For most Australian investors, property investment is the way to go. Many of them are taking advantage of negative gearing, where they can claim a deduction against their ordinary income for property investment expenses not covered by the rent. These include a plethora of fees such as strata/body corporate fees, management fees, repairs, interest on the bank loan, council rates, insurance, and land tax.
But while these deductions are certainly helpful, investors need to see decent capital gains in order to profit from it. The losses every year can mount up over time, and they can end up being at a loss even if they sell their property at a higher price than they bought it for.
On the other hand, investors choosing to invest in shares can take out a margin loan, but it also has its own set of disadvantages. These include higher interest rates, lower lending levels, a potential for margin calls, and required knowledge and experience to invest in the right shares. If investors choose not to use a margin loan, they need to have a sizeable lump in the first place.
However, property investors should consider diversifying beyond property. Investing in shares gives investors the potential to beat and drive much higher returns in the market. According to recent ASX long-term investing report, investments in Australian shares made through super had a 9.9 per cent return after tax compared to just 9 per cent for residential property.
Yet those who still want to invest in residential property can try rentvesting, wherein first home buyers make their first home purchase an investment and either rent elsewhere or live at home with their parents.
This shows that through investing across both asset classes, investors can get the best of both worlds.
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