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Superannuation

Q&A: Is it Better to Invest in Super or Property?

To grow your savings for retirement, what is the best investment strategy: maximising your super contributions or investing in property?

If you’re like most Australians, there’s a chance you are doing both. Around 66% of Aussie households owned their home in 2017/18, according to housing occupancy data from the Australian Bureau of Statistics (ABS). Most employees also receive the compulsory 9.5% Super Guarantee, which means you have likely got some exposure to the stock market in your super fund.  

Super or property - SMSF Mate

Determining which asset class will provide the best bang for your buck is critical, so it’s a good idea to assess the pros and cons of each investment option. It’s also worth noting that there are many ways you can gain exposure to real estate without owning the property yourself and all the hassles that go with it. 

When we think of investing in property, most of us will assume we will need to get a mortgage, save a 20% deposit or stump up for lenders mortgage insurance, pay stamp duty and pay expensive agents fees.

How else can I invest in real estate (besides the obvious)?

REITs (real estate investment trusts) a worthy alternative to owning traditional real estate. Purchasing property directly might not be for you but you can still gain exposure to the property market with investments called REITs. This will provide you with exposure to various sectors of the property market without the hassles of buying a property yourself.

- The Accountant (semi-retired)

Real estate investment trusts provide exposure to the property market from the comfort of their own share portfolio. REITs offer investors exposure to things like offices and apartments, shopping centres and hotels. 

- The Thrill-seeker (late-20s)

Is borrowing to invest in property better than in shares?

Owning a home in Australia over the last 30 years has been the best-leveraged investment one could make. With a relatively small deposit, investors can borrow a large amount and have enjoyed strong capital growth and rental yields. Interest rates have also fallen significantly, making the cost of borrow even more attractive. 

- The Small Business Owner (early 60s)

The property market is generally less volatile when compared to the equity market making borrowing to invest a less emotional experience when compared to borrowing to invest in shares with a margin loan. As such, discussing this kind of investment strategy is best done with a financial professional.

- The Marketing Executive (mid-30s)

Are real estate prices less volatile than shares?

As the old saying goes ‘as safe as houses’ meaning safe and secure. Owning a physical asset like a home can make you feel more in control of your investment as opposed to buying shares on the stock market. It’s also a more straightforward investment for people to understand when compared to investing in a listed public company.

- The Small Business Owner (early 60s)

Real estate transaction costs are far higher and liquidity is generally lower (the number of buyers and sellers) which contribute to lower transactions taking place and lower price volatility. There’s generally little correlation between the two markets.

- The Marketing Executive (mid-30s)

Does property offer better tax advantages?

If you own a rental property, the interest on your mortgage is tax-deductible. It’s also possible to claim interest paid on any loan relating to assets for the rental property that can be depreciated (like air conditioners or kitchen ovens etc.) and repairs or renovations to the rental property. 

- The Accountant (semi-retired)

Negative gearing is a hotly debated topic at present, and it refers to a rental property investors ability to offset their taxable income with any net losses made on the rental property (when the total expenses exceed the gross rental income). 

- The Small Business Owner (early 60s)

Other deductible costs for rental property include advertising (for tenants), bank fees; maintenance costs; travel to and from the property; real estate agent fees, legal charges, council rates, and land tax.

- The Accountant (semi-retired)

Is owning property more labour-intensive compared to the share market?

Property ownership is something we can all relate to, but that doesn’t mean owning and maintaining a rental property is a walk in the park. The management of a listed public company is taken care of by the management of the company but managing a property is on you. 

- The Marketing Executive (mid-30s)

The ongoing maintenance and management of a rental property can be extremely labour intensive when compared to investing in the share market. Whether it’s a broken garage door or a hot water system that’s run out of steam, the costs can quickly add up.

- The Thrill-seeker (late-20s)

Are real estate investments harder to sell?

Real estate investments are highly illiquid because it takes much longer to sell a property when compared to buying and selling shares. Finding a buyer for the property can be challenging, and the transaction process is arduous, requiring much input from various parties, settlement agents and the like. Comparable sales can impact property values in the same area. Negotiation of the price is also prevalent, which is different from an exchange-traded asset like shares.

- The Small Business Owner (early 60s)

Are real estate transaction costs are high?

Fees are high for both the buyer and the seller when selling a property. Exactly how much you pay is determined by the state you’re from, but costs of purchasing a $500,000 home can range from between $12,500 – $25,000 and include expenses like conveyancing ($1750), stamp duty ($8750), transfer fees ($1120), lenders mortgage insurance ($8000) and the list goes on.

- The Accountant (semi-retired)

A property seller will have to pay hefty costs too, which can be as high as 5% to 8% of the final sale price. This is significant when compared to the costs of buying and selling shares on the stock market. 

- The Thrill-seeker (late-20s)

Are shares easier to sell compared to property?

Compared to a real estate investment, where your funds are locked away until you can find a buyer at an agreeable price, equities are very easy and quick to sell. Provided the market is open (10 am – 4 pm local time) in most cases, you can click a button, and your investment is sold. Because of the way a company’s share price is quoted, it’s easy to know the value of your investment at any time. This can be both a good thing and a bad thing. 

- The Marketing Executive (mid-30s)

Is diversification easier with shares?

Diversification is very hard to achieve in a portfolio of directly owned property, not to mention extraordinarily pricey and likely out of reach for most of us. To be truly diversified, you would need to own a variety of residential and commercial property in a range of locations and sectors. In contrast, with a portfolio of equities, you can quickly put together a portfolio of companies in a range of industries or market sectors to achieve a diverse investment portfolio. 

- The Small Business Owner (early 60s)

Another option would be to purchase shares in LICs (listed investment companies), index funds or ETFs (exchange-traded funds). Each of these funds will hold an underlying portfolio of investments within, so you can achieve an even higher level of diversification by adding these to your portfolio.

- The Accountant (semi-retired)

What does it cost to purchase shares?

You can purchase shares on the ASX for as low as 5 cents a share with Interactive Brokers, so you will need to open a brokerage account to buy and sell shares. There are many brokers in Australia to choose from which offer competitive transaction fees. Some companies even offer brokerage-free trades on index funds, mutual funds and ETFs listed on the US market.

- The Marketing Executive (mid-30s)

Can share prices fluctuate more than property prices?

The always-moving nature of share prices can keep you on the edge of your seat if you are continually watching the price move up and down. It’s always best to take a long-term investment view with any investment and try not to sweat over the intra-day price fluctuations. Doing the proper research before diving into any investment is critical, and having the conviction to stay with an investment despite the ups and downs until the investment matures can be an excellent way to operate.

- The Thrill-seeker (late-20s)

Would capital gains tax apply when I sell my shares?

If you’ve held the shares for less than a year, you may have to pay capital gains tax (CGT) on any profit made on the investment. SMSFs and individual investors pay different rates of CGT. The SMSF is generally taxed at a concessional rate of 15%, although special rules apply when a fund is paying a pension to members and the length of time asset held by the SMSF before sale also come into play. If you’re an individual, the rate paid is the same as your income tax rate for that year. 

- The Accountant (semi-retired)

As the great economist, John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.” You can be right that a market or sector is undervalued but wrong on the timing due to a variety of external factors. When markets are volatile, investors often cash in right when they should be holding their ground. “Investing is the only business I know that when things go on sale, people run out of the store”. Having a long term investment timeframe should help your weather any potential market moves. 

General Advice Warning

Kind words from Aussies managing
their own self funded futures

  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
  • SMSF Mate provides a unique insight into superannuation and financial topics in a way that is easier to understand than conventional websites. The colloquial nature of the site makes it easy to understand and they often speak about complicated topics in lamens terms so I can wrap my head around them. The investment product information is a great way to research funds that I am interested in investing in with my SMSF and there is a lot of helpful information on the site for better structuring my investment portfolio. In comparison to other websites which offer similar information, SMSF Mate excels as the information is free to access whereas many other sites charge a subscription fee for the same thing. Overall, I think SMSF Mate is a great resource for SMSF trustees and is worth looking at for a variety of super-related topics. Thanks.

    Tim B, Business Owner, SMSF Trustee