Buy-to-let has been a hugely popular means of generating a nest egg for retirement. Landlords across the UK have enjoyed capital growth, increasing rents and low interest rates for a number of years. As a result, their returns have been hugely impressive in some cases, generating high growth on their original capital.
However, the outlook for buy-to-let investing is becoming increasingly challenging. Regulatory change, increased taxation and a lack of capital growth potential could mean that buying FTSE 100 dividend stocks is a better move for investors who are seeking to make a million.
Regulatory changes
While buying and letting a property has never been a simple or low-cost process, it’s becoming increasingly difficult. For example, landlords may bear the cost of the end of tenancy fees. From 1 June 2019, new tenancies are not allowed to charge a tenant any fees for things such as credit checks and administration tasks. Estate agents may therefore look to pass them on to landlords in the form of higher management costs.
Alongside this, obtaining a buy-to-let mortgage has become more difficult. In previous years it was possible to do so with a low deposit and limited rental cover compared to the interest being paid on the debt. Today, more stringent rules mean many individuals may struggle to obtain a mortgage – especially on favourable terms. This could reduce the profit potential of a buy-to-let, and ultimately dissuade many people from becoming a landlord.
Tax changes
While investing in FTSE 100 dividend stocks can be undertaken through various tax-efficient products such as an ISA or a SIPP, tax on buy-to-let investing is increasing. An additional rate of stamp duty plus changes to mortgage interest payments being offset against rental income mean the net returns on buy-to-let investing have come under pressure.
Looking ahead, it would not be a major surprise for increasingly onerous taxes to be placed on property investing. There seems to be a political consensus against buy-to-let investors, with a shortage of properties for first-time buyers likely to drive MPs towards further restrictions on buy-to-let landlords. As a result, the net returns from property may come under pressure while it’s possible to pay no tax on investments in the stock market.
Today’s opportunity
While the FTSE 100 may have experienced a bull market for over a decade, there continue to be a number of dividend stocks that offer high yields and low valuations. By contrast, property prices compared to average incomes are towards the upper end of their historic range.
Therefore, now could be a good time to buy FTSE 100 dividend stocks, rather than seek to overcome the variety of challenges that are in place for landlords across the UK. Doing so could lead to higher returns over the long run, as well as lower risks.