Property vs. Shares as an Investment in Australia

Are you wondering whether you should put your money into investment property or shares?

While at Metropole we are property specialists, we also advocate for diversification, so a healthy investment portfolio should contain an element of both.

Each has its pros and cons, and most successful investors have multiple income streams and tend to benefit from both asset classes.

Therefore, this is not an argument or property vs shares to suggest one will perform better than the other.

This is about my experience growing an asset base and why I think property (residential in particular) has the edge over shares in the growth phase of your wealth creation journey.

Having said that, what’s the best investment for you is highly personal and dependent on the amount you have in savings; your investment capabilities, knowledge, and risk profile; and your long-term goals.

So here are 10 things to consider when considering shares or property investment.

1. Entry threshold

One of the first things to weigh up when it comes to deciding whether to invest in shares or property is the entry threshold for each and the ease and speed at which you can invest.

Shares: Investing in the stock market has a much lower entry cost than buying an investment property.

That’s because there are no mortgages to worry about and additional fees to start trading.

You simply need to set up an account with a stock trading platform, which will charge you brokerage fees. This may either be around 1-2% of your total purchase price, or a flat fee, which could be anywhere up to $30 per transaction.

Property: Property investment is often a trickier, more costly, and more time-consuming exercise.

A property investment would require a larger outlay, requires the need to save a deposit ahead of time and secure a loan for the remainder, and could come with additional expenses such as stamp duty, conveyancing fees, and possibly mortgage insurance.

2. Management

The ease of managing and controlling your investment should be a key consideration when looking at investment in property or shares.

Shares: A key appeal of shares investment is that it is more hands-off, although as a result, it comes with less control over management or decisions of the company you own a stock in, although these can directly affect the share outcome.

If you decide to use an adviser or broker to help manage your shares, it will come with an additional fee, usually a percentage of the portfolio value.

Property: A key appeal of property investment is that investors have direct control over their asset(s).

However, management and maintenance of an investment property comes at a cost, from using a property manager to repairs and upkeep, and even renovations - management and associated maintenance costs can be unpredictable.

3. Taxes

In Australia, tax is payable on the income you earn and also on capital gains on the sale of any investment - property or shares.

Running costs including interest on borrowings can be claimed as a deduction on your tax return to reduce your overall taxable income, and therefore your tax liability.

While negative gearing is available to property investors to reduce their tax liability, this strategy can also be used if you borrow money via a margin loan in order to invest in shares.

But for property vs shares in Australia, there is one tax advantage that each investment option exclusively has.

Shares: A significant tax advantage for share investors is the franking credits they receive on dividend income when investors are paid out from a company’s after-tax profit.

As the money they receive through franking credits has already been subject to tax, this is effectively a tax-free income for investors which can offset any tax an investor is subject to pay on dividends.

Property: One significant tax advantage for property investors is depreciation which is a tax deduction tied to the aging and gradual wearing out of your real estate asset.

When you invest in a property, the tax authorities don't see it as merely buying a building.

Instead, you're essentially acquiring land (which usually appreciates) as well as a physical structure along with a variety of additional assets (often referred to as plant items) that depreciate over time.

In terms of property investment, depreciation serves as a tax deduction that comes from two distinct areas the capital expenditures on the building itself and the depreciation of items (plant) within the property.

But here’s a little wrinkle: while investment property depreciation is “officially” the amount that a property loses in value as it ages, that is not always the case in real life, because even though you write off the value of the physical building over a period of 40 years, it costs a lot more to build the same dwelling today than it did even five years ago, so the value of your asset may not have really depreciated at all.

4. Income

Both shares and property are income-producing assets, but it’s important to understand the difference between the two.

Shares: Investment in some shares can generate a solid dividend income, on top of the franking credits mentioned above. How much income you get from this depends on company performance and their payout policies.

Property: Property investment gives consistent rental income which can differ depending on demand from prospective renters and market conditions.

And just to make things clear, residential real estate is really a high-growth, relatively low-yield investment, which brings us to…

5. Capital growth

Both investment property or shares are growth investments which means that over time they generate capital growth on top of the production of the income mentioned above.

Shares: The potential to buy your shares for one price and sell them at a later date for a higher price offers the ability to generate a capital gain.

For many, shares are seen as a short- to medium-term investment option which requires timing the market effectively in order to buy low and sell high.

Some say this means shares can provide stronger capital growth, but these investments also come with additional risk, and dips in a share price can be harder to recover from because you can simply ‘renovate’ your share to help boost capital growth.

Property: Property is a long-term investment with seasoned investors using a buy-and-hold strategy in order to get enough time in the market to enjoy capital growth (rather than buy-and-sell or even buy-renovate-and-sell).

It’s possible to help the capital growth of a property investment along the way by doing enhancements or renovations, while changes to the local area - such as planned improvements to facilities or transport - can also help boost capital growth.

6. Volatility

Volatility is a term that refers to how large an asset's prices move around and can be applied to both property vs shares investments.

Shares: The share market, by nature, is volatile. Shares move fast, investors can withdraw or input cash quickly and combine that with economic indicators, worldwide events, and even company or industry-specific news can make prices move upward or downwards suddenly making it a riskier asset from a volatility perspective.

Property: As property investment is a much slower, long-term game, volatility tends to be lower and the market more stable in terms of experiencing significant price fluctuations.

As we have seen over the past few years, market dynamics, supply and demand factors, and even government policies can create fluctuations in the market but generally property investment presents consistent growth.

7. Liquidity

The more liquid an investment is, the more quickly and easily you can turn it into cash. This is important if you need to access your money in a hurry.

Shares: Shares are generally more liquid as they can be bought and sold within a few days.

Property: Real estate is generally considered illiquid, because of how long it can take to sell a property. Getting your funds from the sale of a property usually takes months.

You need to find a selling agent then a buyer, go through negotiations, and then the process of conveyancing to officially transfer ownership, and then settlement usually occurs 30 or 60 days after that.

8. Leverage

Leveraging an investment – borrowing and using other people’s money - provides you with increased exposure to an underlying asset.

If the asset grows in value leverage magnifies your returns, but if the asset falls in value leverage magnifies your losses. 

Shares: Because shares are more volatile than property you typically cannot leverage them to the same extent.

When investing in shares, you will generally be required to come up with somewhere between 30% - 50% of the funds, a $100,000 of your money will only allow you to invest in around $200,000 to $300,000 of shares.

Property: With residential property, quite often a standard loan will require a 10% to 20% deposit (in the past, it has been as low as a 5% deposit), which means that with the same $100,000 of your savings, you could find yourself being able to access funds that would allow you to invest anywhere between $500,000 to $1 million.

Strategic property investors use leverage to continue building their property investment portfolio over time by borrowing against the increasing value of their properties.

9. Diversification

Diversification is the idea of spreading investments over different assets in the same asset class or in different asset classes to protect against volatility in the long term, and it's possible to do for both shares and property investments.

Shares: Given that shares are faster and easier to access and require less initial funds to get into, they’re easier to use for diversification too. Investors are able to spread their shares across a wide range of different industries, sectors, companies, and even countries in order to hedge against risk.

Property: It’s also easy to diversify your property investments by buying investment properties in different areas, suburbs, and even different types of properties.

The difference here is diversification through property investment takes a lot longer to achieve given levels of funds required.

10. The ability to add value

You probably know one of our favourite investment strategies at Metropole is to “manufacture” capital and rental growth by adding value through renovations or redevelopment.

It’s the old story of “buying the worst house on the best street.”

You just can’t do this with your share portfolio.

So which is a better investment in Australia?

Investing doesn’t just come down to which asset class offers the best returns.

You need to consider your personal situation such as your goals, financial situation, risk appetite, your age, and where you are along your wealth journey as well as the risks associated with the asset class you’re investing in.

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The entry threshold for shares, its liquidity, tax and income benefits, and capital growth potential make it an appealing investment for investors looking to accumulate wealth.

However it does come with an added element of risk and volatility, and there isn’t as much control over the shares and companies you invest in.

Meanwhile, property is a more stable long-term investment that enjoys the benefit of good capital growth (for the right property in the right location), good income potential, and the ability to leverage to grow investments further while facing relatively low volatility.

However, it’s possible to move as quickly in property and takes longer to get into and therefore build and diversify.

As I said at the beginning, there is no answer for which is best: property investment vs shares.

In my opinion, both property and shares carry their own perks, and also their own risks which can fluctuate depending on market conditions, interest rates, economic trends, and what is happening overseas in other markets.

Real Estate Institute of Australia figures show the nation’s median house price rose from $343,000 to $953,000, while the All Ordinaries index that measures the values of our 500 biggest listed companies climbed from 2839 to 7366 points.

Both have been long-term investment winners.

Yet, for me, there is a clear winner because of it's stability, the ability to add value and particularly because of the power pf leverage.

Please welcome to the stage … property.

But in order to identify the best investment option for you - whether that is property investment, shares, or both - you need to identify your risk tolerance and your investment goal.

I often enjoy the debate between property and shares and watching many get hot under the collar as they promote their preferences over the other.

When you look into the details though, there has been very little between the two in overall performance and I would suggest that this will continue moving forward.

But, in my experience, there are two factors that give property the edge when starting out, which allow you to build wealth faster.

You can leverage more of your own money into the property than you can with shares.

This means access to funds to invest in a larger-sized asset and when you include compounding and growth, there is a clear edge.

Adding value to the asset to promote added capital growth also gives property the upper hand, particularly in a low-growth environment.