Over the past few decades, buy-to-let as an asset class has created a tremendous amount of wealth for investors. However, more recently, it’s become harder to make money from renting than ever before.
Additional layers of regulation, the withdrawal of certain tax benefits, and the introduction of new stamp duty charges for second home buyers, (up to 15% for homes over £1.5m) means that buy-to-let investing is no longer the sure thing it once was.
Meanwhile, rental yields across the country have been falling and, although some markets still offer potential yields in the 5% to 8% range, when you include costs, returns aren’t as attractive.
With this being the case, I’m shunning buy-to-let and putting my money in GlaxoSmithKline (LSE: GSK) instead.
A better buy
From an investment perspective, shares in Glaxo immediately looks to me to be a better buy than a rental property.
For a start, buy-to-let is becoming an increasingly hot topic in the political world. A few bad actors have given the industry an awful reputation, and politicians always seem to be looking for ways to make life harder for investors.
This layer of political uncertainty is enough to scare me away from buy-to-let investing altogether. We just don’t know what the politicians will decide to target next, and trying to sell a property quickly if the rules change could be difficult.
In comparison, as one of the world’s largest pharmaceutical and consumer healthcare businesses, Glaxo’s fortunes are not tied to the success or failure of one drug or market. If new regulations cause the company’s growth to slow in one market, growth in other regions should offset some of the headwinds.
Care-free income
I think this global diversification, and Glaxo’s defensive nature, also makes the company a much better income investment than buy-to-let property. You see, right now shares in this pharmaceutical giant support a dividend yield of 5.4%. This compares to a potential income of 8% from buy-to-let and, as noted above, this is a yield excluding costs.
Including the costs of managing the property you might be lucky to achieve a net return of 5%. But considering all of the work involved in managing a property, I’m not convinced this return is worth it.
Glaxo’s 5.4% dividend yield is available with no effort required on your part whatsoever.
Capital gains
Another major part of buy-to-let returns is the capital appreciation of property. In the past, this part of the equation has provided a more significant return for investors than rental income. The problem is, home price growth in the UK is starting to slow, and it’s starting to look as if capital returns from property will be significantly lower over the next 10 years than in the past decade.
I’m not saying property prices will fall, but it certainly looks as if the days when property prices increased by 5-10% per annum on average are now long gone.
Once again, capital growth is something Glaxo might be able to offer where buy-to-let can’t. A combination of earnings growth, coupled with the prospective breakup of the business could, according to my figures, yield a total return for investors of 48% over the next three years, with no extra effort. That looks to me to be a much better deal than buy-to-let.