The other day, I was talking to a buy-to-let investor. Make no mistake: they had done very well for themselves. They owned properties up and down the country.
The investing process was almost passive, to the point where a property wouldn’t be physically viewed until an offer had been accepted.
I was under a spell. That was until I compared it to holding a Stocks and Shares ISA.
On investigation, buy-to-let wasn’t as easy as it was made out. Here are a few of my findings, and why I still prefer stocks.
Upfront costs
Opening an S&S ISA couldn’t be easier. Usually, there is a minimum amount needed to open the account, but this is often below £1,000. Then there may be a transaction fee to buy shares, and funds will usually incur a regular commission.
Compare that to purchasing a buy-to-let property, where a proportion of the property value will need to be found for the mortgage deposit. And then you have fees for surveyors and solicitors, and maybe some cash for renovation work.
All of these costs have to be paid before any return on investment is made.
Ongoing costs
Then there are ongoing costs. Fees to estate agents, interest on the mortgage, insurance costs, paying for a new boiler when it breaks.
Aside from the usual platform fee, and a commission for a fund, holding an S&S ISA will usually mean you’re paying a much lower ongoing cost than owning a portfolio of buy-to-let properties.
Tax inefficient
In 2015, then-Chancellor George Osborne, made changes in the tax system which to a degree penalised buy-to-let landlords.
Anyone buying a home that is not their main residence has to pay a surcharge on stamp duty.
Added to this, as part of his sweeping reforms, the Chancellor effectively looked at taxing landlords based on their turnover, rather than profit, making the tax payable substantially higher.
In comparison, tax is not payable under money contained in a ISA, even on dividends.
Harder to release equity
Imagine that you’ve been investing in buy-to-let properties for 30 years and the properties are your only asset. You need to access cash for an emergency. What do you do?
As I see it, you have two options. You could sell a property, which could take months and months, and incur yet more fees, or you could remortgage.
With an S&S ISA, the option is much easier — usually as simple as a click of a button and the shares will be sold.
Of course, the stock market can be turbulent, so you may have to sell at a loss. But the housing market can be just as bumpy. And when it is, it’s even harder to unload a property.
For a true long-term investor, I think there is no better investment than stocks and shares.