Investing in buy-to-let property has become a popular way to build wealth over the long term. This asset class has produced substantial returns for investors in the past. However, there’s no guarantee this will continue to be the case going forward.
As such, investors may be better off avoiding buy-to-let property and buying FTSE 100 stocks for the long haul instead.
Buy-to-let declining
Over the past few years, the government has introduced rules that have reduced the attractiveness of the buy-to-let property market. These include changes to the way property income is taxed and rules on the standards of properties.
At the same time, investors have been squeezed by rising home prices. Other costs, such as management changes, have also increased. All of these factors have reduced the appeal of buy-to-let investing.
Investing in the stock market has always been more straightforward than buying property. Online stockbrokers allow investors to buy and sell stocks at the click of a button. Accounts with these brokers can also be opened relatively quickly.
However, the one downside of the FTSE 100 over property is volatility. Stocks can be more volatile than property. For some investors, this might be too much to handle. But focusing on volatility ignores some key positives of stocks over buy-to-let property.
FTSE 100 benefits
Stocks are easier to buy and sell and can be owned inside an ISA. There’s no future tax to pay on investments held within an ISA.
Another benefit of FTSE 100 stocks is diversification. More than 70% of the FTSE 100’s profits come from outside the UK. Further, companies that make up the index come from many different sectors and industries. This gives investors the ability to buy stocks in the industries with the best outlooks.
Owners of buy-to-let property are reliant on the performance of the UK property market. FTSE 100 investors, on the other hand, can invest all over the world. They can buy tech stocks, mining stocks, retailers or more — whichever sector they think has the best outlook.
It’s impossible to put a value on this flexibility. Being able to move out of one sector and into another at the click of a button gives FTSE 100 investors a huge advantage over buy-to-let.
Owning FTSE 100 stocks may also provide higher returns than buy-to-let. Indeed, over the past 10 years, FTSE 100 gaming group GVC has yielded a total annual return of 27% for investors. £1k invested in the stock a decade ago would be worth nearly £15k today. It would be challenging for investors to gain a similar performance from a rental property.
Therefore, buying a diversified basket of FTSE 100 stocks today may be the better investment tha rental property over the long run. While the market may face further uncertainty in the short term, over the long run, FTSE 100 stocks have the potential to yield high total returns for investors.