Property vs Stocks – Which is best?

If you’ve got a lump of cash burning a whole in your pocket and want to invest, what should you do with it? Which is better property vs stocks? That’s the question we are covering this week.

Of course you could invest in both and many people do, but if you had to choose one, which would it be?

Property vs stocks

Just about everybody is an expert in property. Even if we haven’t ever purchased one, it is a safe bet that someone close to us has. It is also a safe bet that we’ve lived in a few houses, so at the very least we’ve got a good base knowledge about what a house is.

You’ll be surprised by how many people invest in the stock market without any base knowledge about that. Many of us probably have a pretty good idea about the state of the local housing market, what kind of prices you need to be paying for what kind of properties at any given moment, at least near where you live anyway.

However, I don’t think this could be further from the truth for the stock market.

Most people don’t invest in the stock market directly and most of the people who do don’t know half as much about the stocks they are buying as they do about the house they buy.

Of course, there are those out there who do know a lot about the stock market, but in my experience they are few and far between, so most people are more likely to make a safer investment in property than in stocks.

Sensible investing

Another great advantage of property is that people instinctively invest in a sensible way. Basically, they put money into the market when they buy, leave it there for a really long time, and don’t think about it until it is time to sell.

Even if they did pay attention to daily price movements, which most don’t, they wouldn’t be able to panic sell even if they wanted to. Even chain free houses can take months to sell when demand isn’t high.

On the other hand, those who invest in the stock market have a tendency to scan the price every day and panic sell when the market takes a turn for the worse, then buy back in when the market goes back up again, effectively losing money twice in the process.

Money makes money

Probably the biggest advantage with property is the fact that you can relatively easily borrow money to fund your investment, which means you can increase your wealth faster.

If you were buying a £500K house with a £400K mortgage, you would only be spending £100K of your own money to buy a £500K house! Though that is a good enough reason to take out a mortgage in itself, it is not the only reason.

The best bit about taking out a mortgage is the fact that you can make money using the banks money. This is because if the price of the house went up by 10%, then the new price would be £550K which means you’d have made £50K. In contrast, if you didn’t take out a loan and just paid cash for a £100K house and the house went up by 10% you’d only have made £10K.

Income

Last but definitely not least, you can let you property out to generate an income.

Don’t worry if you don’t fancy being called out in the middle of the night to fix a faulty toiled, because if you are willing to sacrifice a percentage of your rental yield you can employ a letting agent to handle everything for you. You can just sit back and watch your bank balance increase.

At this point its looking like the property vs stocks debate is all but over, but don’t overlook stocks just yet. There are some great advantages to investing in the stock market.

Why the stocks are better

Liquidity is much better when you invest in stocks, which means you can get access to your money much easier than with property. Even selling properties chain free to cash buyers can take months, whereas most stock brokers can return your money within days if not instantly.

Size matters

Another big advantage with stocks is that you can invest smaller amounts. In fact, these days you can invest as little or as much as you’d like, which certainly isn’t the case with houses.

At the time of writing the average price of a house in the UK is just over £200K. Purchasing a £200K property is likely to need a £50K deposit, not to mention all the associated fees and stamp duty.

Diversification

On top of that, it is much easier to be diversified when you invest in the stock market. Spreading your money and risk over different sizes and kinds of companies in different geographical locations is really easy to do these days through cheap exchange traded funds.

You’d have to have serious wealth before you can start thinking about any realistic kind of diversification with property. Even if you bought a range of different houses in different cities around the world, you’d still be focused on residential property.

To get any serious diversification you’d need to have hotels, offices, shops and factories located all over the world, which isn’t going to be realistic for the majority of people.

Risky lending

Finally, it is a lot harder to borrow money to buy shares because banks are unlikely to lend you money for that purpose, which in turn means you can’t take on the risk associated with borrowing to invest.

Although, I said that borrowing money to buy property was an advantage, it really comes down to what kind of person you are. The example that I gave above could quite easily go the other way.

If the house price went down by 10% you’re house would only be worth £450K, so you’d have lost £50K of your own money. In fact, you’d have lost half of your original £100K investment and don’t forget that houses really can lose money sometimes.

In 2008, the biggest drop in the UK occurred in Northern Ireland where house prices fell by almost 40%. If this happened to your £500K house you would have lost £200K, so not only would you have lost all your £100K savings, you’d also be paying back the bank £400K for house that’s now only worth £300K.

To make matters worse, housing market crashes have a nasty habit of occurring at the same time as people are losing their jobs. Imagine being out of work and stuck with mortgage payments for a property that isn’t even worth as much as you are having to repay to the bank.

That thought alone should be enough to make sure you do your due diligence before you buy, and have a back up plan like insurance or cash in the bank for if things do take a turn for the worse.

Property vs stocks – the bottom line

Personally, I think they are both great ways to increase wealth.

If I had to say outright which one is better for making money, I’d have to say property because I think that in general a buy to let with a big loan to value mortgage is probably the way to make the most money for most people.

To be clear though, it is only going to work so well if you take out a mortgage and let your property out. A buy to let with a small loan to value mortgage, no mortgage at all, or an untenanted property may not make you as much money as investing in the stock market and could come with a lot more hassle.

So the bottom line is that investing in a buy to let with a mortgage is probably going to make you more money. That said, you’d have to be comfortable with the size of the mortgage and the fact that it is possible that prices can go down.