There is much debate between investors as to what is the best investment. I believe that any portfolio should have a mixture of both investments but which one is the best? I define the best investment as the one that gives me the best Return On Investment (ROI). ROI is simplified into two distinct components:
- Yield – The amount of money you get from income usually in dividends or rent payments
- Capital Growth – The percentage increase in value of the shares or property
yield and capital growth. Investing is about making money work for YOU and the harder it works the better it is. If you want to achieve financial freedom or high net worth status, choosing your investments is key to your success.
Property Vs Shares – Yield
The calculation for the yield on shares is easy. It is the amount of dividend received divided by share price. Currently in the FTSE100 dividend yield is ranging from 7.82% (HSBC) to 0% (Tesco).
For investment properties it depends if you buy houses cash or with a mortgage. Gross Yield of UK Northern Properties are between 7-10%. Any property investor with half a brain invests with an interest only mortgage. The reason is because it increases your yield by leveraging the asset. Let’s say I buy a £100,000 house and I have a mortgage of 75% Loan to Value. That means I only need to put £25,000 in. I will still be receiving the same amount of gross rent for that property. This means that I can boost net yields to 15% on single bog standard Buy to Lets and this is not even the highest cash flowing property strategy!!
Let’s compare two investors:
Share Investor – £25,000 in shares over 10 years at 7.82% (HSBC) dividend = £53,080
Property Investor – £25,000 in property over 10 years at 15% (Leveraged Single Buy To Lets) = £101,138.94!!
Property Vs Shares – Capital Growth
Over the past 20 years shares in the FTSE100 has risen by around 5.4% per annum. Not bad. Will it Make us wealthy? Definitely not.
Over the past 20 years the average house price in the UK has risen by 4.5%. You may think an easy shares win. You would be very, very, wrong. Here is why, you have only invested £25,000 in a £100,000 house.
Let’s do the maths – 4.5% rise in a £100,000 house is £4,500 a year. £4500 divided by £25,000 is 18%!!!! It is not even close.
Property Vs Shares – Return on Investment
Let’s add yield and capital growth together to make you overall return on investment.
Shares = 7.82% + 5.4% = 13.22%
Property = 15% + 18% = 33%!!
Share Investor – £25,000 in shares over 10 years at 13.22% ROI = £86,530
Property Investor – £25,000 in property over 10 years at 33% (Leveraged Single Buy To Lets) = £432,968!!
Have I changed your mind about property? Disagree with anything I said? Comment in the section below.