PROPERTY VS INVESTMENTS
Have you ever wondered which is better – property or investments? This article tackles this issue and compares property vs investments.
- Why compare property vs investments?
- Definitions of property and investments
- Issues to consider
Why do we compare property vs investments?
The short answer is because people ask! Most people when asked the question will answer that their biggest value asset is their house. However, what do you do when you have more money to invest for capital growth or income? For many people this will come down to a choice: property vs investments.
Neither is actually better. This article should help you to have a better idea as to which is better for you.
What do we mean by property?
Typically, property means a buy to let investment. You would put a deposit down on a residential property (perhaps 25%), and then mortgage the remaining capital on an interest only basis. You would then find a tenant to pay the mortgage, and hope to make a profit. Longer term you would aim for income and capital growth.
There are other property alternatives such as commercial property, or property investment funds, but this article focuses on the ‘standard’ approach.
What do we mean by investments?
Typically, investing means buying some sort of product such as an ISA or investment account. In this account you can purchase investment funds like unit trusts, OEICs, investment trusts, ETFs, or individual stocks and shares. The underlying assets will rise and fall in value and can be traded. They should produce an income and capital growth over time.
Some issues to consider when comparing property vs investments
Depending on the assets you buy property is likely to be a more cautious approach than investments. This is not always true, since you can buy lower risk investments which take less risk than property. In general terms property should grow at a steadier pace over time than investments like shares.
Many property owners put all of their eggs into one basket. they hold a lot of property, and often this is concentrated into a few assets of a similar type in a similar location. This can be a problem since if the property market drops in that type or location, then all of your assets go with it. This increases the risks you take.
You can diversify your assets better with an investment contract since you can hold many different types of assets within one account. When comparing property vs investments we would argue that investments can be better diversified.
Property is harder to buy and sell than investments. This means that it will take you more time, and potentially cost you more to access your assets when you need to. Therefore, if access to your capital is important to you property may not be the answer. Of course having access to your capital is not everything, since investments can still lose value. It may be that your investments are not performing as expected at the time you need your capital, meaning you lose money. However, when comparing property vs investments you have better access to your capital with investments.
You need to think about tax when comparing property vs investments. Tax will be a cost you have to bear, and it will reduce your returns. With a property investment you will pay income tax on your rental profits. You will also pay capital gains tax at on any gains when you sell the property. You need to factor this in to your calculations.
With investments you get slightly more favourable treatment. Dividend payments from shares as income are taxed with a 10% tax credit, which is lower than the standard basic rate income tax. Capital gains tax works in the same way, although it is easier to buy and sell investments regularly to avoid having to pay capital gains tax, or at least reduce the burden. You can also invest via an ISA, which means that your income and gains will be tax-free.
Getting the tenants to pay your expenses
One major benefit of property vs investments is the fact that you can get tenants in to pay your mortgage and other expenses. This can mean that over time a relatively modest investment can grow and achieve an income. This is not possible with investments. However, it should always be remembered that it is possible to make a loss on property investing. Some people find themselves in the situation where multiple investment properties lose money each month. if your costs outweigh the rent available, you could find yourself in trouble fast. When you add this to the difficulties in selling property, this investment could end up costing you money. The lesson here is to build in some slack to your calculations.
Gearing is the way that you can leverage your investment capital to borrow and boost your returns. In a rising property market it can be a great investment. Here are some figures which show gearing in action:
£100,000 value property
If the property rises in value to £110,000 your £25,000 initial investment is now worth £35,000. This ignores all costs and taxes. This is a growth of 40%.
However, if your property drops in value to £90,000 your initial investment is now worth £15,000. This is a loss of 40%.
Thus borrowing is an amplifier of gains or losses, and this could be said to add to the risk. Investments are less likely to use gearing, although this is still possible.
Looking at property vs investments there are other costs to consider. Property will come with maintenance, safety certificates, management fees, legal and estate agency fees, plus stamp duty. Investments have product charges, adviser charges and stamp duty.
Property probably costs more to purchase and sell than investments.
The income you achieve can vary between property and investments. This very much depends on the prevailing market conditions so it is difficult to generalise. The fact is that income is not guaranteed, and is also a factor of other issues such as costs and tax. It could be said that investments can generate a greater income than property, but this could come with greater risk to your capital, and will certainly fluctuate more. Property is more likely to generate a more stable income.
The capital growth of your asset is also important. Comparing property vs investments both are likely to be a good hedge against inflation over time. This is not always true of course. The normal state of affairs should be that investments tend to grow at a faster rate on average over time, but this depends on the risks you are prepared to take.
It is likely that you will understand property better than investments and this is an advantage. The mantra should generally be that you should never invest into something that you find it hard to understand.
Photo credit: Flickr>Images_of_Money
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