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Property Or Stocks?

Five reasons why investing in property beats the stock market (and five why it doesn't).

This article is co-authored by:

David Graham: CEO of Property Connect

Paul Rose: Property Professional (Founder PSN Property Education)

Chris Power: Chartered Accountant (Davy Private Clients UK)

We all know that, thanks to low interest rates, keeping money in the bank just doesn't make much sense any more. In fact, when inflation is higher than interest rates, your money in the bank is actually worth less every year.

You might also know that Einstein is reputed to have said "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."

So investing is sensible. Einstein says so... and he was pretty smart, right?

But one question that keeps coming up, time and time again, is whether it is better to invest in property or in the stock market.

Well I have my own views but I'm not an expert. Which is why I have invited two POWERHOUSES to weigh in.

In this article, two experts offer five reasons why investing in property is better than investing in the stock market and five reasons why it isn't.

Property or Stocks? Grab some popcorn and read on to find out! It’s pistols at dawn…

Let's meet our experts

(P.S. Despite their eerily similar looks, they aren't actually related, I promise).

Paul Rose

Experienced property professional, educator and podcast host Paul Rose is the founder of PSN Property Education, former co-founder of the UK's first and largest property sourcing franchise and has a wealth of experience in many areas of the property sector.

Paul has run his own estate agency, been involved in thousands of property transactions worth tens of millions and also set up a peer-to-peer property investment platform that has since gone on to fund millions of property projects all over the UK.

But today, Paul helps others, with a unique approach to property education that bucks the trend... providing one to one mentoring and coaching for people - without the usual high-ticket costs that so-called gurus charge.

Chris Power

Chris is a Director in Davy Private Clients UK, having joined the company in 2013.

Chris is a Chartered Accountant, having previously trained with KPMG Corporate Finance.

Chris is currently responsible for the management of over £140 million of client assets and his clients include high net wealth individuals, corporates and charitable organisations.

Chris specialises in the provision of investment management, trust & tax planning and pensions advice, and his role involves developing holistic financial plans to meet his clients' needs.

Five Reasons Why Property Is Better

by Paul Rose

REASON 1 - Leveraging Finance:

“Access to finance such as your traditional buy to let mortgages and also creative finance; namely bridging loans and development loans is my number one reason property wins over other investment classes.

Favourable fixed terms, set over a long period of time mean many investors can leverage these finance products and benefit hugely in the long term.

You can also benefit in the short-term too, using bridging and development finance, you could theoretically recover 100% of your seed capital by utilising a strategy known as B.R.R.R. (Buy, Refurbish, Refinance and Rent).

Imagine gaining ownership of an asset, but your seed capital (deposit) is repaid back to you within months! This allows you to use that capital to ‘go again’ and build yourself a portfolio using effectively what amounts to one deposit.

Leveraging finance to grow wealth via property is a powerful advantage over investing in stocks as you can only invest your own capital. This is why property is so popular as an investment in the UK , you can invest in a big way by lending or using other people’s money (OPM) in certain circumstances.

When we look at the return on investment via property, you could generate an infinite return when using the B.R.R.R investment model. This enables investors to grow portfolios quickly and obtain multiple assets using just one lump sum of deposit money, over and over again.

An infinite return is just not possible when investing in stocks and shares due to your money always being ‘invested’. For me an infinite return always wins, over say the average 8 to 10% returns via stocks.

I wrote a recent article which dives into B.R.R.R in much more detail you can read it here.

REASON 2 - Capital Appreciation:

“It’s an absolute certainty that tomorrow the sun will rise in the morning sky and it’s an absolute certainty that property will increase in value over the long term.

Yes, we could focus on the monthly ups and downs in the property market but let’s be realistic here… nobody invests in property to make a return for a couple of months!

Also the stock market has the same ups and downs, usually in an entirely unpredictable way, making investing in stocks much riskier and more difficult to mitigate any losses.

With property it’s usually a long-term investment (buy to let) and during the 10,20,30 years you hold your property asset, it will without doubt go up and down and even stagnate but…

The long-term picture is almost always positive and that’s why people choose property over and over again as their investment of choice.

You must have heard the saying ‘safe as houses?’

People like certainties, they like strong historical evidence and they like to mitigate any losses where possible. Bricks and mortar investing achieves this very well over the long-term.”

REASON 3 - Supply & Demand:

“In the UK we have historically not built enough new homes to meet the demand of a growing population for decades. This lack of homes creates a supply and demand issue, and the bottom line is - we all need somewhere to live!

The private rental sector in the UK is growing at a rate of knots and is expected to keep on growing, for decades to come. Demand for rental properties out-strips supply in the majority of areas and this is great news for investors as they can guarantee with a high level of certainty that a good quality home will cash-flow them money, month on month, year after year.

It’s also worth noting according to the office for national statistics that the average renter stays for over 4 years, again we go back to that certainty that investors look for.

A tenanted property will always cashflow you money month after month, even when the property market dips or moves… you still have a tenant paying rent. If you compare that to stocks you won’t generate regular cashflow – the only way to generate cashflow is to sell your stocks but if the market dips and your stocks are worth less than what you paid – you will be left with no option but top hold and wait and see if it rises in value in the future.

Cashflow for many investors is king and monthly cashflow is often the second biggest reason for investing in the first instance.”

REASON 4 - Inflation:

“It could be considered a bad thing but let’s look at it with our property investor hat on – The fact is most of our big costs when investing in property (mortgage and taxes) are fixed for the long term, but when you consider that rental incomes will inevitably rise and the value of your asset will also rise, that’s when inflation really works in your favour. Inflation is not the enemy as a property investor it’s a huge positive.

Savvy long-term investors know this and factor in the hidden gains that add to their wealth and the best thing is… inflation is pretty much guaranteed.

Many investors take out an interest only mortgage so imagine you have a mortgage for £100k over 30 years. Fast-forward 30 years and you still have a £100k mortgage – BUT inflation would mean your tenant is paying a lot more in rent and your own salary might be £100k per year meaning your mortgage is just one year’s salary.

If your rental income is for example £5k per year then that’s 5% of the mortgage balance. In 30 years-time the rental income could have inflated to £10k meaning it covers 10% of the mortgage. This is just an example to show how inflation really benefits property investors.

However with stocks inflation works against you…

In stocks, you might get 10% returns per year but if inflation is at 3% then in real world terms you only gain 7%. In stocks inflation works against you. In property inflation works with you. Interest only lending is a powerful benefit when you mix that with inflation.”

REASON 5 - Potential:

People talk about property market cycles and crashes and dips and boom periods, and they look at crashes and dips as being a negative. I’ve always said if you are looking to invest in property you make your money when you buy. So when prices fall you invest, and you benefit when the market recovers.

When the market booms you can sell and release your capital gains (equity) or re-finance and use that capital appreciation to buy more assets and grow your portfolio.

Property is forgiving if you know how to take advantage of the markets. I always say to people there is opportunity no matter what is happening in the property market. It might just be a different type of opportunity. The key is, if you know how to read the data and you understand where the opportunity is – you can do well regardless of market conditions.

Savvy investors don’t just buy a property and let it out to generate cashflow, they utilise various property investment strategies to take advantage and use the market conditions to their advantage.

When the stock market suffers a dip, you are extremely limited to what you can do, you cannot use a different investment strategy other than buy when the market dips and trade when it rises. Property is very forgiving if you understand how to invest in all market conditions.”

Five Reasons Why The Stock Market Is Better

by Chris Power

REASON 1 - Diversification:

“One of the key benefits of investing in stocks & shares versus property is diversification. The old adage of ‘not having all your eggs in the one basket’ is a powerful one and can be achieved by spreading your funds across multiple companies, rather than being exposed to a single asset class, such as property.

This diversification can be further improved by investing in collective investment vehicles such as Exchange Traded Funds (ETFs) or Open Ended Investment Companies (OEICs). These funds invest in 100s, sometimes 1,000s, of underlying companies thus spreading the risk further.

Another way to improve diversification is to consider adding other asset classes to your investment portfolio. This could include corporate bonds, government bonds or other alternative asset classes, such as infrastructure or absolute return funds.

The idea of multi-asset investing is that not all asset classes move in tandem and therefore you are able to manage the volatility and the ‘ups & downs’ associated with purely stock market investing.”

REASON 2 - Tax Efficiency:

As a UK resident, there are a number of tax efficient vehicles which can mean that investing in stocks & shares can be done so in a highly tax efficient manner. Take a stocks & shares ISA for example: any growth within an ISA is exempt from capital gains tax (CGT), whilst any dividends and interest is also tax free.

Investments held in your own personal name (and not ISA-wrapped) will also benefit from the various tax allowances on offer from the government. For example, a basic rate tax payer can avail of the following tax exemptions / allowances when investing in stocks & shares in their own personal name:

  • Capital gain tax allowance of £12,300 – the investment can crystallise up to £12,300 of gains each tax year without incurring a CGT liability

  • Dividend allowance of £2,000 – the investment can generate up to £2,000 of dividends each tax year without incurring an income tax liability

  • Personal savings allowance of £1,000 – the investment can generate up to £1,000 of interest each tax year without incurring an income tax liability

Investing in property on the other hand can be highly tax inefficient.

The stamp duty surcharge of 3% levied on second home purchases is hefty and something which should be considered before investing in property. Stamp duty when purchasing stocks & shares is much more palatable at 0.5% on the value of the shares purchased, whilst this does not apply when purchasing ETFs or OEICs.

Investing in property in a personal capacity means any rental income will be subject to the landlord’s marginal rate of income tax, which can be 20%, 40% or 45% depending on their other income.

This means that a gross yield of 7% on a property, nets down to an ‘after tax’ yield of 4.2% for a higher rate taxpayer or 5.6% for a basic rate taxpayer. Tax efficiency when investing is key and should be considered before choosing property over other types of investment.”

REASON 3 - Costs:

“Generally speaking, the cost of investing in investment portfolios tends to be lower than investing in property, although this does vary.

This is because the market for investments is so much wider. Transaction charges are usually much lower when it comes to investing in stocks & shares, compared with property investing, whilst there is no need to involve solicitors or surveyors for conveyancing or valuation purposes, etc.

Adviser charges may be applicable if you engage a financial adviser to guide you on the purchase of stocks & shares, but this will vary based on the individual’s needs & objectives.”

REASON 4 - Flexibility, Liquidity and Access:

“Property investments are not very flexible. In relative terms, the investments tend to be large and if your situation changes, you may be unable to sell quickly. If you need access to more capital you may need to arrange a new mortgage, which can also take time.

Investments in stocks & shares tend to be much more flexible. Your investments are likely to be a wide range of funds and investment types, all of which are traded on recognised exchanges. This means that you can change your investment focus from capital growth to income generation, or withdraw lump sums as your situation changes.