As private investors, there are two main types of investment that capture our imagination as tools we can use to compound our wealth: stocks and property.
I obviously bang the drum for property loud and often, but have I ignored another asset class that good be just as good – or better? In this article, I’m going to put property head-to-head against stocks across eight different factors to see if we can pick a winner.
(I’m assuming here that for property, you’re just buying an average property for its market value, and not doing anything to increase its value.)
I’ll leave this to Moneystepper, who found found that an investment in the average property would have outperformed the FTSE250 over the last 30 years.
The difference in the total returns wasn’t as big as I’d expected, but that’s because it didn’t account for leverage…
The most powerful thing about property investment is the ability to use leverage: using other people’s money to fund the bulk of your property purchases. With a standard 75% loan-to-value mortgage, your lender is putting in three times as much money as you are to help you buy an asset!
To understand the beauty of leverage, it’s important to consider inflation.
If you buy a house for £300,000 and the general level of inflation in the economy is running at 3%, in a year’s time that property is likely to be worth £309,000 (all else being equal).
Say you bought that house with a £240,000 mortgage and £60,000 of your own cash. If you were to sell after a year for £309,000, that represents a gain of £9,000 on your original £60,000. That’s a 15% gain – beating inflation by 12% – just from holding a property for a year that’s done nothing other than go up in line with inflation! Plus, you would expect to make a rental profit every month while you were holding.
For holds that short, transaction costs would eat up all the profit – but over the long term, you can see how leverage allows you to make a great return by doing nothing clever at all.
This kind of leverage is unique to property. You can buy stocks on margin, but that’s not suitable for the long-term, buy-and-hold investments we’re looking at. And, as Graham notes, you can take out an unsecured personal loan to buy stocks – but it’s really not the same thing.
Having a diversified investment portfolio leaves you less exposed to negative events that affect one segment of the market.
If you own 10 stocks, it’s safest to make sure each one is in a different sector of the market so you’re not vulnerable to bad news in any one area. This is easy to achieve by just spreading your initial investment between as many companies as you want to, and rebalancing by buying and selling over time.
In property, it’s not so easy. Because properties are more expensive, almost everyone starts out with just one – meaning that if something negatively affects that particular house or the area it’s in, you’re in trouble.
Even as your portfolio grows, diversification isn’t easy. You can make sure you buy all over the country, buying different types of property and targeting different tenant markets, but most investors don’t – because it’s easier to just buy locally or make use of their previous research by buying a second property near their first.
Property prices have historically doubled every 10 years. But compared with a fast-growing stock, this is unbearably sluggish!
When LinkedIn first went public, their share price doubled in a day. For Facebook, it took two months. Even away from tech IPOs, it wouldn’t be particularly remarkable for a company to double in a year. Take Taylor Wimpey – a housebuilder – which more than doubled between mid-2012 and mid-2013.
Property prices are constrained by factors like wages, access to finance and fundamental supply and demand, which mean that it will never double in a day or go up tenfold in a few years. Of course, if you diversify your stock portfolio you’re unlikely to only hold companies that grow remarkably quickly, but the upside is still far less limited.
Source, Property Geek, 2015, Full Article Here