Which of the two most popular types of investments is the best? And what should you be adding to your portfolio?

Property investment or investing in stocks is a dilemma most investors battle with, both are very popular and have their own pros and cons. It really depends on what type of investor you are, in this blog I will take you through the key differences and I will help you make up your mind about what suits you best.

Property Investment VS. Stocks 

Let me start by saying that comparing property investment to stocks is not like comparing apples and pears.

Property is described as a tangible asset which means that you can hold or visit the object that you have invested in. The good thing about property is that whatever happens your asset will never go away.

A stock, however, is a share of ownership in a publicly-traded company. Most of these companies have millions of shares, so ultimately unless you are Warren Buffet the number of shares you own in these companies is insignificant. One of the big disadvantages of the stock market is that, if the market takes a blow and the company you own shares in fails, your stocks will no longer have any value. 

However, the stock market does have some advantages over property investments. Stocks are considered a liquid investment, which means that you can typically sell a huge amount of stock and have the money in your bank account within a couple of days. 

Compared to property, investors can enter the stock market with as little as £5, compared to property this investment is extremely low. Stock portfolios are easy to diversify across many different companies. That doesn’t mean you need to break the bank to do a property investment, but £5 doesn’t buy you a house, unfortunately.

Property investment

So let’s have a look at which investment is best for you. To do this, we need to take a closer look at the types of investments that exist.

Sources of a return on investment:

  • Cashflow
  • Capital Gain
  • Equity 

Cash flow

The most interesting thing about investing in property is cash flow. Whether you are investing in residential rental properties, multifamily properties, or commercial units, the idea is that you want to earn a profit from the monthly rental income. The thing we like about rental income is that it is consistent, regardless of the position of the market. People always need a place to stay. 

Some stocks investment pay dividends to their investors, for example, Coca Cola or Bank of America. Most of these dividends are paid quarterly and are pro-rata share of the company’s profit of that year.

Dividends are normally a fixed percentage of the current price of the stock, not to be confused with the amount you’ve invested in it. However, now comes the downside, when the market is down, your dividends will also be down. If the market is up, your dividends will be up. 

If you are somewhat familiar with mutual funds you would know that these are often heavily invested in dividend-paying stocks. Some of these funds allow investors to have their dividend payments reinvested into the fund to increase their returns.

Capital Gains

Capital gain is the profit you earned from selling an asset for a higher price than you paid. The majority of the profit earned for stocks is classed as capital gains. You purchase a stock with the belief that its value will increase over a longer period of time. The term buy low, sell high originated in the stock market. 

Capital gain is also a well-known strategy within the property investor market. If you purchase a property when the market is down and sell when the market is up, you can make a significant profit. Most investors that invested in property in the last financial crisis, have seen a massive increase in their capital. 

Don’t worry you haven’t missed your chance at a capital gain if you didn’t invest in 2008. Investors also earn capital gain by increasing the value of their property. The ways most investors do this is by improving the property and increasing the rents, this way you can force the appreciation of the property and earn yourself some capital gains. 

One clear benefit that property investors see over stocks is the ability to control the performance. With stocks, you’re relying on the market to improve, which in turn improves the value of your stock. With property, you can increase the value no matter how the is performing.

Equity

Building equity is more specific to the property market. Property is easy to leverage, which means that you can use the bank’s money to purchase property, and in turn profit from the equity you build up over time. 

The moment you collect rent each month from your tenants, you use a portion of that rent to pay the mortgage payments of the property. Every month you do this, the principal balance goes down and the amount of equity you have in the property increases. By doing this, you build a significant amount of equity that your tenants are paying for.

Many investors often overlook this benefit, because they usually don’t consider the amount of profit they will earn when they cash out on the equity.

Tax benefits of property

Property investments provide tax benefits that other investments don’t. These tax benefits don’t necessarily increase your cash flow or the value of the investments, but they allow more retention of the profits at the tax time.

Investing in property comes with the following tax benefits:

  • Depreciation
  • Interest Deduction
  • Expense write-offs
  • Tax-deferred exchanges

Depreciation

allows you as the investor to deduct the cost of the improved property over a period of time. Commercial property is depreciated over 39 years, and rental properties are depreciated over 27.5 years. In practice this means you get an additional annual tax deduction over this period of time. 

Allow you to write off any interest you pay on the mortgage on your investment property. This deduction is significant, especially in the beginning, when your interest payments are higher. 

In the first couple of years, your interest deduction will probably be higher than your depreciation. 

Interest deductions

Allow you to write off any interest you pay on the mortgage on your investment property. This deduction is significant, especially in the beginning, when your interest payments are higher. 

In the first couple of years, your interest deduction will probably be higher than your depreciation. 

Property investment

Tax-deferred exchanges

This is what allows you to sell your investment property and defer the capital gains tax as long as you use the funds to purchase another investment property. This way you can continue to trade up to larger properties without paying capital gains tax after each sale.

Expense write-offs

This includes all of the costs that are associated with your property investment. Not only does this include maintenance, repairs, and property expense, but also home office expenses, telephone, and travel expenses can be written off.

Stock Liquidity 

Like I mentioned before one of the major advantages stocks have over property is the liquidity. Cashing out on property can be a lengthy process, with high transaction costs. Stocks, on the other hand, can be sold quickly, often with the click of a button and with minimal costs. If you are in need of quick cash out, stocks can typically be liquidated in a matter of a week. 

Another advantage is that you can sell a portion of your stock while selling a part of your property will be difficult… 

We focus on the long-term, so liquidity is not really the issue. But if you’re focused on short-term you need to weigh your options carefully. 

Full-time job?

This is all depended on your strategy. The amount of effort required investing in both property and stocks can vary a great deal. If your planning to manage your own rental property, get ready to put some serious effort into it. On the other hand, if you put your money in an index fund that follows the S&P 500, your life will be a little bit easier.

However, investing alongside another investment company will offer real estate benefits while letting the investment company put in all of the efforts. Investing this way provides true passive income for you. 

Property investment or stocks – which is right for you?

Property investing provides you with a ton of benefits, but it required a lot of time, energy, and money to get started with, for some this can be overwhelming. Finding the right investment property, negotiating good terms, getting financing, and managing your portfolio is time-consuming when not treated right. This is the most common reason for people to avoid getting into property investing, but they often forget the massive benefits that property provides. 

Promagem Limited allows you to receive all of the benefits we mentioned above, but without the hassle. We are able to secure loans with the lowest interest rates available, further increasing the cash flow and equity growth on our portfolio.

Max Kastanje

Max Kastanje

CEO