Is It Better To Invest In Property Or Stocks And Shares?

Property and stocks and shares have been popular investment vehicles for a long time. But which one is right for you? We've rounded up the pros and cons of each to help you decide.

  • written by Jon Howe
  • published on Thursday, May 25, 2023
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There are many reasons why we look to invest our money, but whatever they are, it doesn’t change the fact that you need to be very careful where you invest it, and you need to find a vehicle that makes the most of what you have.

People are growing increasingly sceptical about the reliability of the traditional pension and are looking for new investment opportunities to fund their retirement. It may be that you are looking for an alternative career option or simply wish to accumulate money over a period of time to fund lifestyle choices in your middle age.

Regardless of your motivations, you are still faced with the same investment playing field, which is influenced by low interest rates that are only likely to increase slowly. Hence you need to get creative, and the two investment paths that most people go down are property or stocks and shares. There are a number of factors that might dictate your suitability for either of these, and we will study these in detail, but fundamentally it often comes down to your attitude to risk and what your overall ambitions are.

The good news is that both of these investment vehicles are relatively easy to get into, but of course there are different skills required and different ways you can approach each one. Having a short, medium and long term plan will usually point you down a particular path, but here we look at the pros and cons of each investment sector, to enable you to identify where you best fit in and what you ultimately want to get out of it.

Property as an investment

Property has always been a popular form of investment, mainly as it is an arena that most of us have a general knowledge of. In most cases, a property investment will be in a second home, and usually one that you buy-to-let. This immediately gives us some market knowledge and experience and an understanding of the fees involved and the potential pitfalls you face.

The big difference when investing in a second property is regarding liquidity and cashflow. With any investment you need to keep an eye on liquidity, ie. how quickly you can sell an asset and access cash, and in that sense property can be something of a minefield if you judge the market badly. In terms of cash availability, a second home can tie a lot of this up and provide difficult periods that restrict your movement. But then you have to balance this against the freedom you get from having an asset you can to some extent control, by which we mean you can do things to improve the value and you can usually judge the right time to buy and sell.

Advantages of investing in property

  1. There is accessible and digestible historic information available about the property market which makes it easier to judge the right time to enter it, and where to buy.
  2. Anyone can enter the property market and you don’t need expert knowledge or even, necessarily, professional advice.
  3. Capital growth is still relatively strong in the property market, depending on the location you choose. The average house price three decades ago was £44,434, compared to around £210,000 today1, so with some smart investment it is relatively straightforward to make money in the right areas.
  4. You can make good money from buying a cheap property and doing it up to increase its value, and if the market is in your favour this can easily reap rewards, by making £20,000 on a house you bought for £200,000 only a couple of years ago, as an example, minus any refurbishment costs of course.
  5. You can make good rental yields of around 8-10% if you make the right call on where to invest in property, and can take a mortgage based on the kind of income you want. You can take an interest-only mortgage and seek to diversify quickly with another property, if you are not too bothered about capital appreciation and are earning good rental yields in the meantime.
  6. Rental income can be steady income over the long term. There is always likely to be rental demand, as long as you are careful about the location, property type and market you wish to rent to. There is a shortage of new-build properties and the Government is struggling to re-balance this deficit, add to this slow wage growth and many people are finding it difficult to get onto the property ladder, and hence buy-to-let is always likely to be in strong demand. It is widely predicted from various sources that by 2021, one in four households will be renting from a private landlord.  

Disadvantages of investing in property

  1. The Government has attempted to clampdown on the power held by buy-to-let landlords. This has resulted in tax restrictions and an increase in stamp duty charges.
  2. A second property now means that stamp duty rates are increased by 3% compared to ordinary buyers of a single property.
  3. Rental income is taxable and changes to the rules for tax relief on mortgage interest increases the amount of tax payable for buy-to-let landlords.
  4. You could be subject to capital gains tax for any profits you make from selling a property, and this could be as much as 28%.
  5. Tax rules can change significantly whilst you own a property, although of course this can be a good or a bad thing, depending on the change.
  6. Initial costs can stack up when you buy a property and this can eat into your returns, delaying the point where you see any profit by several months in some cases. Legal, financial and agency fees and refurbishing and furnishing the house ready for tenants all needs to be factored into your calculations. You may also be faced with periods of time where the property is not occupied, and hence your income is dramatically reduced.  
  7. Property investment can also eat into your time. There are lots of decisions to be made, particularly if you want to be a hands-on landlord, and lots of hassle finding tenants, collecting rent, carrying out maintenance, and potentially travelling to the property if you have invested in a different area to where you live, which is common.
  8. Liquidity can be a problem in the property market. You can be stuck with an asset if the market bombs, if something happens in the area that makes the property undesirable, or you have simply chosen the wrong location. Property might be booming where you live, but where you invest may not have seen house prices move for nearly 10 years. This works both ways of course, and good research can avoid this issue, but if you need access to money quickly, property is not always the best option. You may be forced to accept a lower offer on a property you can’t sell in order to free up cash, and this could still be after your property has been on the market for several months.

Stocks and shares as an investment

The main difference often cited by people assessing property as an investment compared to stocks and shares, is that at least a property is a tangible asset that you can see, touch and to some extent work with to increase the value. While this is largely true, there are ways that you can manage an investment portfolio in stocks and shares, to restrict your investment, lessen the risk and ensure there are expert eyes watching what is happening and giving you advice. 

With property, there is lots to be said for diversifying and spreading out your investments in different properties of different value. This usually smooths out any market volatility and brings rewards for the long term investor, and the same is largely true when investing in stocks and shares. However, depending on the investment portfolio you go for, it can be harder to access your money than it is for property, or at least it makes much less financial sense to access it, and hence liquidity can be a big factor.

There are investment options such as equity income funds, where you own shares in well-managed and dividend-paying companies. With these your money is more easily accessible, but of course this comes with the caveat that the returns are not as generous.

The advantages of investing in stocks and shares

  1. A long term investment in stock and shares will usually outperform a comparable-length investment in property, but there are no guarantees of that.
  2. You can mix your investment up to diversify and spread the risk involved. This can be a mixture of active funds that carry high returns and passive funds that are not so influenced by volatility in the market, such as tracking an index.
  3. There are ways that you can avoid excessive fees and be tax-efficient by storing your investment profits in an ISA. Here you won’t be charged tax on your profits, whereby a capital appreciation on a property sale could cost you 28% in capital gains tax.
  4. Stocks and shares take less time to manage, and don’t necessarily need any involvement from yourself at all. However, you should probably take some professional advice as to which investment portfolio suits your needs and status.
  5. If you follow professional advice you should be able to find the investment vehicle that's right for you - matching your capital, your ambitions and your attitude to risk. You can start low by investing as little as £50 per month in a single investment fund, watch it for 12 months and then diversify having got a handle on the market.
  6. Some funds allow you to spread the risk by investing in other asset classes alongside your shares, such as Government bonds, gold and cash. While there are online platforms for small investors, where you can build a portfolio of small investments in shares, corporate bonds, commercial properties or commodities. This reduces your risk and brings a balance of returns over the long term. Some companies will even let you split an investment over two separate funds.
  7. Investing in something like a FTSE100 tracker can bring good returns. If you can commit to a certain amount per month, say £100, over a long term period of 25-30 years, it can bring you rewards approaching £90,000 by the end of that period, but of course not everyone can make that commitment.

The disadvantages of investing in stocks and shares

  1. When investing in stocks and shares you are at the mercy of both the economy and the performance of the individual organisation or fund you have invested in.
  2. Compared to property investment, you are generally-speaking not involved in any decision-making with stocks and shares, albeit that is an advantage to some people. In essence, however, stocks and shares is a domain for experts with specialist knowledge and you may need to employ a broker for professional advice, at least at first.
  3. While stocks and shares can certainly be more profitable over a longer period of time, this is no good if you need access to your money in the short term, ie. within around five years. This isn’t giving your investment a fair crack at growing and hence stocks and shares might not be right for you.
  4. You can very easily be hit with a number of fees when buying stocks and shares, and if you use a funds manager, they will always take a fee.
  5. Individual company shares tend to carry more risk and are more unpredictable, and you really need professional advice and experience of the market to deal in these.

Investing in property vs shares: considering your options

Everybody’s personal circumstances are different and the right investment vehicle for you is dependent on your ambitions and attitude to risk, as mentioned above. But these are also key factors:

  • Starting investment – what capital have you got? Can you release it now? When do you need it back?
  • Income – what do you need to live on? Do you need a steady income from your investment now?
  • Age – can you afford to make a long term investment of 25-30 years? Can you commit to regular investment amounts? Can you afford to risk all your money and maybe not have time to accumulate it back before you retire?
  • Time commitment – do you want to have an active or passive role in your investment? Is this a hobby or a potential career?

Property or shares: a summary of which is right for you

If you get the fees and tax advantages right and you can commit to a long term investment where you don’t need access to the money, stocks and shares can be more lucrative than property, but you have less control and certainly less involvement. Therefore, it’s not for everyone.

Property, on the other hand, can give you a regular income and can offer you good returns much quicker, in terms of capital growth. While liquidity can be an issue, smart investment can avoid this and turn it to your advantage. Property, therefore, can be more attractive to those who wish to control their own destiny.

Of course it is possible to combine the two investment vehicles and build a diverse portfolio of properties alongside stocks and shares; something that perfectly matches your available capital, your financial needs and your attitude to risk.  A creative way of doing this is property crowdfunding through UOWN, where you invest in a share of a property and speculate on how it might increase in value, while also earning a regular percentage of the rental yield.

With this investment, you can choose to invest more based on performance and can decide the right time to get out. This is a popular investment for those who want a steady income, a liquid asset (you can sell your shares at any time) and wish to retain the right to increase their investment over time if the circumstances are right. And in many ways, this resonates with a lot of people as the perfect form of investment.

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