As an investor looking to generate solid returns, you will have thought about the best way to build a portfolio, but will you choose to invest in property or shares?
Both asset classes have the potential to generate attractive yields and capital growth over the long run. However, they also come with different risks and require different levels of expertise to navigate.
This guide provides an overview of shares (stocks) vs. property investing to help determine which path is right for your financial goals and risk tolerance.
Shares vs. Property: 5 Key Differences Explained
In this section, we’ll explore five key differences between shares and property to help you decide on which to invest in.
We’ll compare these two asset classes based on these five criteria:
- Risk and return
- Liquidity
- Management
- Diversification
- Tax efficiency
1. Risk and Return
Property is generally considered a lower-risk investment, whereas shares carry more inherent volatility and uncertainty. However, sometimes with higher risk comes the potential for higher returns.
Shares have a higher return when the market is good, but this is usually short-lived given its volatile nature. On the other hand, returns on property—in the form of rental yield and capital appreciation—are usually stable over a long period, especially in up-and-coming property areas in the UK.
2. Liquidity
Shares are highly liquid, meaning you can buy and sell quickly. Property is not, as it can take months to sell — but with promising returns in the long term. This is why investors looking for steady cash flows choose to invest in buy-to-let properties. You have a steady return on investment for a more extended period.
3. Management
Shares typically require little management once purchased. On the other hand, property involves ongoing responsibilities like maintenance, repairs, tenant issues, and vacancy periods between rentals that require significant time and money. The good news is that you can cut the cost and time spent by employing the service of a professional property management company. The reliability that comes with property investment makes it an attractive option.
4. Diversification
Both shares and properties can be diversified to reduce the risk. You can buy shares across various companies and sectors. Likewise, you can invest in multiple properties in different locations to maximise income and reduce risk in case a region performs badly.
5. Tax Efficiency
Property investment offers valuable tax advantages, like deducting expenses and mortgage interest. Dividends and capital gains from shares are also taxed lower than other income. In a nutshell, both assets provide opportunities to build an assets portfolio tax-efficiently.
In summary, while property and shares have pros and cons, a balanced investment approach incorporating both asset classes may provide the optimal risk-return trade-off for your needs and financial goals. Diversifying across different investment types is a time-tested strategy for success.
Is Real Estate Investment Worth It? The Pros and Cons
Property investment has long been considered worthwhile for those seeking a safe asset-building approach in the UK.
However, there are several factors to consider before deciding if it is right for you, including the following:
- Stable property values
- Tax benefits
- Ongoing costs
Stable Property Values
Property values generally increase over the long run—up to a 365% bump in the last seven decades—and they resist inordinate volatility. Values are closely tied to supply and demand in the local market, interest rates, and the overall economy.
Even if there’s a decrease in property value, it’s usually negligible, and you can wait until the market improves to sell your property above the purchase price. Just make sure to contact UK property investment experts to understand your options.
Tax Benefits
The significant taxes associated with buying a property in the UK are capital gains and rental income taxes. However, if you invest wisely, you can reduce the overall tax you pay on your properties to a minimum. Understanding the latest tax rules and deductions is essential to maximising the tax efficiency of your investments.
Ongoing Costs
Property investments often come with ongoing costs like maintenance, repairs, taxes, and insurance that can eat into your returns. As a landlord, you’re responsible for any costs to upkeep the property and address issues. This can require time (if you do not use a property management company) and money, so you must go in with realistic expectations. However, you can manage these stress and costs more effectively by partnering with property investment experts like Baron & Cabot.
Is the Stock Market a Safe Investment? The Pros and Cons
The stock market can be an attractive investment option, with the potential for positive returns over time. However, it also comes with risks you must consider before deciding between an investment in property or shares.
Let’s explore three vital factors to look at before putting money in shares/stocks:
- Volatility
- Risk of loss
- Ongoing monitoring
Volatility
The stock market is volatile, meaning share prices can fluctuate significantly and quickly. Stock values are determined by the combined sentiments of millions of investors, so they tend to overreact to events, both positively and negatively.
While the overall stock market has trended upward over long periods, periodic downturns, crashes, and bear markets can dramatically reduce the value of your holdings. If you need to withdraw money during a market downturn, you could lose a substantial portion of your investment.
Risk of Loss
There’s always a chance that a company’s share price could drop to zero, resulting in a total loss of your investment in that stock. While diversifying your holdings across different companies and sectors can help mitigate risk, there’s no guarantee against losses. Blue chip, established companies are generally less risky, but even large companies can see their stock values drop significantly or go bankrupt — for example, Silicon Valley Bank’s stocks recently dropped by 60% within 24 hours.
Ongoing Monitoring
To invest successfully in stocks, you must regularly monitor the performance of companies and the overall market. You must keep up with how companies’ earnings, growth projections, management changes, and other events could impact share prices. You must also monitor the economy and factors like interest rates that could affect the broader market. This level of involvement may not suit investors looking for a more hands-off approach.
While the stock market presents risks, it also provides the opportunity for solid returns to help you achieve important financial goals. For many investors, a balanced approach that includes stocks and more stable investments (like property) may be the right choice. By understanding both the pros and cons of the market, you can make an informed decision about whether stock investments are suitable for your needs and risk tolerance.
Which Asset Class Has Better Returns: Shares or Property?
When analysing stocks vs. real estate, these four factors should be considered to determine which asset class will generate higher returns for you as an investor:
- Historical performance
- Income generation
- Liquidity
- Diversification
Historical Performance
Historically, shares saw a profit of only 5.2% after inflation between 1900 and 2012. However, property values have received an enormous boost, with a maximum increase of 365% in the last 70 years. In addition, property values and rents are often more stable, whereas share prices can be more volatile.
Income Generation
Both shares and property can generate income through dividends and rent, respectively. Property typically produces higher yields, with an average of 4.75% currently, whereas the average FTSE 100 dividend yield is currently 3.62%. Income from property can also increase over time through rent reviews and inflation, whereas share dividends depend on company profits and aren’t guaranteed.
Liquidity
Shares are generally more liquid than property, meaning you can buy and sell shares more quickly. While selling a property could take longer, the benefits of investing in this asset class are seen in its long-term capital appreciation and rental income. Overall, the liquidity of shares and property funds depends on market conditions and demand.
Diversification
A balanced portfolio containing both shares and property can provide diversification, which helps reduce risk. The value of shares and property don’t always move in tandem, so holding both may produce more stable returns over time. Diversifying your properties across different locations also provides stability, positioning you better for potential economic downturns.
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In summary, properties have historically achieved higher returns, and they can also provide income stability, diversification and a hedge against inflation. We suggest maintaining an optimal balance of shares and property, depending on your financial goals, risk tolerance, and time horizon. In all, seeking professional advice from UK property investment experts can help determine the right strategy for your investment needs.
How Easy Is It to Buy and Sell Property vs. Shares?
When analysing stock investing vs. real estate, an essential factor is how easy each is to buy and sell. Both investments have their pros and cons in this regard.
With property, the buying and selling process can be lengthy and confusing, especially for international investors purchasing property in the UK. For example, there are legal requirements around conveyancing that must be satisfied. This typically takes several months and significant paperwork unless you consult a property investment expert.
Selling a property can also take time if you need to find a suitable buyer. However, the upside is that property is a physical asset; you have complete control and ownership.
In contrast, buying and selling shares is generally much more straightforward; you can open a share dealing account and start trading almost immediately. The process is mainly automated and digital. However, share prices can be volatile, and finding a buyer willing to pay the price you want may take time. There’s also no physical asset you retain ownership of.
Taking a long-term buy-and-hold approach to investment for both property and shares is a good idea. This avoids frequently buying and selling, which can be time-consuming and erode your returns through fees and poor market timing.
If liquidity and flexibility are priorities, shares may have an advantage. They can be bought and sold quickly to suit your needs. With property, you typically commit your capital for at least several years.
That said, remember that shares and property serve different investment purposes. Property is best for generating income and capital growth over the long run. On the other hand, shares can be seen to be suitable for building a diversified portfolio and exploiting market growth if you are looking for an active role in your investment.
In summary, while property transactions require more administration, this asset class offers more stability and security as an investment. Shares provide more flexibility and liquidity but with potentially higher volatility. It’s best to have a balanced portfolio tailored to your investment goals, risk tolerance and how actively you want to manage your investments.
How Much Money Do You Need to Invest in Property or Shares?
You’ll need sufficient capital for real estate investing or stocks purchase.
The exact amount depends on several factors, including the following:
- Type of property or shares
- Method of investing
- Leverage
- Ongoing costs
Type of Property or Shares
The amount of money required depends on what you want to invest in. Commercial property typically requires a more significant initial outlay than residential property — off-plan property investment, in particular, provides low entry points. Similarly, investing in blue-chip shares or an index fund usually requires less capital than investing in a startup company. Generally, the higher the potential returns, the higher the risks and capital required.
Method of Investing
If you want to invest directly by purchasing property or shares outright, you’ll need enough capital to cover the entire purchase price. However, there are other options if you have limited capital.
For residential property, the team at Baron & Cabot provides some flexibility in terms of payment plans. You only need to pay a £5K reservation fee alongside a 20% initial deposit; you can then acquire a mortgage to finance the rest.
For shares, you can invest in an exchange-traded fund (ETF) or mutual fund. These allow you to gain exposure to the stock market or a particular sector with a relatively small initial investment.
Leverage
For property in particular, you can use leverage in the form of a mortgage to fund a large portion of the purchase price. The more leverage you use, the less capital you need upfront.
However, with higher leverage comes higher risks if property values fall. As a result, lenders will require a larger deposit, typically 20% of the property value. The deposit amount will also depend on your credit score and income.
Ongoing Costs
If you choose to get into property investment, don’t forget to budget for ongoing costs like mortgage payments, maintenance fees, taxes, and management fees. Similarly, shares investment will demand that you cater to trading fees. Ensure you have enough capital to comfortably cover all costs for at least the first year of your investment.
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In summary, while the specific amount of capital you need depends on your investment goals and risk tolerance, a good rule of thumb is to start with at least £25,000 to £50,000 for a property investment and £5,000 to £10,000 for share investing. However, the more you can invest, the greater your potential to build a profitable assets portfolio over the long run.
How Much Time Do Property and Share Investments Require?
Another critical factor when comparing real estate investment vs. stocks purchasing is the time each option requires. Both can potentially generate solid returns over the long run, but they differ significantly in terms of hands-on management and maintenance.
Property investments typically need more of your time initially. There are legal documents to review, mortgages and insurance to arrange, and property managers or tenants to oversee. Regular maintenance, repairs, and renovation projects must also be addressed to keep the property in good shape.
Although professional property managers can handle many tasks, property ownership generally requires an ongoing time commitment to maximise returns. A better way to minimise this stress is to use the service of a property investment expert and hire a property management company to take a more hands-off approach.
Share investment through the stock market or index funds is often more passive. Once you’ve selected investments, the day-to-day management is typically handled by fund managers. You can take a “set it and forget it” approach, only periodically reviewing and rebalancing your portfolio.
Of course, closely monitoring the markets and your investments can potentially yield better results. Still, share investment doesn’t require the same initial level of hands-on involvement as property investment.
The level of involvement and responsibility you want will help determine the most suitable and sustainable path for your needs and priorities. With suitable investments and management strategies, both property and shares have the potential to generate solid returns over the long term. The key is finding the approach that fits your financial goals and matches the time you wish to dedicate.
Shares vs. Property Investment: Which Is More Tax-Efficient?
When deciding whether to invest in property or shares, one of the critical factors to consider is tax efficiency. Both options offer certain tax benefits, but there are some key differences to be aware of, which we’ll discuss below.
Property investments typically allow for generous tax relief on mortgage interest payments, which can significantly reduce your tax bill in the early years of ownership. You can also claim tax relief on maintenance and repair costs to offset rental income. However, when you sell the property, you must pay Capital Gains Tax (CGT) on any profits above the tax-free allowance.
Share investments, on the other hand, don’t provide the same level of tax relief on costs and interest payments. However, when you sell shares, you have an annual CGT allowance of £6,000, which you can use to offset profits, and any excess can be offset against losses in the current or previous tax years (this also applies to property). Share dividends income is also taxed at a lower rate than other income.
Property investments are more tax-efficient due to the tax relief available on costs and mortgage interest. However, over the long run, shares may also be tax-efficient due to the generous CGT allowance and lower tax on dividends. Your choice will depend on your investment goals and time horizon.
Here are five additional points to consider when considering tax options for both asset classes:
- Your income tax bracket and the tax rates on dividends, rental income and capital gains can change over time.
- Whether the intended investment property qualifies for certain tax reliefs, e.g. Furnished Holiday Lettings Relief.
- How much of your CGT allowance can offset profits from selling shares or property?
- If you can benefit from tax-efficient share schemes like ISAs, SIPPs and EIS/SEIS.
- Your investment risk appetite, as property and shares, have different risk profiles.
In summary, a balanced approach combining property and shares is the most tax-efficient strategy for most investors. You can then optimise your holdings based on changes to tax legislation and your financial circumstances over time. Again, seeking professional advice from UK property investment experts can help you make the most of available allowances and reliefs.
Frequently Asked Questions
Which is a better investment: property or shares?
Investing in properties can be a wise choice for long-term financial growth. With the potential for rental income and property appreciation, real estate offers stability and tangible assets. Shares, on the other hand, have the perks of liquidity and decent growth in the long term but are more volatile.
It’s best to have a diverse portfolio comprising stocks and property to help manage risk and reach your investment goals. And if you’re keen on building a property portfolio, consider your financial goals and seek guidance from a real estate professional to make an informed decision that aligns with your investment objectives.
Is investing in real estate good?
Investing in real estate can be a good financial decision for many individuals. Property has historically been a stable and reliable long-term investment option. It offers potential benefits such as rental income, property value appreciation, and tax advantages.
However, it’s essential to consider market conditions, location, expenses, and financial goals before making investment decisions. Conduct thorough research, seek professional advice, and evaluate your circumstances to determine if investing in property aligns with your financial objectives.
Are stocks more risky than property?
Both stocks and property carry risks but offer unique opportunities for returns. Stocks can be volatile in the short term, influenced by market conditions and company performance. On the other hand, property is generally considered more stable, with the potential for appreciation and rental income.
We recommend having a balanced portfolio comprising both property and shares to help mitigate risk. Still, assess your circumstances, conduct research, and seek advice before investing in either.
Conclusion
Whether you invest in property or shares, you can potentially generate solid returns over the long run. However, you should base your final decision on personal investment goals, risk tolerance, and liquidity needs. For most investors, investing in a balanced portfolio containing a mix of property and shares is ideal — this helps spread your risk while still achieving healthy returns.
Whatever you decide, the most important thing is to start investing as early as possible. Time in the market is one of your most significant advantages, so make the most of it. With patience and persistence, you can build a diversified assets portfolio.
The road ahead isn’t always easy, but by following the guidance in this article, you now know to make informed investment choices. Stay focused on your goals and keep putting your money to work. Don’t hesitate to contact us for professional advice on investing in the most lucrative asset class — property.
Disclaimer: Any information provided by Baron & Cabot does not constitute financial advice and is for educational purposes only.
