If you have somehow managed to resist the lure of all the excessive trappings and saved a nest egg, the next challenge ahead of you is where to invest your hard earned. The decision often wavers between investing in the safe and relatively predictable property market, or trying your luck on the lucrative but unpredictable stock market.
Property Investment Offers More Stability Than Shares
While buying a house or apartment has higher entrance fees (stamp duty, financing costs and solicitor fees) property capital gains tend to be more stable over the long term, while stock investments are less predictable and more volatile. While buying shares can provide diversification across many industries, the volatility in markets can catch unsophisticated investors off guard and lead to sharp rises and falls in share prices in a relatively short period of time.
Level of Risk Higher in Stock Markets than Property
For many, getting into the property market has a significant barrier to entry in the form of the large wad of cash needed for a property deposit. The stock market can be more inviting for the less patient among us, especially if you can turn your small amount of savings into a larger house deposit by way of a few savvy stock investments. Historically speaking, investing in Australian property is relatively stable so property investment is theoretically far less risky than investing in the stock market.
Low Interest Rates Makes Property More Appealing
The low interest rate environment in Australia where home loan rates are 2.7% to 3.4% makes property investing very compelling. The low interest rates are also enticing investors with interest only loans to switch to principle and interest loans so that loans can be paid down quicker, accelerating the capital gain on the proceeds of an eventual sale.
Tax Benefits of Property Investing
A property investment that is rented to tenants has allowable deductions for expenses. In addition to any depreciation of the building and assets, maintenance and upkeep costs are also deductible. Be sure to contact your property manager if these costs are not itemised on your rental statements. It is important to keep a record of your expenses on the investment property so you accountant can dutifully expense those on your annual tax return.
Stock Market Complexity
Stock markets are complex. Unless you have a passion for learning about stocks, bonds and shares, and investment portfolios and strategies, you will have to pay someone else to take care of it for you. Financial advisors and stock brokers charge fees for their services which should be factored into any share market portfolio allocation you have set up with them.
Be sure to ask your financial advisor what the ongoing fees are for investing in a stock market portfolio and remember that you are relying on your faith and trust in a stranger to take care of things on your behalf. If you manage your investment yourself and treat it like a part time job, you can have some control over the level of risk you are prepared to take.