While demand for housing tends to be relatively robust, the process of selling a property is long-winded. For example, it must be marketed, then viewed, and then negotiations take place before the sale completes and the money is (finally) transferred to the seller. This contrasts sharply with the shares of major companies, where the click of a mouse button is enough to process a sale, with trades normally settling three working days later.
Although this difference in liquidity may not seem like such a major issue during prosperous periods of time, should a seller need the funds for other uses, holding shares could prove to be a big advantage over owning property.
Most people that invest in property can count the number of their buy-to-lets on one hand. This means they are not well diversified and, should there be a maintenance issue with a property they own or a problem receiving payment from a tenant, their return could be severely reduced. And, with even one property being such an expensive asset in terms of requiring a relatively high deposit, even investors with a substantial amount of capital may find it challenging to diversify.
On the other hand, it’s easy to diversify when it comes to shares. You can invest small amounts of money in a large number of stocks, thereby reducing company-specific risk.
Even if you outsource the management of a property to an agent (who normally charges around 10% of gross rent for this service), property investment comes with a certain amount of stress. There are inevitable void periods when you have no return, frequent maintenance issues and (if you own a flat) the potential for one-off service charges to pay for repairs to the building.
These issues do not apply to shares. Certainly, you need to keep abreast of developments regarding the companies you own, but even doing so a couple of times a year can be enough to stay on top of things if you are a long term investor.
While mortgage interest payments are tax deductible, property remains a relatively inefficient asset from a tax perspective. Unlike shares, property cannot be purchased within an ISA or a SIPP (unless it is commercial property in the latter) and so when you do come to sell, a hefty capital gains tax bill awaits. Shares, meanwhile, can be more easily sheltered from taxes, which makes them far more appealing from a tax perspective than property.
Although the returns on property have surpassed those of shares in recent months, the future may turn out to be rather different. That’s because interest rate rises and the potential for a change in government could hold back the property market moving forward, especially since many people feel that the market has become overvalued and unaffordable for many prospective buyers.
The stock market, meanwhile, has a number of high quality companies that, based on a variety of methods, appear to be attractively priced at the moment. As such, the returns from investing in shares could prove to be rather higher than those of property in 2015 and beyond.
Source: The Motley Fool, 2015, Full Article Here