A common dilemma many people face: to invest in property or stocks? You are in the fortunate position of having an emergency fund saved and some excess cash. What to do with it? On the one hand, you have people who swear by real estate. The stock market is just fancy gambling, they say. Bricks and mortar are what you need. Something tangible; you can see your investment. Another train of thought offers a completely contrasting point of view: who wants the bother of property when you can invest your cash in stocks? You can make a trade in about 10 minutes while sat at your computer. And so, you find yourself in a conundrum. This article presents a comparison – to invest in property or stocks: 10 things to consider.
Property vs Stocks: 10 things to consider as an expat
This is even more complex as an expat: do you invest in property in your expat country or your home country? Or somewhere completely different? You may not be able to contribute to a pension account in your home country and there might be challenges investing in the stock market from abroad. Which currency to invest in? Where should your funds be domiciled? What happens when you move back home? What are the tax implications? These are valid questions, and there may well be simple answers, depending on your nationality and country of citizenship. But it doesn’t stop it from being daunting before you start.
To invest in property or stocks: 10 things to consider using the UK property market as an example throughout this article: upfront capital investment, capital appreciation, fees and costs, passive income potential, leverage, emotional risk, time investment, risk of loss and returns. Exact figures and information will differ depending on your nationality and expat country. This is not financial advice, and it is necessary to do your own research before investing.
It’s also worth noting that both investing in property and stocks are complex areas in themselves. Within property investment, there are long-term rentals, short-term rentals, flips, student housing and so on. In terms of the stock market, there are single stocks, ETF/index funds, bond funds, options, forex trading, shorting stocks etcetera. The purpose of this article is to give a broad comparison against the 10 factors. Of course, there will be nuances depending on the method you use. However, it’s a good place to start your research.
1. To invest in property or stocks: Upfront capital investment
Property: very high/ Stock market: low
The major issue with property is the down payment required. Depending on the country you are investing in, you will need anything from 5-30% of the property’s value to purchase. That means you will most likely be saving in cash for a period of time before investing (even years), leaving your cash exposed to devaluation by inflation. On top of the deposit, you will need to pay hefty fees to the solicitors, and possibly searches, valuation, repairs, maintenance, taxes, stamp duty, insurance, document postage, broker, and arrangement fees. And that is everything goes well!
Property sales regularly fall through at various points in the often-lengthy purchasing process, which can leave you having paid out money with no refund. As an example, to purchase a property for £150k, I saved £38k deposit plus I paid an extra £10k in fees. To buy the house set me back almost £50k (Dh225k). In the to invest in property or stocks: 10 things to consider debate, upfront capital investment puts many people off property.
On the other hand, purchasing stocks requires almost no upfront investment. You can open an account with a broker such as Interactive Brokers for free and just pay the money transfer costs (Dh100-150). You can then purchase ETF funds such as VRWA for as little as $5 with an ongoing charge of approximately 0.25.
2. Property versus stocks: Capital Appreciation
Property: yes, but varies widely/ Stock market: Yes, but fluctuates regularly
A big reason people buy houses is because they tend to increase in value over time. According to Rightmove, the average increase for a UK property over the last decade is 53% at the time of writing in 2022. It is trickier to find historical appreciation rates for the UAE property market and it tends to fluctuate widely; property can increase by 300% one year then decrease by 11% another. On the whole though, real estate in the UAE has increased massively in value over the past decade. Of course, whichever country’s statistics you are looking at, it is going to vary again depending on the region and type of property, so these figures are very broad and generalised.
The stock market fluctuates widely as well, depending on which country’s market you are analysing, economic conditions and public sentiment. If you invest in a single company, it depends on that company’s earnings. In terms of the entire stock market, I calculated that an initial investment 10 years ago in a global, diversified ETF fund would have increased by 40%. Again, this is generalised and fluid. It is slightly less appreciation that property, but there are less fees involved, which will be explored in the ‘returns’ section.
3. investing in real estate or equities: Fees and Costs
Property: high/ Stock market: potentially very low
With property, the initial fees and costs are high. As detailed above, as well as a 5-30% down payment, you will likely need money to pay for the solicitors, and possibly searches, valuation, repairs, maintenance, taxes, stamp duty, insurance, document postage, broker, and arrangement fees. This is just the upfront costs though. When you own property in a different country, it is likely (and advisable) to use a property manager, who may take up to 10% of your rental income as their fee. In return, they will manage the tenants, respond to issues, and check on the property for you. You are also liable for maintenance and improvements to the property and insurance, which can be costly for homeowners.
For stock market investors, the ongoing fees and costs can be incredibly low if you invest wisely. As explained above, you can open an account with a broker such as Interactive Brokers for free and just pay the money transfer costs (Dh100-150). You can then purchase ETF funds such as VRWA for as little as $5 with an ongoing charge of approximately 0.25. However, if you choose actively managed funds, or even worse, a savings plan, you can be duped into paying a large percentage of your returns in seemingly ‘low’ fees. For example, if a fund manager or advisor charges you 1.5-4%, you might think ‘that’s not very much’. But over the long term, it can reduce your gains by up to 78%. The key with the stock market is to keep fees low.
If your situation is particularly complex or you would feel better speaking to a financial advisor, ensure they are a fee-only advisor and interview them to check that their services align with your values. Or even better, check out Steve Cronin’s website and this awesome expat financial independence workshop. This is the perfect workshop to ensure that you can become a DIY investor and keep your fees ultra-low.
4. Top of the 10 factors for some: Passive Income
Property: Income, yes, passive, no/ Stock market: yes, eventually
With property, if you have a property manager and an accountant to file your taxes, technically it can become a passive source of income. Certainly, it’s going to be less work than working a full-time job. However, the property manager is going to contact you to confirm maintenance work etc. and there generally are issues that regularly crop up. Unless you’re a cash buyer, you have also got to consider the mortgage: re-mortgaging every 2-5 years, plus if it is interest-only, do you have a plan to pay the mortgage off? You could also have troublesome tenants, a market crash or negative equity to deal with. Nevertheless, once the mortgage is paid, you could have a reliable source of rental income, which generally keeps pace with inflation.
Using the 4% rule, you can calculate how big your stock market investment portfolio needs to be before you can start withdrawing from it to support your lifestyle (4% is the amount you can withdraw for 30+ years and never run out of money, assuming an 8-10% rate of return). To flip it and work out your total amount, use the x25 rule. This is where you take your annual expenses (or the annual expenses of your ideal life) and multiply by 25. The number you get is what you need to have saved and invested to not rely on active income (working for money), as you can safely withdraw 4% a year to cover your expenses. Let me give you an example:
$40,000 (annual expenses) x 25 = $1,000,000 (financial independence number)
Clearly, getting to $1million for most people is going to take some time and effort. Once you’re there though, in theory, you only really have taxes to consider before you can sell and withdraw from your retirement pot as easily as you make a transfer between banks. With the stock market, the challenge lies more in the mental games of patience and staying the course on the journey. If you can hold your nerve through stock market highs and lows, a (relatively) passive income stream awaits you on the other side.
5. Leverage in property and stock market investing
Property: yes, absolutely! / Stock market: Not advisable
A real benefit of property is the mortgage market. Leveraging other people’s money to purchase a more valuable asset for yourself is made accessible by mortgages with low-interest rates. The premise is that despite paying only 5-25% of the value of the asset, you can acquire a much more expensive and appreciating asset. The tenants (in theory) should pay the mortgage plus interest and at the end you own the asset outright and can either sell or continue collecting rent as cash flow. Of course, this is simplified, but leverage is one of the biggest benefits of investing in property.
On the other hand, leveraging other people’s money to buy stocks (margin trading, or taking a loan from the broker to trade) is risky and not advisable. Not only are you at risk of losing your money, but you can also lose more money than you originally invested if the stock price drops, or the broker issues a margin call (an immediate demand to repay money). Unlike a mortgage, the borrowing is exposed to greater levels of volatility in the market. Therefore, unless you are willing to take the risk of margin trading, you are limited to invest your own funds and income.
6. what are the emotional risks of investing in property vs stocks?
Property: Medium/ Stock Market: High
So far in this comparison, it seems that the stock market is the obvious choice. But when it comes to emotions, the stock market is a much bigger risk. Emotions are tied up in property for sure; a mistake many investors make is investing in a property they would like to live in over what works best for the numbers. However, it takes so long to buy and sell real estate (3-6 months in the UK) that you will have chance to consider your options, and if there is a market crash, it’s near impossible to panic sell.
On the other hand, stocks are quick and easy to buy and sell, meaning that if you panic during a downturn, it won’t take you longer than 10 minutes to destroy your hard work. The hardest thing about the stock market is the mental discipline to stay the course despite market conditions. It’s impossible to separate emotions and investing, but if we can learn habits and discipline and develop a supportive community, we’ve got a fighting chance.
7. Time Investment for different investment vehicles
Property: medium to high/ Stock Market: low
To make the purchase, property takes more time than the stock market. After you have invested some time learning about the stock market (you can learn as much as you need to do to DIY invest in one weekend), you can spend less than an hour on your investments each month. That’s if you invest in a passive ETF/index fund; if you trade individual stocks or delve into more complex methods such as options or forex trading, your time investment will be considerably higher.
With property, the purchase will likely take much longer. If you’re a cash buyer and there’s no chain (the sale depends on another sale), it may be a smoother process. In all likelihood, once you have put in an offer, the process will take 3-6 months if all is well. Between searches, solicitor interactions, valuations, gathering documents and so on, your time investment will be significant.
This is also true once you have made your purchase. Even though you may hire a property manager to sort out issues that crop up with your tenants, the final decision on repairs, maintenance, improvements, tenants etc. will be yours. When you invest in an ETF (exchange traded fund), the most time you will have to spend on your portfolio a year is to re-balance and possibly to consider your strategy when you move to a different country.
8. Liquidity and Flexibility of property vs stocks
Property: no/ Stock Market: yes
Property has virtually no liquidity and flexibility as it’s time-intensive to sell and liquidate your asset. You may receive monthly cash flow, but if you need the capital gains returned to you quickly, property may not be the investment vehicle for you. On the other hand, stocks are renowned for their liquidity and flexibility. You can sell your stocks and receive the money in less than a week usually. Wherever you live in the world, you can access your account. If your property is located in a certain country, you have to be there to visit.
However, it may not always be a benefit to be able to liquidate your assets quickly and easily. It increases the chances of making mistakes and impulsive buying and selling of stocks or funds you may later regret. Having an emergency fund in cash which you can easily liquidate may ease the need or desire to sell your investments. You could also hold some money in a flexible asset and keep some tied up in property to diversify and balance your portfolio.
9. Risk of Loss: real estate vs the stock market
Property: yes, it’s possible / Stock Market: yes, it’s possible
With any investment, your capital is at risk. Keeping your money in a savings account at the bank is putting it at risk to devaluation by inflation. For example, the UK property market crashed in the 1950s, the 1970s, the 1990s and of course, 2008. The global stock market crashed in 2000, 2008 and 2020 (and many more times before that!).
The worst thing you can do is panic and sell all your investments at a ‘loss’. When it comes to investing, having a contingency plan can protect you from impulsive decisions no matter your investment vehicle of choice. Deciding what you will do to manage and reduce your overall risk can help, things like:
- Build an emergency fund
- Diversify your investments
- Decide what you will do in the case of a market downturn
- Develop a range of highly paid skills to create cash flow
- Educate yourself
- Assess your risk tolerance and rebalance your portfolio in line with it
- Dollar cost averaging (automating your contributions so you invest regardless of market conditions)
10. Last but not least of the 10 factors: Returns
Property: yes / Stock Market: yes
Both property and equities are viable and reputable investment vehicles. The average return of the S&P 500 over the last 30 years is 7.31% (adjusted for inflation). Net rental yields on UK properties fall between 5% and 8%, so after factoring in fees, returns are similar to the stock market. However, returns vary massively by region, country, property type and strategy. A person investing in a studio flat in inner London for short term rental will expect a different return to a family home in Birmingham. The same is true for the stock market; the funds or stocks you invest in and the fees you pay will determine your exact return. For both investment methods, long-term holding of assets generally warrants the best returns.
Beating the market is extremely difficult and is mostly down to luck. It’s much more favourable for you to make a personal plan as an investor following careful consideration of your personal goals. Rather than face the stomach-churning, out-of-control feelings of trying to time the market and speculate based on economic conditions, sticking to a plan suitable for you will guarantee a much higher rate of success.
