There is a long standing debate centering around which asset class is best. Most people can agree on the top two asset classes – property and shares – but debate on their order i.e. which earns an investor higher returns. With real estate, before you buy the property you have to raise funds for the deposit, hire an independent property surveyor, research the area, know what your ROI will be, and much more.
But, once you’ve made the investment, there are only minor repairs to be done occasionally if you’ve invested wisely. Whereas with stocks, it’s easy to invest but you need to keep track of your investments closely to make sure you’re still making money from them. Below is a table I have created to show the performance of 5 different asset classes from 2004 – 2013.
|Asset Class / Year||Bonds (15 Yr)||Equities (All Shares)||Property (Residential + commercial)||Cash (Building Society)||Inflation (RPI)|
|2004||7.2 %||12.5 %||18.3 %||4.2 %||3.5 %|
|2005||8.4 %||21.4 %||19.1%||4.0%||2.2 %|
|2006||0.1 %||16.4 %||18.1%||4.4%||4.4 %|
|2007||5.2 %||5.1%||-3.4%||4.8%||4.0 %|
|2008||12.9 %||-29.8 %||-22.1%||0.9%||1.0 %|
|2009||-1.0 %||29 %||3.5 %||0.3%||2.4 %|
|2010||9.4 %||14.1 %||15.1 %||0.2%||4.8 %|
|2011||21.4%||-3. 4 %||7.8 %||0.2%||4.8 %|
|2012||4.8 %||12.1%||3.4 %||0.2%||3.1 %|
|2013||-7.2%||20.5 %||10.7 %||0.2 %||2.7 %|
|Average||6.12 %||9.79 %||7.05 %||1.94 %||3.29 %|
As we can see from the above, Equities or shares have produced the best returns over the past 10 years. This conforms to the view that Equities produce the highest returns as they are the most risky asset class.
But it is interesting to note two things:
- Although equities offer a greater return as seen above, investing in property through a buy-to-let mortgage may actually give you significantly higher returns due to the power of leverage. This is because, for a £100,000 house, you only need to put £40, 000 down and your bank puts up the rest. But your gain is on the overall £100, 000 value of the property value and not the £40,000 you have invested. You will need the help of one of the many property valuation firms to discover the property value.
- Property return = £100,000 * 7.05% = £7, 050. And the other benefit is that if you sell the house for £120,000, you only pay capital gains tax on £20,000 ( £120,000 – £100,000) and not your actual gain of £80,000 ( £120,000 – £40, 000).
- Add this to the fact that you could use a 1031 exchange to swap one investment property for another and defer capital gains taxes, and the potential which investing in property has is obvious for all to see. To learn more about 1031 exchanges, search for “1031 exchange real estate” and you should find the Petra Capital Properties website.
Of course, not every property you purchase needs to be an investment. If you have invested successfully in the past and just want to spend the money on a purchase something like the Holiday Homes For Sale North Yorkshire then you won’t need to worry about looking into all these different aspects of investing. As long as you have the money for it, you won’t need to look into valuations or ROI’s.
- Cash is the worst investment as the inflation rate has been double that of cash over the past 10 years. This means that if you save rather than invest your money, your money will be worth less and less as the years go by.
There you go, although equities may at first glance look to be the asset class to provide the best returns, property may in actual fact provide better returns through leverage.