The idea of owning a property portfolio has undoubtedly been appealing in the past. Over recent decades, buy-to-let properties have delivered a potent mix of capital growth and rising rents. In the process, the sector has made many individuals millionaires.
Now though, the challenges involved in owning buy-to-lets seem to be increasing. From an uncertain economic outlook to tax issues, as well as the threat of rising interest rates, the sector seems to be losing its appeal. At the same time, buying shares through an ISA or SIPP is becoming simpler. As such, swapping the former for the latter could be an easier way to make a million.
Challenges
From an economic standpoint, being a landlord is becoming more difficult. Around 9% of tenants in the private rented sector are currently in rent arrears. Since it takes an average of 42 weeks to evict a tenant, this could mean that landlords face a rising prospect of losses on their properties over the medium term. Given that the outlook for the UK economy continues to be uncertain, the proportion of tenants who struggle to pay their rent may increase in the next couple of years.
Alongside this, the interest rate outlook does not appear to be favourable for landlords. Although Brexit means that it is perhaps more challenging than usual to predict the path of future interest rate rises, they look set to rise over the medium term. This could squeeze profitability for landlords – many of whom are on interest-only mortgages. And with remortgaging becoming more difficult as a result of changes to lending rules by the regulator, some buy-to-let investors may face an increasingly difficult future.
Of course, tax changes are also set to make the sector less appealing. Stamp duty on second homes and changes to rules concerning mortgage interest deductibility could reduce the potential profit to be made in the sector.
Investment potential
In contrast, it is becoming easier to invest in the stock market. From a tax perspective, up to £20,000 can be invested in an ISA each year, which shields an investor from capital gains and dividend tax. Furthermore, greater flexibility is now available when it comes to retirement savings, with products such as SIPPs and Lifetime ISAs providing significant tax benefits.
The cost of buying and selling shares has never been lower. Tracker funds are continuing to deliver falling costs for those investors who lack the time to buy and sell individual company shares. And with the internet making it easier than ever to keep on top of portfolio holdings through a variety of apps, investing is available to all.
Certainly, there are risks from buying and selling shares. But company accounts help to lessen overall risk, with it being possible to analyse the financial health of a business before buying it. This is in direct contrast to being a landlord, where the same level of scrutiny is not available. And since diversifying through shares is far easier than owning multiple properties, it may be less risky, as well as easier, to make a million from the stock market.