years with residential investment property. For the 20 years to December 2014, the gross returns for Australian shares was 9.5 per cent, whereas residential property performed slightly better at 9.8 per cent annually.
Furthermore, while the average price increase for median property in Australia was 7 per cent in 2014, some regions experienced significantly higher appreciation. For example, these assets rose 15 per cent in Sydney, with zones ranging from 11 to 18 per cent. Other areas in Australia came in much lower, such as about 4 per cent in Melbourne and Brisbane, highlighting the importance of knowing your local marketplace.
Why invest in properties instead of shares?
As far as returns go, investing in shares and property offer about the same prospects for assets of similar value. However, there are a few additional considerations that shape how much you'll get out of your investment.
Here are a few reasons investing in property can be a more attractive option than buying shares:
1. You can borrow to maximise your investment.
It's much easier to obtain a cheap home loan that enables you to purchase property than it is to convince a bank to give you funds to invest in equity. With a mortgage, you can use the same amount of your own capital but buy a product that's worth many times more.
For instance, if you want to invest $100,000 and put 40 per cent down on your property, you could obtain a $400,000 mortgage to buy a $500,000 house. Then, when you're comparing returns, you're getting, say, 7 per cent of $500,000 instead of an estimated 7.1 per cent of $100,000. While you'd have to factor in your mortgage payments and interest rates, you're still increasing your worth significantly more each year.
2. Renting it out generates cash flow
You could start making money back right away if you apply your mortgage to buy a rental property. If you renovate or upgrade your building, you may even be able to charge more, above the annual market increases for rent in your area.
While it might not be enough to completely cover your home loan repayments, the money from your tenants can go a long way towards covering this expense, along with ongoing upkeep and maintenance. In other words, you'll have a cash stream to balance your costs while the value of your investment also appreciates over time.
3. Making informed decisions can be easier
Especially for a novice, navigating the stocks, bonds and other securities can be confusing, and the ASX is large and volatile. With the property market, you may be able to get a better sense of supply and demand, since the assets are larger and more stable, while the population trajectory and regional growth indicate buyer prospects.
You can seek out data from the Australian Bureau of Statistics on real house prices, auction clearance rates, home loans stats, wages and other cost-of-living indicators to assess the strength of your investment opportunities.
4. Your risk tends to be lower
Although property values might not increase at the same pace as you might expect or hope, they usually tend to rise over time as a whole, barring unusual situations. Even if they temporarily decline, you aren't likely to run into trouble unless you have to sell, and your mortgage lender typically won't take issue (unless you stop your repayments).
However, not only is the stock market far more volatile because companies are revalued daily, there's also the chance that the assets you invested in will collapse, go into administration, close and so on - which could mean you lose your investment. Additionally, if you've borrowed to purchase more shares and the value of your equity declines, your lender may come after you.
5. You're in control
When you invest in shares or a managed fund, someone else ultimately holds the reins, making decisions about selling equity or business strategies. In the case of managed funds, you're even paying for someone to assess and carry out investment decisions.
In the case of a property investment, you've probably attained a mortgage to help you buy it, which means you're responsible for managing your repayments. Nonetheless, the property is still in your control from the very early stages of choosing which building or land to invest in and what to do with it. You can also make your own choices when it comes to renovations to raise the value of your assets, and you can choose the right type of home loan to suit your needs or refinance your mortgage at a later date.
Furthermore, once you've paid off your home lone, the property belongs to you, giving you total control to sell it, move in, add on, or alter your rental agreements.
Bottom line, you have to choose the type of investment that best suits your financial situation, goals and lifestyle. However, investing in property is certainly something to consider.