Property versus shares: how do they compare?



When it comes to investing, there are many different avenues to consider. From buy-to-let to stocks and shares, these avenues of investing all have their own unique selling points (and downsides).

That said, real estate and stocks are arguably the most common assets in the market, but how exactly do they compare?

Return

Nine times out of ten, the first thing an investor will look for in an asset is its potential returns. While this will include analyzing its past performance and long-term growth, you should also look to the future – are there any further increases on the horizon? Ultimately, these predictions will indicate how profitable the asset could be.

The potential returns that stocks can offer are one of the main reasons why investors are attracted to this market. According to investment bank Goldman Sachs, 10-year stock returns average around 9.2%, highlighting the potential for capital growth over a long-term period.

With two-thirds of the population intending to invest in stocks in the future, the opportunities offered by buy-to-let make it an increasingly attractive investment. Unlike alternative assets, real estate can offer two streams of income: capital growth and rental returns.

Not only has the average UK house price increased by 64% over the last ten years, which equates to an increase of £107,000, but the average rent in the UK is on course to reach £1,000 in the coming months. This means that while there is arguably more flexibility within the stock market, the returns are second to none, especially with the short-term and long-term income that rental properties provide.

Risks

If the past two years have taught us anything, it’s the value of a resilient investment asset. Competitive returns are crucial, but the added benefit of minimal risk can make all the difference.

Before the pandemic, the stock market was at its peak. With a vibrant economy and attractive stock prices, the stock market was a strong contender for investors. However, as Covid-19 has spread across the world, this economic turmoil has catalyzed a freefall in stock prices. This is largely due to the sensitivity of the stock market – it depends on both the broader economy and inflation.

This means that despite the UK’s economic recovery, changes in inflation and interest rates only increase stock market risk. On the other hand, this turbulence has only strengthened the UK property market. Record-low interest rates and generous tax incentives have pushed home prices to an all-time high, further driven by pent-up demand and the country’s chronic shortage of real estate.

As a tangible investment asset, the risks of buy-to-let have always been low compared to stocks. Even with continued uncertainty surrounding inflation and rising interest rates, property prices are expected to rise 20% over the next five years, underscoring the stability of this investment asset.

The essential

Ultimately, the asset you choose should depend on your own financial plan. It is crucial to determine which asset would be the most appropriate to achieve your investment objectives and whether you favor short-term or long-term returns.

Real estate and stocks both have their own advantages and disadvantages, from their risk to their potential return. While real estate tends to be a more reliable investment asset with far less risk, the best case scenario for investors is to have a portfolio of both stocks and rental properties.

Although less volatile than equities, real estate still carries risk – like all investments. The key to any successful portfolio is to offset them as much as possible, which can be achieved through diversification.

By having a combination of stocks and properties in one portfolio, you will not only benefit from multiple streams of income, but the inevitable ups and downs in each market will generally offset each other. In turn, this will generally minimize the overall impact on your portfolio while maximizing your returns.

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