Unless you’ve been living on the moon, you’ll know the UK is facing a massive housing crisis. You might also know the shortage of properties available to rent is particularly devastating. As a result of booming rents, the number of new buy-to-let investors has again ballooned in recent times. But would these people be better off trying to get rich with FTSE 100 stocks?
I think so. Look, investing in property offers the sort of stability that all investors crave when markets are shaking wildly. Unlike Footsie investors, I’m sure buy-to-let investors weren’t pulling out their hair as the spread of Covid-19 was causing stock markets to crash in March.
But investing in rental properties carries its own problems which, for me at least, make it an asset class to avoid.
Landlord profits are diving
As I say, the number of new landlords entering the market has rocketed more recently. Data from UK Finance, for example, shows the number of buy-to-let mortgage applications for property purchase had risen 7% year-on-year in the first quarter.
There are a couple of major reasons for this. Firstly, rents in many parts of the UK are shooting through the roof as supply fails to keep up with renter demand. Meanwhile, stagnating house prices have encouraged many new entrants to the buy-to-let market.
I, for one, haven’t been encouraged to take the plunge though. I’ve continued to use my cash to buy cheap FTSE 100 stocks instead. Why? The costs of operating buy-to-let properties remain monumental.
Big rents might be attractive. But when you factor in chunky stamp duty bills, rising maintenance costs, and increasing landlords fees, well, it’s no revelation to discover investor profits have more of less dried up.
Grab better returns with the Footsie
The returns offered up by buy-to-let still, broadly speaking, lag those that Footsie investors can expect.
Even the best-yielding types of property in the most lucrative parts of Britain fail to keep up with the profits you can expect to make by investing in quality stocks.
One-bedroom properties in Newcastle provide landlords with the best returns on their money. Rental yields here sit at 7.9%, according to online property management platform Howsy. But now compare this with the 8% and 10% return that long-term share investors can expect to make each year. There’s no contest to my mind.
And this isn’t the end of the story, of course. The rental yield takes into account property prices and rents, but not those suffocating costs I mentioned above. Drawing those into the equation reduces actual profits to a dribble.
No wonder millions of people continue to shun buy-to-let and decide to invest in FTSE 100 shares instead. Following the recent share market crash, there are dozens of great Footsie companies also trading at low prices. Indeed, many top stocks are trading around bargain-basement earnings multiples of 10 times and below, from broadcasting colossus ITV and insurance play Aviva to housebuilder Barratt Developments.
And this boosts the chances of buyers today making mega total returns on their investments and getting on track to making a million.
I’d buy shares over rental property any day.