When we speak of property or investment in this article, we compare two different routes of investment; we weigh the buying and selling of real estate against investment in stocks and shares.
Deciding whether to buy a property or invest your capital elsewhere can be a little daunting. Bricks and mortar have different qualities and performance when compared to shares, and this disparity has become more apparent in recent years.
There are several reasons for this, but a few of the main contributors are:
- Rising property prices vs wage increases
- Taxation of rental income, interest and dividends
- Government housing policy changes
- Market volatility
Property is a tangible asset that has the potential to increase in value while providing a steady income. This has led millions of people into property ownership over the past few decades.
However, analysis reveals that while the property market has done well, the stock market has been the best long-term performer.
A stock investment of £100 made in 1986 would have generated returns of £1,755 by 2019, reflecting a combination of dividends and capital gains. In contrast, a similar investment in buy-to-let property would have produced returns of only £739 through rental income and capital appreciation over the same period. When comparing the percentage increase of each investment, the stock investment option outperformed significantly, achieving growth exceeding 1600%.
This article will take a closer look at how the numbers stack up, but more than that, we will examine key differences between these asset types and consider the benefits and potential pitfalls of both.
Key differences between investing in property or stocks
Both asset classes have the potential to provide healthy yields, but each has very different processes for buying, maintaining and selling. Let’s take a look at some key considerations that may separate the two.
Balancing risk and return
Shares can have a much higher return – providing capital growth when the market is good. However, due to intermittent stock market volatility, buying property is often perceived as the lower-risk investment. Between rental yields and capital appreciation, property can be a stable long-term investment, but this is dependent on external factors that can have a major impact on the property market.
While investment in shares can carry higher risk, this obviously comes with the potential for higher returns as well. And, stock investment isn’t just shooting in the dark – taking professional financial advice, using sufficient diversification, and carefully balancing your portfolio around your objectives and risk profile, all help to mitigate the risk.
Find out how Blevins Franks can help you with a personalised, holistic investment strategy.
Considering liquidity
When we talk about liquidity, we refer to the speed at which you can buy and sell your asset.
Shares are highly liquid, and with the modern way we utilise digital platforms, accessing and navigating the stock market has become much easier.
Property is not so simple. While there has always been a reasonable demand for property, the process can take months to complete. Those looking for a steady return on their property investment over an extended period typically opt for the buy-to-let option.
Maintenance
Shares require very little management after purchase aside from monitoring news and the general health of the stock market. Employing the services of a financial expert will offer expert insights and strategies to your portfolio and help you avoid the impulse to ‘chase candles’ – acting on short-term market movements in fear of missing out.
On the other hand, property involves responsibilities that can cost a lot of time and money. These come in the form of general repairs and maintenance, legal considerations, tenant issues and vacancy periods. You do have the option of employing the services of a property management company, but this will obviously come at its own cost – typically, between 10% – 15% of rental income. In comparison, professional management fees for an investment portfolio usually cost between 0.3% – 1%.
Diversification
Both asset classes allow for a diversified portfolio to help reduce risk. You can own property across different locations to mitigate the impact of badly performing regions, though this would involve a significant capital outlay, and you can invest in stocks across a variety of industries and regions to balance performance.
However, if the housing market takes a downturn, that is likely to impact the value of your entire portfolio, regardless of location. Conversely, if a particular industry takes a hit, it’s unlikely to have the same impact on all your shares – your other investments may even mitigate some of the losses.
Tax efficiency
Real estate investment presents significant tax benefits, including the ability to deduct expenses and mortgage interest, although tax changes have eroded some of these benefits in recent years. Similarly, dividends and capital gains from stock investments are typically subject to lower tax rates compared to ordinary income. In essence, both asset classes offer opportunities for constructing a tax-efficient portfolio.
Property or investment – comparing the numbers
Property is seen as a stable market when compared to shares, and with the right advice, you can reduce your tax liabilities to a minimum. As a tangible asset that is in relatively short supply, the long-term returns that can be earned from a well-diversified property portfolio has attracted many serious investors in the past.
However, as price inflation has far surpassed wage income, and with stringent new tax rules and housing policy changes disincentivising potential future landlords, many believe that the ‘buy-to-let bubble’ has already burst.
Owning multiple rental properties increases the stamp duty and any income from rent paid is taxable. The eventual sale of the real estate will likely be subject to capital gains tax as well, which could be as much as 34% depending on where you are resident. Initial costs can also begin to stack up when you buy a property in the form of legal fees, agency costs, and refurbishment – all of which can eat into your returns and delay the point at which you see any profit.
Stocks and shares certainly take a lot less time to manage, and with the help of a professional fund manager, require hardly any involvement at all. Most importantly, a long-term stock or shares investment will often outperform an investment in property over a comparable time period – although there are never any guarantees. You can more greatly diversify across a mixture of active and passive funds to spread the risk and ensure your investment portfolio is less impacted by market volatility.
However, the investment market is very much an environment for the experts, and while the hands-off approach of utilising a fund manager can be a benefit for those who simply want their money to work for them, stocks and shares can be an ill fit for those who wish to be involved in the day-to-day decision making. Following professional advice from your adviser can guide you toward investment structures that improve tax-efficiency and allow access to investment funds that are not typically open to the general public, and these tend to be more profitable over a longer period as opposed to the short-term. You can learn more by contacting your local Blevins Franks office or via our contact page.
Consider more than market movement
Weighing the decision to invest in property or stocks involves much more than market movements. A commonly held view that property is less risky than shares is really hard to quantify given their differences in liquidity, with shares trading daily and prices updated every second
And so, we look to the long-term prospects. Time in the markets is often a safer and more lucrative path than an attempt at timing the markets, although risk can be found in either case.
Property, while being a tangible asset that you can see and touch but comes at a cost. You may have to invest thousands of pounds into repairs, as well as a significant amount of time and energy. Mortgage interest rates are a great concern to property buyers and a drop in the housing market can have a significant impact on your entire portfolio.
Shares are more easily bought and sold, and you can opt to sell part of your holding and retain some for further growth. With shares you are dependent on the funds or companies that you are invested in. Whichever direction you choose, you should seek professional advice to guide you toward an investment that best suits your situation, objectives and risk tolerance.
Blevins Franks has been delivering the highest level of financial advice for almost 50 years. We have clients throughout Europe that are heavily involved in both the property markets and various investment funds. Our advisers can work with you to formulate a strategy that is built around your personal objectives in the most tax-efficient way possible – wherever you live.
Contact Blevins Franks today.
