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Are you deciding whether to invest in property or the share market?
While at Metropole we are property specialists, we also advocate for diversification, so a healthy investment portfolio should contain an element of both.
Most successful investors have multiple income streams and are shown to hold and benefit from both asset classes.
Therefore, this is not an argument 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.
Performance
As the data shows, there is very little difference between both Australian Shares and Residential Property over the longer term.
It is important to remember we are speaking about averages here.
I know that with both assets that there will be experts that can study, analyse and outperform these markets, or in some cases underperform!
But, overall there is very little difference in performance and I would suggest that this will be the same moving forward.
However, when starting your investment journey, in my experience it is property that leads the way.
So what gives property the edge?
Leverage
The first factor is being able to leverage more of your own money into growth assets, by using….. someone else’s!
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.
What this means is that with $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.
You can then purchase a high-growth asset such as property.
Conversely, when investing in shares, you will generally be required to come up with somewhere between a 30% – 50% deposit.
In this case, your $100,000 will only allow you to invest between $200,000 to a maximum of $330,000.
Regardless of the performance of the asset over the next 10 – 20 years, with a significantly wider asset base, combined with leverage and compounding, it is property that will allow you to grow your asset base and wealth faster.
Add Value Potential
The next one is fairly obvious but often overlooked.
It is pretty much impossible to add value to your share portfolio, so you are relying on the market to do all of the heavy lifting for you.
With property, it is different though.
You can increase the property’s value and boost cash flow by either renovating or developing.
We have a number of beginning investor clients dip their toe in the water and undertake a small cosmetic renovation to increase their property’s value and close the cash-flow gap.
Our more sophisticated investors take their portfolios to the next level and undertake a development, something that builds their wealth and cash flow considerably faster.
It is probably more crucial than ever in a low growth, low inflation economic environment to be able to have a bit of a trick up your sleeve, rather than being left at the whim of the markets.
So which is better?
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 detail though, there has been very little between the two in overall performance and I would suggest that this will continue moving forward.
In my experience though, 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 into a larger-sized asset and when you include compounding and growth, there is a clear edge.
Adding value to the asset also gives property the upper hand, particularly in a low growth environment.
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