Investing is not just about varying between conventional and alternative assets. An experienced investor should to be able to choose between assets that have the most potential for gain. Here we’ll look at two investment options – the property and gold market – and try to discern which is better.
This will encompass examining at a variety of factors, including stability, fluidity and price performance among others. If you don’t understand the commodity and real estate markets, it may sound as though we are comparing apples to oranges. We’re here to tell you they’re nearly as similar as they are different. Read on to discover whether the gold market or real estate market is our favourite investment.
Often difficult to purchase and not so easy to sell, real estate investments are made only after much research and are seen as a long-term strategy.
Over time, the prices of land and built up properties only ever tend to appreciate. Property is also the most popular type of investment for Australians, and for good reason. Generous tax benefits and the fact you don’t have to be a specialist to invest in real estate are among the main draw cards, plus it’s a physical investment that we can touch, feel and see. Additional benefits plus some drawbacks of property investment can be found below.
Advantages of the Property Market
- It Is a Stable Investment
Over time property has proven to be a steady investment compared to other markets such as shares or commodities. While the property market does still fluctuate, on a whole it tends to be a lot less volatile than other investments. This is most like due to the fact that real estate often takes longer to sell (while shares can be traded in a second) and that homes and apartments are almost always in demand. In Australia at the moment we have population growth rates outstripping supply, creating an increase in demand for housing that we can’t build fast enough.
- You Can Leverage Your Investments
Being able to leverage your equity in an investment property means you can purchase another property with less capital outlay. With property this happens when you put down a deposit and the bank loans you the rest.
- It Can Generate Positive Cash Flow for You
One of the advantages of owning an investment property is that you can choose to rent it out. If the property in question is in an ideal location with low vacancy rates and high appeal, you may be able to earn enough rent to cover your expenses. This means you are effectively getting someone else to buy the property for you. And even though it’s you still fronting the deposit, your tenants are actually paying for the mortgage. If you are smart you will even have some money left over which is positive cash flow and passive income.
- Property Can Offer Tax Benefits
Real estate is fantastic when it comes to tax benefits and government concessions, such as negative gearing. This occurs when you lose money on your investment property. You can then offset the losses against your income and thus secure yourself a tax saving. You can also claim things like depreciation on fittings and fixtures, which amplifies your tax savings. In some cases you may even be able to swing a visit or two per year to inspect the property and claim that on tax too!
Disadvantages of the Property Market
- It Is Not Very Liquid
While shares and minerals can be sold at a moments notice, property takes much longer to sell. Depending on where you’ve purchased this could take weeks or even months. This lack of liquidity can be a major con if you need to access your money quickly for use in other areas of your life.
- There Can Be Hidden Problems Associated with Property
Even after doing your research and getting a building and pest inspection; ensuring your property is kept to the highest standards; scrutinising the rental application and more – there will always be hidden problems associated with real estate. It’s not often that you can pick up a property and set it on ‘auto-pilot’. There will always be something to repair, rent to chase up or an unexpected bill.
- Real Estate Has a High Entry Cost
Shares you can buy into for as little as $500. Gold you can invest in for as little as $20. Property however is going to cost you hundreds of thousands just to get your foot in the door. Because of this high entry cost it is common for most people, including SMSF and ‘mum and dad’ investors to have all their eggs in one basket. This lack of diversity opens you up to devastation if the market changes suddenly or your investment does not perform the way you would have expected.
- Changes (e.g. Vacancies, Interest Rates) Can Put Huge Strains on Your Cash Flow
Because property is such a large investment you will often have a mortgage you have to pay for. This means that unexpected changes to rental vacancies or interest rates can blindside you and put a strain on your purse stings. If the extra costs are substantial, it may cause a ripple effect and impact other areas of your life.
- Ongoing and Additional Extra Costs
Property carries with it many ongoing costs that other investments are subject to. Insurance, council rates, mortgage repayments, maintenance and renovations will all have to be accounted for when looking to purchase real estate. These extra and ongoing costs may be regular or may come as a surprise when you least expect it.
Although it is no longer a primary form of currency in the developed world, the gold market remains a popular choice for a number of reasons. Gold, like property, is a commodity that’s best suited to those with a long-term investment plan. The numbers show that gold is a good asset to hold, and has less volatility than stocks. It is even more attractive of an asset when planning for retirement or if you want to put some money away for your children.
Even in the event of a downturn, it is unlikely that the gold market would lose all of its intrinsic value. Plus it’s much easier to keep under your bed as opposed to property.
In high-risk economies, such as those that are subject to extreme inflation, the gold market price will generally go up. This is because in these situations, investors trade cold hard cash for gold as a way to safeguard their wealth.
The gold market is also seen as very steady, where the price of gold is not really affected in the event of a recession. Experienced investors will tell you that gold is a good place to start when building an investment portfolio, but what are some of the other advantages and disadvantages?
Advantages of the Gold market
- It Is a Highly Liquid Investment
Gold can be easily changed into cash pretty much anywhere in the world. Aside from actual physical coins and bank notes, the liquescence and universality of gold is unmatched.
- Gold Has Been Shown to Hold Its Value over Time
Gold tends to hold its value over time, and some economists contend that even the price of gold is not actually an indication of its value. That is to say that even if the price diminishes, the fundamental value of gold as a commodity is largely unchanged. This is because there is a fixed quantity of gold, whereas the Australian dollar, which is a form of fiat currency, holds no inherent value.
- It’s a Safe Bet During Periods of Inflation
Historically gold has risen in value when countries or global markets go through periods of high inflation. Since gold is priced in dollars, any deterioration in the dollar will logically lead to a higher price of gold. As a result, during inflationary times gold offers a much more stable investment than cash.
- It’s an Effective Way to Diversify Your Portfolio
Adding different types of investments to your portfolio (shares, commodities, property) is essential if you want to diversify and lower the risk that comes with putting all of your eggs in one basket. Gold often moves inversely to the stock market and currency values, making it an especially effective way to expand your portfolio.
- Gold Is an Input in Many Products and Universally Desired
Gold is still a universal commodity. Although countries sell their currency futures, treasuries and other securities around the world, unlike gold, they are subject to political chaos. From jewellery to electronics and even astronaut’s helmets, there is a reliable demand for gold that further guarantees its price. Moreover, in times of increased demand, these markets can force the price on the gold market higher.
Disadvantages of the Gold market
- Gold Doesn’t Earn Passive Income
Other investments such as real estate can derive some of their value from passive income in the form of rent. With gold however, the only return you can make is when the value increases and you decide to sell.
- There Is Potential for the Gold market to Create a Bubble
In tempestuous markets, most people will start investing in gold. When investors start to panic though, gold can quickly become overpriced and inflate. This could lead to you losing money on the overall value once the price corrects itself.
- Gold Needs Physical Space for Storage
If you choose to buy actual, physical gold, you will not only need to store it, but you will need to insure it as well. Otherwise, you won’t be able to replace it if it is damaged or stolen.
Gold is a hard asset and is generally considered a safe investment since it tends to be uncorrelated to financial assets such as shares and even property. The biggest hurdle for many in buying gold is that it doesn’t produce a yield.
Property on the other hand is more exposed to market fluctuations plus a myriad of other factors that affect its price, but it can generate passive income. And while it is also considered a secure investment as opposed to securities such as stocks, it isn’t a fluid as gold meaning that it will take longer to free up much needed cash in the event of an emergency.
Our advice is to make sure that you talk to a trusted real estate agent or financial advisor about the money making potential and benefits of diversification across your investments.
- Daniel Fisher, Physical Gold, 14 January 2016, “Gold Investment Versus Property Investment”
- NuWire Investor, 14 August 2014, “Real Estate Vs. Gold: Which is the Better Investment?”
- Charlie Brown, Wallstreet.com, 18 August 2015, “Gold or Real Estate: Which One is the Better Investment”
- Doug Eberhardt, Buy Gold and Silver Safely, “7 Reasons Real Estate Is A Better Investment Than Gold: Rebuttal”
- Prosperity Partners, 13 September 2016, “Why Property Is Better Than Gold, Shares Or Cash”