Pros and cons of investing in real estate compated to ETFS

Question

What are the pros and cons of investing in real estate compared to ETFs? How do these two differ in terms of returns, risks, and overall investment strategy, and which one is generally more suitable for long-term wealth building?

Answer

Hi Elena,

Huge topic which is debated endlessly on the internet and impossible to answer fairly in a short space.  But generally…

Returns in Australia have been pretty similar over the long run, though property is able to be leveraged more than shares.  This is the main benefit and reason people often choose property over shares.

Worth remembering this also increases risk too.  It also comes with large up front costs (stamp duty), ongoing negative cashflows, and more hassles.  It can take quite a while to breakeven due to these factors when relying solely on capital growth which is often hard to predict.  Then, when paid off, the income is typically lower than shares due to properties having high expenses which eat heavily into the rent.

Shares are simpler, less fuss, easier to diversify, produce consistently positive income which helps build the portfolio further.  Easy to get started with small sums, very low fees, no ongoing hassles and a typically higher income stream from a diversified portfolio (especially Aussie shares).  The main downside is dealing with market downturns and volatility.

Both are great options for long term wealth building.  Some investors choose to invest in both, while others just concentrate on their preferred option.  Ultimately, everyone has to decide for themselves which they like better, what suits their goals and preferences.

Hope these thoughts are helpful.
Dave

Answer

Investing in real estate and ETFs (Exchange Traded Funds) are two popular strategies, each with its own set of advantages and disadvantages. Understanding these can help you make informed decisions that align with your financial goals and risk tolerance.Pros of Investing in Real Estate:Tangible Asset: Real estate is a physical asset that provides a sense of security and stability.Potential for Rental Income: Properties can generate ongoing income through rent, which can be a steady source of revenue.Appreciation Potential: Over time, real estate values typically increase, which can result in capital gains.Tax Advantages: There are various tax benefits associated with owning real estate, such as deductions for mortgage interest, property taxes, and depreciation.Cons of Investing in Real Estate:High Entry Costs: Purchasing real estate requires significant capital upfront for down payments and closing costs.Liquidity: Real estate is not a liquid asset, meaning it can take time to sell and convert into cash.Maintenance and Management: Owning property involves ongoing maintenance and management, which can be time-consuming and costly.Market Risk: Real estate markets can be volatile, and properties can decrease in value.Pros of Investing in ETFs:Diversification: ETFs provide exposure to a wide range of assets within a single transaction, reducing the risk associated with individual investments.Liquidity: ETFs are traded on stock exchanges, similar to stocks, making them highly liquid.Lower Costs: Generally, ETFs have lower expense ratios compared to other investment funds.Flexibility: Investors can buy and sell ETFs throughout the trading day at market prices.Cons of Investing in ETFs:Market Risk: Like any investment in the stock market, ETFs are subject to market fluctuations.Over-Diversification: While diversification is generally positive, overly diversified portfolios might also dilute potential returns.Passive Management: Most ETFs are passively managed, which means they may not adapt quickly to changing market conditions.When considering these investment options, it’s important to assess your financial goals, risk tolerance, and investment horizon. Real estate might be more suitable for those looking for tangible assets and potential rental income, while ETFs could be better for those seeking liquidity and lower entry costs.For Pearler users, the platform offers tools and features that can help manage investments in ETFs efficiently, providing a straightforward approach to building a diversified portfolio. Whether you’re looking to invest in real estate or ETFs, Pearler aims to support your investment journey with user-friendly resources and community insights.You can find out more about this topic here: Etfs Vs ReitsDisclaimerI 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

Real estate has the advantage of leverage. When you buy the whole property value is growing and earning you rent. So if you have $100K (and pay lenders mortgage insurance) you may be able to buy $1M house. You may get $1K/week rent on that.
Your $100K in shares may get you $60/week in dividends.
With real estate there are huge running costs, Your $900K loan is going to cost you your $1000/week in interest. Your managing real estate agent is taking $80 of your rent for managing, add rates, insurance, water, repairs, body corporate fees (which is insurance and maintenance and body corporate manager fees). In my experience, many tenants are nice people who look after the property and are not demanding. But if something goes wrong, you have to get a trade out there pretty damn quick, possibly emergency call-out fees. You can’t expect a tenant to fix things, and it is frustrating for the tenant having both the trade emergency contact and the real estate agent to deal with and possibly additional delay with the agent having to contact you for approvals.
Property is a hassle. Some shares and ETFs are a hassle too. Understand all the implications before you dive in.

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