A rumble of investment giants. Which one is the better investment: Shares or property? Is it better to own part of a business or bricks? Property has one major advantage over shares: it offers a roof over your head and walls protecting you from the cold. Even if you were to buy a property as a mere investment, it would still offer you the opportunity to move in yourself if needs be.
In any case, a property offers someone a safe place to lay their head and a space to enjoy memorable dinners with friends and the smell of freshly made coffee in the morning. You see what I am getting at: the sensual aspects of a property. Something shares are largely missing for they cannot be touched.
But what about the financial side of things?
Property taxes
The greatest advantage of shares over property are taxes. It’s too easy to dismiss or forget the aspect of recurring unavoidable expenses. The UK, for instance, underwent tremendous change. Under Cameron’s old government it has become more socialist – well at least considering one proposal. Taxes on property investments were bound to go up for numerous landlords forcing more than a few to sell chunks or all of their property portfolio. Amongst the most famous of examples is a large buy-to-let investor couple ridding themselves of 900 properties due to the newly introduced tax regulations. With the new laws their ability to deduct mortgage interest is abolished multiplying their tax bill manifold.
But unforeseen changes in taxation aside, taxes on property are recurring and unavoidable eating up much of your profits. Some jurisdictions may allow parts of these charges to be shared between landlord and tenant, but that, in turn, will unnecessarily inflate rental demands.
Taxes on shares
Shares, just like property, carry taxes and costs. Yet, one major difference is that rather than being asked to pay property taxes on an annual basis, shares only produce taxes when either sold at a profit or when producing dividends. Some countries may charge a tax on market transactions, such as stamp duty in the UK or the taxes on financial transactions in France, but they are generally lower than taxes incurring when buying property.
Capital gains taxes, whether property, shares, or bonds, are oftentimes similar, but they are payable only when in fact selling the asset. One important difference is that there is usually no capital gains tax on properties that serve as a home. Only those properties that are pure investments or second homes tend to be taxed. Shares, on the other hand, are always taxed. After all, you cannot live in the company you own shares in.
From a tax perspective investments in shares are generally more favorable than property investments.
Maintenance costs and tenants
Shares have two more great advantages over properties. First, maintenance or the lack thereof. While this does not hold true for the financial aspect, as renovations and other costs are generally deductible from your taxes, it is the potential hassle that may come with major renovations.
Refreshing paint isn’t much work, it is major works such as structural issues, electric wiring or plumbing that can be very energy draining. With shares there is no such issues, as you are not required to maintain the company you have bought in any shape or form.
Related the necessity to find and scan new tenants. You will always want to find the best tenant, who is clean and pays on time, for your property. Finding good tenants is time intensive research and analysis of their financial and general life situation. But that is no different from the work that needs to go into researching a new stock investment.
You are in control
Properties, however, have one major advantage over shares. You own them outright, manage them, and are able to increase their value. You do not rely on executives that you will likely have never met to steer your investment as is in the case of stock investments.
When you are a property owner you are the CEO, middle management, worker, analyst, and everything else. Some simple changes to the layout of your property, new furniture or different flooring can significantly increase the value of your investment. None of this is true for shares. You are pretty much unable to control the direction the company is going, unless you are a major shareholder. With a property you are in full control, with shares you greatly depend on the skills of the company’s management.
Property returns are more frequent
While most shares pay dividends, they are relatively infrequent. Some only pay on an annual basis, others two, three, or four times are year. Properties in contrast pay you a monthly return. And that is what makes them wonderful investment vehicles. Particularly if you are financing your life, such as your retirement, with your investment returns.
The monthly rental payments also accumulate greater returns if you were to directly reinvest them and enjoyed the power of compound interest.
Thus, from a cash flow perspective, properties are certainly better investments.
Diversification
So is one asset better than the other. In fact, I love both. Diversification, as the Nobel Prize winner Harry Markowitz said, is essential for investment success. For that reason the advantages and disadvantages of one asset are compensated by the other asset. Properties usually don’t experience the massive price fluctuations that can be observed in the stock market, but they give you something to touch, feel, and have full control over. On the other hand, properties require more love and care, whereas shares, once acquired need relatively little care; at least not in tangible terms such as maintenance work.
Which asset you choose, really depends on your life circumstances and to a great extent on the capital available to you. While share investments are possible with a few hundred or thousand dollars, euros, or pounds, property investments generally require a much bigger stash of cash before being a feasible investment.
