I used to think buy-to-let was the be-all and end-all of investing until I realised the hassle and hidden expenses involved.
Buy-to-let pitfalls
When you let out a property, even if it’s through an agency, you’re still at the mercy of the tenant. Along with the standard maintenance and emergency costs, plus agency and legal fees, there are increasingly stringent regulations to heed and lettings laws change frequently so it’s hard to keep up. You also need lots of insurance. You want a property that will appreciate over time, but this depends on the area in which it’s situated and can be further affected by political, social and economic uncertainty.
Simple returns
Investing in FTSE 100 stocks is a much simpler process. You need capital, a broker account and the time to research your investments carefully. Unlike buy-to-let, you don’t need a huge amount of capital to get started. Investors can begin with as little money as they wish, but when brokerage fees are taken into consideration, I do think it’s best to start with at least £1,000.
Potential returns
Buy-to-let properties have been increasingly subjected to tax changes these past few years, which eat into returns. Falling house prices and pressure on landlords to keep rents reasonable also affect profit margins.
But with a looming pension crisis headed our way, the government is keen to encourage individuals to save for retirement. As such, accounts like a self-invested personal pension (SIPP) or Stocks and Shares ISA, offer tax-efficient savings to encourage simpler investing.
The FTSE 100 has a good track record and contains many opportunities to buy good quality companies with attractive dividends. Income investing through reinvesting dividends can create the compound effect, which makes the likelihood of reaching a million-pound payday an actual possibility.
Risk vs Reward
I’ve discussed the main risks affecting buy-to-let investments, so what risks affect the stock market? There are two main risks to consider: systematic risk and residual risk.
Systematic risk is the risk to the overall market, which is unpredictable and impossible to completely avoid. For example, the US-China trade war has impacted the FTSE 100 on multiple occasions this year for the risk it poses to global growth.
Residual risk is the risk to your individual investment and it can be scaled down through diversifying your portfolio. This can include buying a variety of companies from different industries and sectors of the stock market, such as defence, pharma, and consumer goods. Diversification also includes buying a selection of assets and securities, such as bonds or index funds, along with your equities.
The UK economic outlook is under a cloud at the moment with a general election next month and Brexit still hanging over our heads, but I don’t think the stock market will die a death and when prices are low, it’s important to remember this is the best time to buy.
It’s never too late to become an investor, to learn about the stock market and to buy some shares. In fact, I think this can be the best way to boost your financial future and build a portfolio.