When looking to invest, there are many roads you can go down to make money. The main two types of investment are investing in property or investing in shares. Both have their pros and cons and each carries a level of risk. So, if you are looking to invest, where should you place your money?
At the end of the day, it all depends on your goals and what you want from your investment. Are you looking long term or short term? Do you want low risk or high risk? Do you have a large amount of capital to invest right now?
In order to help you decide which approach suits you best, I have put together a list of pros and cons for investing in property or shares.
Investing in Property
Investing in property is often seen as the ‘safer’ and less volatile option. Everyone needs a home to live in, and the demand for housing is only going to increase as the population numbers grow. However, investing in property requires a longer term approach and you are unlikely to make money overnight.
When it comes to property investing, you need to watch the property market carefully and invest in a good location. As they say, “it’s all about location, location, location.” You might find the perfect property, but if it is not close to transport, shops and amenities then it might not go up in value, or may only grow very slowly. It pays to do your research.
Pros of investing in property
- It is generally seen as a safer investment compared to shares (low volatility)
- There will always be a demand for housing as the population continues to grow
- Lenders can loan more money against property (90%) at a lower rate of interest.
- Housing is an asset, so can rarely be worth nothing.
- You can physically see and touch the property.
- Can inspect a property before you buy to outline any issues.
- There are considerable tax benefits available.
Cons of investing in property
- Need a large amount of capital first to buy a property
- Long term commitment
- If you need to sell the property quickly, it may take many months for the property to sell.
- Market values fluctuate depending on factors such as employment rates, infrastructure and development, crime, local amenities, transport etc.
- You don’t know the exact property value until you sell it or want to raise more equity.
- If the property is negative geared, the investor will have to fork out the remaining money out of their own pocket to pay the difference.
- There are many costs involved when buying property including stamp duty, agent fees, pest inspection etc.
- Interest rates can affect a property investment. When interest rates increase, investors will need to be able to cope with increased mortgage payments.
Investing in Shares
People often perceive investing in shares as the riskier option due to higher volatility and the fact that you could potentially lose all your money if things went belly up. Many people find shares harder to understand, and those in the know or who like to gamble prefer to hold shares.
Although some shares should be held over the longer term, many people look at shares as a quick win and short term approach.
Pros of investing in shares
- Shares tend to provide higher returns over a shorter space of time.
- Potential income through dividends.
- Lots of free advice and help available online (however, you need to use reputable sources).
- You can choose the type of shares you want to invest in and your level of risk.
- You don’t need huge amounts of capital to begin investing in shares.
Cons of investing in shares
- Share values can drastically fall, and may even leave the investor left with nothing.
- You are reliant on the company directors offering integral feedback and forecasts on the risks involved.
- If the company goes bankrupt, you are the last ones to be paid, and you might not even get any money back.
- Share values fluctuate day by day and month by month, so must be watched carefully.
- Understanding shares involves time and a lot of research and analysis.
- There are often costs involved such as set up costs, so it is important to shop around.
- Lenders can only loan up to 50%.
Overall, whatever option you choose, you need to remember there is always a degree of risk involved. Diversifying into different property markets or shares can help to spread your risk so you don’t lose your whole investment. As the age old saying goes, “Don’t put all your eggs in one basket”.
If you are looking at investment for the longer term, then I would suggest investing in property due to the property market being more stable and less volatile compared to shares. By choosing the right property, in the right location you will be on the right track to making money.
Published on 31st of March 2015 by Marty Stanowich