Should I invest in property or start a business?
It’s a choice many Australians face: should you invest in business or property? We look at the potential returns and risks of each.
Should you buy an investment property or start a business? It's a tough question. Property investment is relatively low-risk and stable, but requires a significant amount of capital upfront. Investing in business is riskier and requires a lot more work. But it could lead to significant reward for the right investor.
Let's look at the risks and benefits of both options to help you make a better decision.
Pros and cons of investing in a business
- Potential for higher returns. Businesses generally offer a greater potential for return on investment than residential property.
- Serious effort. Starting a business is a serious undertaking. There are no get rich quick approaches.
- Personal fulfilment. Starting a business may allow you to pursue your goals and creative interests, leading to fulfilment and satisfaction on a personal level.
- Options. With a business you can start small, with an online business or service in your neighbourhood. This kind of flexibility is harder with property.
- More expertise required. Running a business will most likely require more knowledge, expertise and training.
- Disruption factor. You may have to leave your current job in order to give your business the attention it deserves.
- Risk of failure. Many new businesses fail, so make sure you're aware of all the risks before investing in business.
Pros and cons of investing in property
- Higher LVRs. Lenders offer higher LVRs on residential loans than commercial loans.
- Simpler. Investing in property requires less time, effort and stress than investing in business. Being a landlord is still a role that requires you to do some work, but it isn't as demanding as running your own business.
- No specialist expertise required. You don't need specialist knowledge or training to invest in property (although doing plenty of research does help).
- Easier to obtain finance. An investment mortgage is secured by the value of the property. If you can't repay the loan then your lender can sell the property and recover their costs. This makes getting a loan a bit easier than if you were applying for a business loan.
- Upfront costs. The deposit required to purchase an investment property can be 10% or 20% of the property's value. This is quite a lot of money.
- Passive. The passive nature of investing in property can be a drawback for those who prefer hands-on investments.
- Keep your job. Most property investors work full-time and treat their investment as a secondary income source.
- Lower returns. Businesses generally offer the chance for higher returns than residential property. However, if you buy the right property in a booming market your capital growth could be significant.
Investing in property vs investing in business
Investing in property can offer a more passive approach than investing in a business. Property can help you build a passive income, which supplements (or even replaces) your job income via a property portfolio. The property portfolio would run as a business with the intent to grow asset value and give you returns.
Buying a property is something available to anyone showing the capacity to repay a home loan.
On the flipside, a well-run business has the potential to deliver greater dividends than a property investment. Businesses also offer a chance to explore a creative outlet and achieve fulfilment on a personal level. If you have a true passion or a great idea you want to share with the world, a business can let you do just that.
The decision ultimately depends on your own goals, ability and financial situation.
Questions to ask yourself
Still having trouble deciding which investment route to take? Ask yourself some of these questions:
- Do I have a set of skills or knowledge I can turn into a business?
- Do I have the cash available to fund an investment property purchase?
- Can I put in the hours and time to run my own business?
- What level of risk am I comfortable with? Can I handle the risk if my investment doesn't work out?
More helpful resources
- Should you pay off your mortgage or invest in another property?
- Should you pay off your mortgage or invest in shares?
- Learn more about loans for startups
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