Real Estate Shares vs Investment Properties
Most wealthy individuals and investors choose to invest in real estate companies, instead of buying real estate properties. In this article, we'll explore some of the reasons they do so.
1. Managing the Stock Market Risk
Like most assets, both real estate and the stock market are cyclical, and they may not move at a similar rate, as they are not fully correlated. To minimise the stock market risk, a great option is to diversify your portfolio with real estate.
2. Liquidity
You can cash out at any time you want. The important thing is that if you wanted to sell right now, you know exactly what you could get for your share. If you don't have any selling intentions, then the price really doesn't matter. Instead of viewing it as a negative factor, consider the fact that you are able to sell almost instantly if you want to — which is a positive factor. If for example, something unexpected comes up and you need cash fast, you could simply sell your shares and have your cash in the bank within 3 days. That's faster than breaking the term of a low risk term deposit.
3. Financing Costs
Financing costs are much lower for shares investments. When you buy a property you need to pay for origination fees, adjustable rate mortgages, monthly costs to maintain the bank accounts, and much more. Combined, this is a lot higher than buying stock on margin. When you purchase shares of stock, you only need to pay for two things:
- The actual price of the stock
- The fee charged by the brokerage firm, called "commission"
4. Low Entry Point and Leverage
With investing in shares, investors can generate capital gains if their share price increases with time. In contrast, when purchasing an investment property, whilst the tenant is paying your mortgage, your equity is increasing as the value of the asset appreciates over time. With the use of leverage, this enables your asset to grow more in dollar terms, which means that you can refinance with other asset purchases given your increased net equity value.
5. Diversification and Historical Profitability
Investing in shares has been historically more profitable than owning a property. Additionally, shares have often provided better returns over the long run than the other main asset classes: property, cash or bonds. Holding shares in just one company carries a high level of risk. If that company faces major difficulties, you could lose some or all of your money. Diversification is the key to spreading risk. You can start buying shares in a variety of companies, and investing in other assets or countries, or alternatively, you could place your money into pooled investments such as unit trusts or OEICs. Investing in real estate companies will provide diversification not only in one country, continent, or currency.
6. Maintenance Costs
The maintenance costs for rental properties can be high, and may get higher over time. Shares, on the other hand, potentially offer income and low costs as you don't directly pay pesky maintenance costs, council rates and land tax bills. Also, as a property investor you might get worried when the property is vacant.
7. Shareholding Aspect
Investing in shares can be pooled. You can own shares yourself, or you can pool your money with other people in a collective investment often known as a fund. Bear in mind that if you own shares directly you become a shareholder, which usually means you have the right to vote on some company decisions. This doesn't happen if you invest in a fund.
8. Taxes
In some cases, paying real estate taxes can be higher than investing directly into the stock market. In Australia for example, for retirees over 60 years old, with assets less than the proposed $1.6 million cap, in the pension phase there's no capital gains tax and no income tax on the earnings received from investments. On the other hand, assets held in your own name will attract taxes as high as 45% plus surcharges.
What's The Real Risk Then?
Whilst the equities market offers greater volatility, some investors may even lose their entire investments if a listed company becomes insolvent. Despite this, as an investor, some risk might actually be beneficial, because no risk means no potential for a return. Therefore, the risk is not necessarily severe, however, understanding the level of risk and the anticipated returns is of paramount importance.
Risk technically means the "volatility", but most people associate it with the downside or losses. The more stable an asset value is, the less risky it is. As listed equities shares are constantly bought and sold via internet accessibility or directly via a broker, the prices are generally known in "live" terms during the times the market is open. Listed equity shares can rise if a business's actual fortunes rise, or if certain factors weigh the future earnings of the business — these can all greatly impact the shares. Often, real estate shares may move earlier than physical real estate values.
Shares can be cheap, with many shares costing less than $50 each, hence, it would be possible with a few thousand dollars to diversify investments across different companies. It might also be advisable to decide against buying individual companies, and instead, purchase exchange traded funds (also known as ETFs) which provide further diversification. About 10 years ago, in 2008, the world experienced the Global Economic Downturn, wherein the share price of many companies fell, although they didn't fall to a complete value of zero.
In a scenario where you had to sell your share when the prices of your shares are down, you could potentially lose some money. However, most people suffer losses on the share market, therefore, a better strategy might be to sit on investments until they go back into profit territory. Sometimes, people who don't require their investments or superannuation savings for many years to come, still feel the need to sell their shares as a result of fear during share market sell-offs.
The Best Real Estate Shares to Invest In
Every investor's goal is to acquire profits. With this in mind, investors often need this catalyst to push their stocks higher. With proper portfolio management, investing in shares should yield much higher returns than owning a property. With Admiral Markets you can trade ETF CFDs (Exchange Traded Funds Contract for Differences) and here is a list of the most popular real estate ones:
- iShares U.S. Real Estate ETF CFD (IYR)
- SPDR Dow Jones International Real Estate ETF CFD (RWX)
- Real Estate Select Sector SPDR Fund ETF CFD (XLRE)
- Vanguard REIT ETF CFD (VNQ)
- SPDR Dow Jones Global Real Estate ETF CFD (RWO)
- iShares International Developed Real Estate ETF CFD (IFGL)
- iShares Mortgage Real Estate ETF CFD (REM)
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
