One of the big stories in the world of investment over the past 20 years or so has been the rise of property prices. Many buy-to-let investors have done very well but there are headwinds in the sector now that didn’t exist before.
I’d shun buy-to-let property today and invest in FTSE 100 shares instead for the following three reasons.
Poor liquidity
Getting in and out of property can be difficult. It’s one thing to decide to sell your buy-to-let investment but quite another thing to do it. First, you must find someone willing to buy the property and then proceed through a long and often complicated process to execute the deal. Sometimes, if the market conditions are poor, you may be unable to sell and could end up trapped in an investment you’d rather be shot of.
Equally, finding and buying a buy-to-let property in the first place can be fraught with frustration and difficulty. In that sense, property is illiquid, which contrasts with owning shares of firms listed in the FTSE 100 index. Buying and selling shares with big market capitalisations is usually as simple as making a number of clicks of your computer mouse.
Valuations
Compared to the average wage, residential property is less affordable now than it was 20 years ago. As such, the valuation of property is running at heady levels and has been fuelled by factors such as low general interest rates and the government’s help-to-buy schemes. I reckon there’s a real risk of property prices reverting to more affordable levels, especially if and when interest rates finally rise again.
But that situation contrasts with the valuations of many FTSE 100 companies, which on some measures look cheap. The dividend yield of the FTSE 100 overall is running close to 4.5%, which strikes me like a decent return for shareholders.
Costs
Buying, selling, and owning buy-to-let property is a process loaded with costs from professional fees through to maintenance and other ongoing expenses. But buying and holding FTSE 100 shares involves smaller costs such as dealing fees around £10 or less when you buy and when you sell, stamp duty at 0.5% when buying, and a small amount of loss because of the spread between the bid and offer prices. There’s also often a running fee for holding the shares in a share account.
However, the costs of shares are often much lower than the costs of property. But both classes of asset are capable of delivering similar benefits. For example, the value of both can fluctuate with the potential to rise over time. Both are capable of delivering a yield to their owners – with property, it’s the rent and with shares, it’s the dividend.
On top of that, given all the time and hassle involved with property ownership, I’ll take FTSE 100 shares any day!