Shares vs rental property: which is best?

Shares vs rental property: which is best?

For many, 2012 was a year where the doom and gloom of the GFC slowly abated and we emerged into the new year with a significant increase in the value of many sharemarket indices and Auckland/Christchurch house prices.

This positive news has revived the interest of many in moving their money from bank term deposits to shares and property. At present, it appears to be property that is winning the hearts and minds of the majority of investors but special caution is now required. This is due to:

  • Mortgage interest rates are at historical lows and a significant rise in mortgage rates could harm heavily indebted property owners.
  • The government and the Reserve Bank are talking about the economic damage of New Zealanders having too much investment in residential property and too little in the share market. There is discussion about the Reserve Bank taking drastic action to slow the property bubble in locations such as Auckland and Christchurch. This could see some prices fall.
  • New Zealand residential property prices are some of the highest in the world relative to affordability.
  • It is dangerous to assume that the high property appreciation seen recently in Auckland and Christchurch will automatically flow through to other regions.

There is no definitive answer as to which is the better of the two investments. Both have their pros and cons and the ‘best investment’ is the one that is most right for the individual investor at the time, based on their risk profile, wider asset base, cash generating ability and longer term goals. The table below summarises often overlooked pros and cons for each of these investments. Use this to get a general feel for the two opportunities then give us a call to discuss what may be right for you.

Share managed funds: Advantages Residential rental property: Advantages
Potential for huge diversification into sectors, economies and using different fund managers. Historically shown good growth over the long term in NZ.
Can invest with small or large sums plus the ability to save on a regular basis. Historically it has been perceived to be less volatile than shares.
Ease and speed to sell - can be in or out of a managed fund usually within a week. Banks willing to lend against it so easy to gear the investment.
Low transaction costs. Main centres like Auckland have had historical strong demand for rental property.
High quality research is readily available and able to compare managers and their costs and performance. Tax advantages- can offset expenses against income.
A number of checks and balances are provided in the form of a fund manager, a trustee and a custodian. The manager must follow what is contained in the Investment Statement and prospectus.  
Very little time commitment by you.  
Ability to use PIE funds or other tax structures.  
Shares have historically outperformed other asset classes over the long term.  
A professional is managing the investment on your behalf and this cost is built into the managed fund.  
Share managed funds: Disadvantages Residential rental property: Disadvantages
Values will fall if markets fall. Values will fall if market falls.
More susceptible to negative market sentiment. Expensive to buy and sell.
  Large personal time commitment may be required to manage the property.
  Regions with low growth have poor capital gain.
  Rental returns usually low. It is more of a speculation purchase for capital gain rather than for regular income.
  Susceptible to rising interest rate risk.
  Potential property damage by tenants.
  Illiquid - can take time to sell - often months and not always at best price.
  The cost of a property manager, lawyers and accountants is often higher than the management fee charged by a managed fund.
  Harder to be adequately diversified. Even if you have multiple rental properties, they are usually in same city.

Notes: 1. Comments relating to shares are based on using managed funds and having a number of funds in different sectors and economies.
2. Comments relating to residential rental property are based on properties only in New Zealand.

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