Unfortunately, when it comes to passively growing your money, there’s not much you can do that doesn’t carry a certain amount of risk. If you absolve to keeping all of your cash stuffed under a mattress, you run the very real danger of inflation making your savings worth a whole lot less when you eventually use them... and getting robbed.

And while a savings account can help evade the total depreciation of your moolah, the interest rates offered are typically lower than the inflation rate or conditional (looking at you, bonus interest).

Shares and property typically often offer two things in meaningful balance: Returns and relative safety. Both are less risky than, say, cryptocurrencies or your odd neighbour’s ‘millionaire-making’ business idea while generally offering greater potential returns than term deposits, bonds, or the underside of your mattress.

Though, neither real estate nor shares are a guaranteed way to grow wealth. There are plenty of ways investing in property or on the stock market can backfire on you. So, which one is the better investment? Well, that will ultimately depend on your personal situation and risk tolerance.

Let’s dive into some of the major considerations one should make when tossing up between investing in property or shares.

1. The battle against inflation

Cash savings erode in value due to inflation. Yes you read that right. You won’t see your $10 bill turn into $5. However, in two, three, four, or five years' time, it will probably buy you less.

But when the cost of living increases, the value of shares and property typically increases too.

If you’re renting out your property, you might also be able to increase rent with inflation. If you want to hedge against inflation, real estate investments historically have kept toe-to-toe with the rate of inflation better than cash.

Meanwhile, the value of companies listed on the Australian Securities Exchange (ASX) have also historically increased alongside their profits. Shares can also provide dividends, which tend to increase alongside their value. Thus, they generally provide a level of protection against inflation.

2. Real estate is tangible, shares not so much

It’s easy to get sucked into the complexities of the financial system and forget that money is merely a claim on wealth with no intrinsic value. Consider cryptocurrencies, for example, where value is purely derived from what people are willing to pay. It is possible for the value of a cryptocurrency to drop to zero.

While shares do genuinely carry value (they all represent a portion of a very real company), many investors will likely find greater comfort in investing in a literal ‘brick and mortar’ asset.

Real estate is a tangible asset, like precious metal or art. It is of course possible that the value of a property sees a dramatic fall, but there will probably always be inherent value in owning land and a house.

On the other hand, someone new to the investing landscape might have a harder time grasping the concept of investing in shares as they’re, for the most part, intangible. These days, an investor probably won’t even get a piece of paper to represent their shareholding – its all kept somewhere in the internet.

It might be easier to think of shares as a portion of a business, because that’s ultimately what they are.

Further, real estate has non-financial benefits. If you buy a house to live in, not only does it probably become your most expensive asset, it may also becomes the roof over your head, the home your children grow up in, the venue for your dinner parties. A share portfolio is unlikely to offer such palpable uses.

While the value of some shares can be incredibly stable (Aussies can buy shares in seemingly ever-lasting companies like BHP or the major banks at the click of a button), others can be absurdly volatile.

The value of a risky tech start up might tumble to nothing, for instance, if a competitor were to sweep its ‘game-changing’ technology out from under its feet. Or, a mining junior could fail to get permits for its ‘world-class’ asset, thereby rendering it effectively useless.

Real Estate Is Tangible

3. Real estate can be improved

There isn’t much you can do yourself to improve the value of most types of investment.

When you invest into stocks or mutual funds, you are essentially trusting that the board of directors or portfolio managers will increase the asset's value, while the value of bonds is dependent on the government and the second hand market. That can be preferable, many investors assumably wish to passively grow their wealth in an entirely hands off manner.

With real estate, on the other hand, there are tonnes of ways you can improve your investment.

You might invest in repairs and maintenance, renovate to add a new bathroom and bedroom, or even use your garden to grow fruit and vegetables to sell or save money on buying from the supermarket. As a creative investor, you can continuously grow your wealth through strategic property improvements.

A major benefit of making improvements is that these are often tax deductible.

4. It's easier and cheaper to borrow money to pay for real estate than other investments

In finance, leverage refers to using borrowed money to invest. You might not think of it this way, but a home loan is a way to leverage in real estate, and relative to other leveraged investments, is safer.

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If you have a good credit history and can demonstrate your ability to make your repayments, it shouldn’t be too difficult to find a lender who will agree to give you a home loan on an attractive property at a reasonable rate.

It is possible to use leverage to make forms of investments other than real estate: a margin account is a type of investment account that allows you to use borrowed money to buy securities like stocks, ETFs or bonds. There’s also nothing stopping you from applying for a personal loan to invest in securities. You will probably find, though, that the interest rates on margin accounts or personal loans far exceed those on typical home loans.

On top of this, you will likely have a harder time finding a willing lender.

Shares are a riskier ‘investment’ for a lender, as an borrower can essentially purchase shares in any type of company. Stock in, say, CommBank or Cochlear have historically carried far less risk than buying shares in an up-and-coming, loss-making, rare earths explorer, for instance.

The value of shares can also fluctuate with severity and rapidity, which could leave a lender nervous. If you’ve leveraged shares, it’s possible to get a margin call, which means you’ll need to top up your account with extra cash.

Not to mention how much leverage a regular investor can have. Lenders often allow qualified borrowers to take out a mortgage on as much as 95% of the value of their property – or more under particular circumstances. For the most part, a margin account typically allows a person to borrow up to 50% of the value of their investments.

5. Tax implications 

If you’re tossing up between investing in property or shares, it is probably worth contemplating which would better suit your tax situation. The income provided by both investment vehicles is considered as part of an investors' taxable income, and both offer tax incentives that differ markedly.

To put it simply, the majority of tax incentives for property investors come from losing money. If expenses like rates, insurance, repairs, home loan interest, and property management fees are heftier than the rental income an investor is receiving, they could make the most of negative gearing to offset their taxable income.

When it comes to shares, however, arguably the most attractive tax benefit comes from dividends. If a company is paying dividends, it’s likely also providing franking credits. Franking credits can reduce the amount of income tax an investor needs to pay. If an investor doesn’t earn an income outside of dividends, their franking credits might even see them eligible for a tax refund.

In addition, losses made from shares can also be claimed against your income and reduce tax payable - there are simply fewer avenues for capital outlay than property; you either bought, sold, and lost money on shares, or you didn’t.

When it comes to selling an investment property or shares, both will probably see a person paying capital gains tax. The rate is typically halved if an investor holds their asset over 12 months.

6. Property vs shares: Cash flow

Steady cash flow from a property investment isn’t a guarantee. If you hold a property over a long period, there will likely be times when it is vacant. However, depending on how you wish to invest, real estate rentals might offer you a higher probability of regular cash flow.

Everyone needs a roof over their head, and one third of the Australian population rent. Rental yield is often expressed as a percentage term by calculating the difference between the income and the value of a property.

Meanwhile, many stocks pay cash dividends to their shareholders. A company’s ‘dividend yield’ is the difference between its value and its payouts, expressed as a percentage. However, those payments are generally discretionary. There isn’t any obligation for companies to issue dividends to their shareholders.

Though, the people steering the ship will typically want to keep investors happy and, so, if dividends are expected, a company will generally do what it can to pay them. In fact, listed companies have been known to go into debt in order to pay a dividend. And while you can technically ‘rent’ your shareholdings through options and covered calls, these are derivatives and carry extra risk. Plus they can be complex.

As rental tenancies are nearly guaranteed by a lease, rents are sometimes considered a more dependable cash flow source. That’s not to say rent is always guaranteed. A tenant can simply forgo paying rent, potentially leaving an investor scrambling into legal action. Or, they may move out at the end of their tenancy before a new tenant is found, leaving an owner without income in the meantime.

In contrast, some investments like cryptocurrencies don’t provide any cash flow at all; you’ll only make money on them if you’re successful in selling them to someone who is willing to pay more for them than you did.

You Can Borrow Money to Pay for Real Estate

7. Real estate tends to be less volatile than other forms of investment

Any investment can gain or lose value.

Property and shares exist on markets – albeit very different ones. A ‘frothy’ market (one in which many people are bidding for fewer assets) can drive up the value of an investment artificially, while a stagnant market can feasibly drag asset values down below what could be deemed their ‘true worth’. Neither property nor shares are immune from wild market swings.

In saying that, historically, real estate has tended to be far less volatile than securities such as stocks and crypto. A large part of that is because of the market they’re in and their liquidity.

Share prices are often subject to sudden changes in value. Single events such as a CEO resigning can reduce the confidence that the market has in a company’s ability to grow and profit and, for that reason, its share price could tumble. However, risk can be mitigated by diversifying your share portfolio such as through an exchange traded fund (ETF), which invests in a wide variety of shares.

It’s also worth noting that demand for real estate largely comes from factors like population growth, demographic changes and job growth, which tend to be less volatile than the demand that generally drives the value of shares. Government housing policies and RBA interest rate changes can also induce demand in the property market as the cost of borrowing becomes easier.

So, if you’re the type of person to get nervous if the value of your investment changes dramatically in a short space of time, you might be better suited for real estate investment than you are for the stock market.

8. Performance and returns

Both house prices and the value of Australia’s largest listed companies have increased over the years. Check out how each investment vehicle has performed over the last decade in the chart below:

Of course, past performance isn’t indicative of future performance.

The ASX 200 is measured by the minute – a feature of its liquidity – while the mean Australian house price is measured quarterly by the Australian Bureau of Statistics (ABS), so the two charts above look considerably different.

Still, it's not hard to see that the values of both property and shares have grown over the last decade. While the mean house price has increased by around 80%, the value of the ASX 200 has grown by nearly 35%. However, that doesn’t take into account dividends. According to S&P Dow Jones Indices, the ASX 200 has delivered annualised price returns of 3.59% over the last decade as of August 2023, or 7.97% including dividends. That could be seen to add up to close to 80% as well.

With that in mind, the decision on whether to invest in real estate or on the stock market once again falls to you, dear reader. In choosing a method in which to grow wealth passively, one should consider not only potential returns, but also their financial position, risk tolerance, long-term goals, and personal preferences.

9. Shares have more liquidity and fewer transactional costs 

Buying a property will likely see an investor forking out for stamp duty, conveyancing fees, and other costs. Using our stamp duty calculator, you can see that buying and selling a property can cost many thousands of dollars. By the time all these fees are added together you’re looking at potentially tens of thousands of dollars spent before you’ve even moved in or rented the place out.

If you’re renting your place out, you will likely also need to pay property management fees. These can cost 8-12% of the weekly rental price. This is of course unless you go it alone, which might not be recommended for a first-time property investor.

On the other hand, a person looking to sell a property for cash will typically need to employ a real estate agent who will probably organise open homes and communicate with buyers, while solicitors draft paperwork and complete sales, and after all that there’s often a lengthy settlement period.

Even in a hot property market, a property can take more than a month to sell, and take longer again to settle. Plus you’ll need to aside time on weekends for everyone to traipse through the home and have a sticky beak.

When buying shares, an investor needs to go through a brokerage platform, which will typically charge a fee. This is typically about $20, while some platforms are a lot less. There might also be performance fees if you buy say an ETF from Vanguard or Blackrock. However, these transactional costs are likely much less than on a property.

In addition, shares can be bought and sold within minutes. If you need the cash near instantly, it’s easy to log into your share portal and sell. In addition, you can also put what’s called a ‘stop order’ on your shares, meaning you can automatically buy or sell once a stock reaches a certain price.