Property investment versus shares – what gives you better returns?

You’d like to invest, but you want to be confident that your money is going to grow, beat inflation and generate a substantial nest egg for when you really need it. So what is the best choice – property investment or shares? Some investors say it comes down to personal preference. If you invested in riverfront property in Sydney twenty years ago, you’d have made a killing, but you’d be equally happy if you’d invested in Apple a decade or two ago. So what’s the difference between the two types of investments?

Property investment versus shares

When you invest in property, you’re buying something physical. You could be buying it to live in, or rent out for an extra stream of income. When you buy shares, you’re buying a piece of a company; whether the company makes toys or computers is irrelevant. What is relevant is how well the company is performing on the stock exchange. It really is as simple as that.

So how do you decide what to invest in? Well property investment has a few clear-cut advantages:

It’s easy to understand

Most people understand property. You grew up in a home or a flat, your parents more than likely had a mortgage, and maybe you’ve moved a few times. Property investment is more tangible, unlike share investing which many people only have a vague idea about.

It’s safe (as houses)

There is a reason that’s a popular saying. The Home Value Index by CoreLogic RP Data shows that from 2012, house prices have increased nationally across Australia by 36.6 per cent. Compared to the volatile share market, it’s a much safer and more predictable investment.

It’s easy to find information

Researching property is far simpler than researching the stock market. To invest in shares you need to know how the system works, have a good broker or fund manager and you need to stay on top of what’s happening in the financial news, which changes on an almost daily basis. Researching property is far easier. You can do a lot of it online, or speak to a trusted real estate agent.

Financing property is straightforward

Home loans form a major part of any bank’s business. Finding the right mortgage is also straightforward. A well-informed mortgage broker can present you with a range of potential lenders and find the right mortgage to suit you.

You can improve your property investment

Unlike shares, which you just own or trade, you can actively improve the value of your property investment. By doing home renovations, you’re able to increase its value and marketability. By making some clever interior design and structural changes, you’ll see significant returns that you have complete control over.

Leverage is your friend

Leveraging the equity in your existing home to purchase a new investment property is easy to understand. Your home’s equity is the difference between your current property’s market value and the balance of your mortgage. There’s a strong chance, if you’ve owned your own home for a few years, that you’ve already built up a reasonable amount of equity that can be used to purchase your investment property.

So what exactly does leveraging your equity mean? Essentially, it’s borrowing to increase the potential return on your investment – in this case, your second property. For example:

• Imagine the existing value of your home is $500,000 and the balance of your mortgage is $300,000.
• The difference between the two is $200,000 – this is your home equity.
• As an investor, you can access up to 80% of this amount without having to pay Lender’s Mortgage Insurance, leaving you with  $160,000 to use as a deposit on your second property.
• By using your equity in this way, you’re minimise risk because you’re not using your actual cash reserves or savings.

You can borrow more with your line of credit loanif you are using a property as a security. Lenders will lend up to 95% of the value of your property, and only up to 50 or 60 per cent of your share portfolio. The advantage of this greater borrowing power means you benefit from the capital growth of a much larger asset.

If you would like to know more about how to purchase your own property, contact one of our mortgage brokers today and find out more about accessing the equity in your home or getting a new home loan.