It’s the age-old question that plagued both budding new investors and long serving industry stalwarts alike – can you make more money investing in shares, in business, or in owning property?
On one side we have property. Reliable, tangible and as some may argue, less exposed to risk due to gradual and predictable market fluctuations. On the other end of the spectrum we have shares. Easily accessible to those with limited capital and zero ongoing fees as opposed to the costs of owning property. And what about putting your money in business? While it’s unquestionably more time consuming, it is hard to ignore the fact that the majority of the world’s billionaires choose to put their money into companies. It’s true that an intelligent investor will diversify their portfolio, and make sure each asset is providing a return via capital gains, interest, rent, dividends, or all of the above. But how do you know what’s going to work for you?
Shares are a highly flexible investment when compared to property or business and can be easily accessed with very little initial outlay. It is however much more difficult to outperform the long term averages when it comes to shares, and you’ll need to be relatively clued up on how the stock market works. Other benefits and drawbacks of investing in shares include the following.
- Asset value is readily available: You’re able to check how your shares are performing every day. If you’re a property investor, this access is restricted unless you list the property for sale
- Immediate access to cash: Shareholders can sell of a part of their portfolio or the entire amount to gain access to cash relatively quickly
- Limited additional fees: Property requires that you pay a number of professionals for different services, meaning you must outlay additional costs on top of your deposit. Buying shares only entails a brokerage fee being paid so you free to invest in shares with only a small amount of money
- Unpredictable: Share prices can drastically decrease in value over a short period of time, leaving you with very little, very quickly
- Time consuming: Share prices fluctuate day in, day out and must be monitored carefully. You’ll find that a lot of your spare time will be taken up researching just how well your current potential shares are performing
- Risk of bankruptcy: If you have money invested with a company and they go bankrupt, you’ll most likely be the last one to get paid. That’s if you get paid at all
While buying into somebody’s business can be a smart move, it’s important that you do your due diligence. Conversely, starting your own business is highly risky and demands a lot of time, patience and planning. If you’ve found a business to invest in, it’s important to first consider the pros and cons to see how it stacks up against putting money in shares or property.
- Immediate access to funds: If you’re purchasing a business that already has a guarantee revenue stream you’re given immediate access to any profit
- You have a say: By buying into a business for investment purposes, you essentially have control over the day-to-day running of that property. This allows you to improve or change the business as you see fit in order to generate a higher return on investment
- Higher potential for profit: Unlike shares that you can only buy or sell dependent on the price, or property that can only have a certain amount of value added before it’s deemed overcapitalised, businesses have a greater range of options for wealth creation. From selling advertising and selling online to trading over the counter, wholesale or selling subscriptions. These are all different avenues that can be explored if you invest in a business.
- Illiquid investment: Much like property, businesses are illiquid i.e. not readily saleable. If you want access to cash quickly, you’re going to have to wait till you can find someone to buy you out, and by then it may be too late
- Your lifestyle may be impaired: Operational and management duties can take up a lot of your time, and may negatively impact other parts of your life
- Risk of underperforming: Of course both shares and property can underperform, but with a business it’s much more complicated then just a poor rental market or drop in prices. A business can underperform for a number of internal and external reasons, most of which are out of your control. This can lead to complicated scenarios that require you to sink in large amounts of money over a long period of time to recover losses
Property is the most popular type of investment for Australians, and for good cause. Generous tax benefits and the fact you don’t have to be a specialist to invest in property are just a couple of reasons why we love to put our money in bricks and mortar. But what are some of the other advantages and disadvantages of investing in property?
- Cash flow: Unless you’ve got abysmal tenants, you’re guaranteed to have a consistent cash stream from rent, not to mention the capital growth of the property
- Equity: By having equity in an investment property, you’re then able to leverage money for another purchase or to take out a loan
- Add value potential: By renovating, repairing or simply remodeling a property you’re able to hasten it’s rate of capital growth and add value when it comes time to sell
- Ongoing management costs: Whether you employ the services of a property manager or take a swing at DIY property management, there’s going to be ongoing maintenance costs until the property’s sold
- Lack of liquidity: If you need to obtain substantial capital that’s tied up in your property then you’re going to have to sell, which could take weeks, months or even years. This means you won’t have quick access and could end up missing out on a golden opportunity
- All your eggs in one basket: The initial cost of getting into the housing market means that you’ll have a large amount of money invested in one asset. This could pose a problem if the market turns or the property ends up costing more to maintain than expected
It’s pretty obvious that property is the best bet for those just getting into the investment game. Even though you’ll have to outlay a large sum of cash for the deposit, if you do your homework the risk of losing that money is minimal. Shares are also a logical next step if you’ve got the time to keep an eye the stock market. They’re also a great investment option if you’re looking to diversify your portfolio. Business on the other hand can be tricky, unless you know exactly what you’re getting yourself into and have access to company financial records. This doesn’t mean that you won’t be rewarded for hard work, and the potential for huge profits is there if you know what you’re doing.
- Mike King, 24th May 2016, “Should you buy shares or property?”, (http://www.fool.com.au/2016/05/24/should-you-buy-shares-or-property/)
- Alex Goldhargen, 31st March 2016, “Pros and cons of investing in property vs shares”, (https://www.ibuynew.com.au/news/our-thoughts/pros-and-cons-of-investing-in-property-vs-shares)
- Kent Kwan, 27th September 2016, “Can shares be less risky than investing in residential property?”, (http://www.nestegg.com.au/from-the-experts/q-a/10388-can-shares-be-less-risky-than-investing-in-residential-property)
- Business.qld.gov, 22nd June 2016, “Advantages and disadvantages of buying a business”, (https://www.business.qld.gov.au/business/starting/business-startup-options/buying-a-business/buying-business-advantages-disadvantages)
- Joshua Kennon, 4th May 2016, “Getting rich by investing in an excellent business”, (https://www.thebalance.com/getting-rich-by-investing-in-an-excellent-business-357871)
- Michael Yardney, 24th February 2016, “8 reasons why property is a better investment than shares”, (http://www.businessinsider.com.au/8-reasons-why-property-is-a-better-investment-than-shares-2016-2)