It’s a challenging time to be a buy-to-let investor. House prices are moving lower in many parts of the UK, tax changes are reducing net returns for many landlords and economic uncertainty may mean that the growth prospects for the industry are more limited than they have been in the past.
As such, investing in property to try to boost your wealth in order to retire early may not prove to be a worthwhile move at the present time.
Although the FTSE 100 also faces an uncertain future due to the prospect of a major global trade war, it could offer better value for money and stronger growth prospects than buy-to-let investments.
Growth potential
The potential for capital growth within the property industry appears to be relatively low at the present time. House prices are close to record multiples when compared to average incomes, which historically has been followed by a period of slower growth or even decline.
Furthermore, an uncertain period for the UK economy could mean that confidence among first-time buyers is lower than it otherwise would be. Despite policies such as Help to Buy being available, house prices could continue their recent fall as increases to stamp duty and other tax changes limit the appeal of the sector to investors.
Although the FTSE 100 could be impacted in the near term by Brexit, a number of the index’s members are forecast to post strong growth in the medium term. This could translate into rising valuations, while a weaker pound may produce positive foreign currency translations for those large-cap shares that operate internationally but report in sterling.
In addition, the FTSE 100 trades at a price level that is less than 10% higher than 20 years ago. While the index may have been overvalued in 1999, its cyclicality suggests that today could be an opportune moment to buy blue-chip stocks.
Risk reduction
Diversifying in direct property investments is challenging. It requires a large amount of capital that may not be available to many investors. As such, many buy-to-let investors have a small number of properties on which they are reliant to build their long-term wealth.
This poses significant risks, since void periods, repairs to a property or a failure to pay rent by a tenant can have a damaging impact on an investor’s financial future.
By contrast, buying a range of FTSE 100 shares is affordable for many investors, with a modest amount of capital being required in order to build a diverse portfolio. This could reduce risk when compared to having a limited number of buy-to-let properties.
Takeaway
While taking on a buy-to-let investment may continue to be popular among many investors, the risk/reward ratio from buying FTSE 100 stocks appears to be much more appealing. As such, now could be the right time to buy large-cap stocks while they trade on relatively modest valuations and have impressive growth outlooks.