Many people are instinctively more attracted to the idea of investing in property, rather than building up a strong portfolio centring around stocks or equities. This is understandable; after all, real estate is inherently more tangible than indexes or graphs on a spreadsheet.
You can feel, smell and touch mortar, which makes it feel more “real” and, therefore, reliable. This inclination has helped fuel the popularity of many real estate investors in public consciousness, such as Robert Kiyosaki (author of Rich Dad, Poor Dad).
However, is property necessarily a better investment than the stock market? Many people will remember how property portfolios were heavily hit during the 2008 financial crisis, for instance. Doesn’t property leave your money unnecessarily “tied up” or “exposed”?
In this short guide, our financial advisers here at Cedar House will be sharing some thoughts on the pros and cons of property investing, versus equity investing.
Like most advisers, we argue that it is generally sensible to incorporate a blend of different asset types into your investment portfolio to help spread out your risk. The precise balance between equities and property will likely vary from person to person, depending on factors such as someone’s risk tolerance and investment goals.
Please note that this content is for information and inspiration purposes only. It should not be taken as financial advice. To attain regulated, professional financial advice please consult an independent financial adviser.
Property: Pros & Cons
There are different ways to invest in property. For instance, you could invest directly in property by buying a house outright and then letting it out. Or, you could take out a Buy To Let mortgage and seek to cover your expenses from the rental income, whilst also aiming to turn a profit. Another common approach is to invest in property more “indirectly” by pooling your money with that of other investors in a fund, which then invest in different properties (e.g. a Real Estate Investment Trust, or REIT). This latter approach is popular amongst investors who want to incorporate property investments into their portfolio, but perhaps lack the funds to buy a house outright and let it out to tenants.
Here are some of the advantages and disadvantages of investing in property:
● Direct control. As a landlord over your property, you have final say over who rents out your property and the rules governing how it should be used. You can set the rent too (although you will need to factor the market rate into this).
● Rising value. In the UK, properties have generally increased in value over the past 50 years. With the British population continuing to rise, and demand for homes also likely to go up in a country with limited space, it seems reasonable to expect this trend to continue. However, past performance is no guarantee of future returns or results.
● Taxes. Unfortunately, where there is money to be made there is usually a government not far away looking to take tax from it. This is certainly true with property. If you sell a second home, for instance, then you will have to pay capital gains tax (CGT) on any increase in its value since you acquired the asset.
● Illiquidity. When the time comes to sell a property, it isn’t always easy to do. Perhaps the housing market is suffering and you cannot get the price you want. Or, maybe you simply cannot find a buyer. This problem is often less acutely felt with indirect real estate investments such as REITs, since your money isn’t tied up so much with a single asset. However, illiquidity can still be an issue with indirect investments when you want to sell.
Equities: Pros & Cons
Similar to property investing, there are different ways to invest in company stocks. One way is to invest directly; for instance, by becoming a director and shareholder at your family business. The more common route, however, is for people to invest indirectly in equities such as these by pooling their money with others’ in various funds, which then invest in a range of companies. For instance, if you invest in an FTSE 100 index fund then you are effectively joining other people in investing in the UK’s largest 100 companies.
Here are some of the advantages and disadvantages of investing in equities:
● Liquidity. In opposition to property, if you want to buy or sell company stocks then this is usually a lot easier to achieve; particularly if you primarily hold indirect investments. This is not always the case, however. Consider the 2019 Neil Woodford incident, where investors were barred from withdrawing their money from a failing fund!
● Lower costs. With equity investments, you do not have to worry about covering the costs of an unoccupied property, of replacing a broken boiler or struggling to find a buyer when you want to sell. If you use tax-efficient investment vehicles such as an ISA for your equity investments, it is possible to limit your costs to just a few areas such as your investment management fees.
● Volatility. Investing in stocks carries risk because if the overall value of your shares goes down during a market decline (or crash), then you risk losing your money if you then sell them. It’s worth noting, however, that diversifying your equity investments can help to shield you from too much risk here. Moreover, property markets are not immune to volatility; in fact, many people regard property as riskier than many equity markets.
● Less control. Unless you are Peter Jones from Dragon’s Den, you are likely going to be limited to choosing from a set range of investment fund when it comes to equities. The managers of these funds decide which companies and opportunities make the cut, and enter the fund. This means less control for you as an investor.