Thoughts on real estate vs stock market

Question

Last year, I started a small online business that unexpectedly took off, and now I find myself with a surplus of about $50k after taxes. I'm keen to invest this windfall wisely in the Australian market but am torn between real estate and the stock market. What factors should I consider before I decide?

Answer

When deciding between investing in real estate or the stock market with your $50k windfall, there are several factors to consider that can help guide your decision:

Investment Goals: Define what you are aiming to achieve with your investment. Are you looking for capital growth, income through dividends or rent, or perhaps a combination of both? Real estate often provides both income through rent and potential long-term capital gains, whereas stocks can offer dividends and capital growth, depending on the type of stocks you invest in.

Risk Tolerance: Real estate generally involves a lower risk compared to stocks, which can be volatile and fluctuate widely in the short term. However, real estate requires a larger initial capital and is less liquid than stocks, meaning it can take longer to sell and convert into cash.

Time Horizon: Consider how long you intend to hold your investment. Real estate typically requires a longer commitment to realize substantial gains, whereas stocks can be traded more quickly and easily, allowing for shorter-term strategies.

Market Conditions: Research current market trends in both the real estate and stock markets. For instance, factors such as interest rates, economic growth, and government policies can significantly impact both markets.

Diversification: Investing in stocks can offer more diversification, reducing risk by spreading investments across different sectors and geographies. Real estate investments are usually more concentrated, potentially increasing risk if the market in a specific area performs poorly.

Liquidity: Stocks are generally more liquid than real estate, meaning they can be sold and converted into cash much quicker. This is an important consideration if you anticipate needing access to your funds.

Tax Considerations: Understand the tax implications of each investment type. Real estate can offer benefits like depreciation and potential deductions against rental income, whereas stocks held for over 12 months typically benefit from a capital gains tax discount.

Additional Costs: Real estate investments can incur significant additional costs such as stamp duty, legal fees, and ongoing maintenance, whereas buying stocks usually involves lower transaction fees and minimal ongoing costs.

Given your situation with a successful online business, you might also consider how these investments align with your business cash flow and financial stability. For instance, if your business requires more liquidity, the stock market might be a more suitable option.

At Pearler, we focus on helping investors like you make informed decisions that align with your financial goals and investment strategy. Whether you decide on real estate, stocks, or a combination of both, Pearler offers tools and resources to help you build and manage your investment portfolio effectively.

You can find out more about this topic here: September Investing Q And A

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Great question, and congrats on the business success!

Lots to consider… here’s a few thoughts…

— Can you afford to tip more money into holding the property each month?  Most Aussie rental properties are negative cashflow after costs, so signing up to a mortgage + expenses is a long term commitment.

— Will banks see you as a safe borrower?  If you’ve only just begun earning decent income, banks will want to see a longer history of this income to base your loan repayments off, just to make sure they think you can afford it.

— The benefits of leverage with property are pretty big, since you can potentially get decent gains by using the banks money rather than your own.  But buying/selling costs are high, cashflow is often poor, and growth cycles are often unpredictable.

— The simplest option is shares, and something like an index fund.  You don’t have to add anything extra to it if you don’t want to, but the option is always there if you keep having success with your online business.

— Are you able to leave the money invested for at least 5 years in the stock market?  If so, it could make sense.  Are you able to hold for 7-10 years with property?  I say longer for property due to the extra costs involved + ongoing, which both impact the return needed to breakeven.

Both are excellent options, so if you don’t have any debt to repay and have an emergency fund in place, both of these places are likely to be fruitful places to invest your money.

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