When Australians choose an asset to invest in, the choice before them is often narrowed down to two: stocks and property.
On the one hand, the share market is virtually synonymous with investing. At the same time, property investment has grown in popularity in recent years, with the Australian Prudential Regulation Authority recently reporting that investment loans made up a full 34 per cent of all residential term loans in the September 2014 quarter.
In fact, investing in property has a number of key advantages over the share market. Here are just a few.
Less risk for a substantial reward
When people cite the stock market as a smart investment option, one of the common arguments is the potential return you can make on an originally relatively small capital investment. All it takes is picking the right ones, and timing your purchase and sale well.
However, shares are also notoriously volatile, with big swings in values not uncommon. This can leave you shouldering a lot of risk even at the best of times.
By contrast, while the capital growth in the real estate market may not be as meteoric, it's generally acknowledged to be less risky asset. Dramatic price changes are not nearly as common when it comes to property, which tends to steadily grow in value as time passes. And with patience, you're likely to see similarly significant profits - if not more so.
The most recent RP Data Pain and Gain report stated that just over 30 per cent of all properties sold over the June quarter made a profit of 100 per cent or more. This could mean a return of hundreds of thousands of dollars.
In addition to this, banks tend to lend more to individuals purchasing property than shares. Banks will typically lend up to 80 per cent of home's value, and depending on the lender, even more than this. By contrast, margin loans - which are used to invest in shares, managed funds and more - typically will have a loan to value ratio (LVR) of 70 per cent at most, according to the Australian Securities and Investments Commission (ASIC). In the case of a 'margin call', where share value drops below an acceptable amount, this LVR will rise, requiring you to make up the discrepancy.
Property investment allows more control
One key benefit of property is the fact that you have more control over it as an investment. You can choose to add value to a property, for instance, by making renovations or additions, or you can choose to supplement your profits by turning your property into a rental.
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Both the stock and property markets have professionals who can take care of the day-to-day issues, and who will also take a cut of the profit. If you decide to rent out your investment property, a property manager can take care of maintenance and deal with tenants. In return, according to New South Wales Fair Trading, they will charge a letting fee of one week's rent, a management fee of around 5-12 per cent of the gross weekly rent and fees for advertising and other aspects.
When it comes to stock brokers, who will keep tabs on the market and advise you on what to buy and sell, the Australian Securities and Investments Commission tells us they tend to charge fees of 2.5 per cent on transactions less than $5,000. For large trades, they may take a substantially smaller cut. However, this does mean a trade worth a few thousand - or less - could end up being quite expensive
Because with property, only a small part of your profit is coming from renting, in the long-run you may see less of your profits being siphoned away.
Finally, it's also important to note that, if you're already a homeowner, making the transition into property investment is a natural shift. Rather than entering the unfamiliar world of stocks, you'll still be dealing with an asset that you're already fundamentally acquainted with.
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