Direct property and direct shares are among the most popular investments to own. They both provide an investment return, but lets explore the advantages, disadvantages and what the main differences are between the two investment assets.
Direct property
For the purposes of this article we will discuss the advantages and disadvantages of residential property. A residential property includes houses, units, apartments and townhouses.
Advantages of direct property:
- Income is received through rent. When tenanted it is usually charged weekly and received monthly.
- The capital growth is achieved through the property value increasing. Unlike shares, property isn’t valued daily. In order to get a an accurate valuation, you would need to pay for it.
- With the combination of income and capital growth, property is deemed a more moderate risk compared to direct shares.
- Tax benefits come from the benefit of tax depreciation. These benefits can comfortably exceed $10,000 in one financial year. This depends on the age of the property. The newer the property the greater the tax depreciation entitlement.
- You have greater control of the asset. This means you can choose your tenant, property location and even what you want to sell it for. Regardless of the market price.
- Direct property is tangible in comparison to direct shares. You can drive past it at any given time.
Disadvantages of direct property:
- Affordability is the most common barrier. Most require a loan from the bank to purchase. When a loan is acquired for investment it magnifies the gains and losses. You need to be risk tolerant as it increases volatility.
- Property maintenance can be expensive. Especially for older properties.
- Property expenses can also be costly. For example, owners corporation fees (if applicable), rates etc.
- Selling direct property takes a longer time than direct shares.
- The real estate fees to sell a direct property are significantly higher than direct shares.
Direct shares
For the purposes of this article we will discuss the advantages and disadvantages of direct shares. This excludes other forms of investments and strategies that can be bought on the Australian Stock Exchange.
Advantages of direct shares:
- Direct shares are easy to buy through online trading portals such as Commsec.
- You can invest smaller amounts compared to direct property. You can purchase as little as $100 if you choose. This asset class is easily accessible.
- Capital growth is generated with the company’s unit price increases.
- The transaction fees are low, making it much cheaper to buy and sell than direct property.
- Prices are valued daily, providing transparency. Accessing unit prices is readily available.
- Direct shares provide income through dividends. Dividends are a share of the company’s profits.
- Tax benefits are received through franking credits. As a company has already paid tax on the profit paid out as a dividend, you are entitled to receive a tax credit.
- Once you have bought your shares, there are no ongoing expenses unless you are receiving ongoing professional advice.
Disadvantages of direct shares:
- Dividends are generally received every six months or annually. This is less frequent to direct property which receives rent monthly.
- Direct shares are deemed to be more risky than property investment. Prices move daily and can change due to market movements beyond your control. For example, big fund managers will sell to capitalise a profit for their unitholders. For other existing shareholders, this can cause negative returns due to a large sell off. Poor financial results from a company can also cause prices to fall.
- If you are a growth investor with a risk tolerance in borrowing to invest, it is very difficult to obtain a loan to buy direct shares.
- The majority of direct share investors do not have control over the investment performance. The company makes its own decisions in how it operates and if it wants to pay out dividends.
Whether you are into direct property or direct shares, professional advice is always well warranted. At Crest Property Investments we are very passionate to property investment. If you want to explore your options and buy an investment property, please feel free to contact us.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more please contact us. We welcome the opportunity to assist you.
July 2020
