The prospects for buy-to-let could prove to be relatively unappealing when compared to FTSE 100 property shares. The latter may offer superior tax avoidance opportunities, while also having wider margins of safety. And with the ease of buying and selling aiding diversification, it may be prudent to avoid buy-to-let investments and instead buy FTSE 100 property stocks for the long term, in my opinion.
Tax
Buy-to-let investing is becoming more challenging from a tax perspective. The government has introduced an increase in the stamp duty payable on the purchase of second homes, with investors now required to pay an additional 3% charge. As well as this, changes to mortgage interest deductibility mean that the net returns available on being a landlord have fallen considerably in some cases.
In contrast, investors can buy FTSE 100 property shares through a Stocks and Shares ISA. The ISA allowance has increased to £20,000 per annum per person in recent years. And since it means that investors avoid dividend and capital gains tax, it seems to be a sensible means of generating impressive after-tax returns in the long run.
Margin of safety
Last year, house prices reached their highest-ever level when compared to average incomes in the UK. As such, there are increasing concerns that houses are becoming unaffordable for vast swathes of the UK population. This may prove to be a drag on their future performance, and could mean that landlords receive a lower rate of capital growth than they had previously been expecting.
In contrast, a wide range of FTSE 100 property stocks now appear to offer wide margins of safety. The index has experienced a sharp pullback since reaching its record level in May 2018. It may therefore be possible to buy several housebuilders, REITs and other property-related shares on low ratings, or even at below net asset value. This may lead to improving capital growth figures in the coming years.
Diversity
Buying and selling shares in the FTSE 100 has never been easier. It’s possible to pay only limited amounts in commission due to the competitive nature of online sharedealing. As such, even smaller investors can build a diverse portfolio of property-related shares. This could help to reduce their overall risk, and may lead to improved performance in the long run.
In contrast, it’s tough to diversify through buy-to-lets. In many cases, individuals will put a large chunk of their life savings into a property. This means that buying even two properties is impossible due to the significant cost involved, which concentrates their risk in just one single asset. Should a tenant fail to pay rent, even for a short period of time, it could put them under severe financial pressure. Given the uncertain outlook for the UK economy, a lack of diversification could prove to be a very unwise decision.