Buy-to-let property has been an excellent investment in the past. However, I believe this is no longer the case. In recent years, the government has made several tax and regulatory changes, which have made it harder for landlords to earn a decent return. I think this has significantly reduced the appeal of the asset class.
Instead, I reckon investors can earn a much better return in the stock market. Indeed, that’s the approach I’m using with the goal of building a seven-figure fortune.
Falling buy-to-let returns
A study published in 2019 claimed the average landlord would turn a profit of just £2k after recent tax changes. That was based on an average investment of £183,278. These figures suggest a potential average annual return of only 1%.
That’s not to say all buy-to-let landlords will earn the same profit. Some may make significantly more. Unfortunately, some may also earn considerably less.
Still, on average, the figures above suggest the average returns in the sector are underwhelming. And that’s why I’ve been investing in stocks and shares rather than buy-to-let property. There are many reasons why I believe this is a better asset class than property.
For a start, figures suggest stocks and shares could produce significantly higher returns than rental property in the long term. Over the past two decades, the FTSE 100 has yielded an average annual return of 8%. That looks particularly appealing compared to the average buy-to-let property investment return of 1% cited above.
The benefits of equity investing
Owning stocks and shares also provides diversification. For example, more than 70% of the FTSE 100’s earnings come from outside the UK. The index’s 100 different companies generate profits from all over the world. It would be impossible to achieve the same sort of diversification with UK buy-to-let property.
Finally, companies can generate much higher returns on assets than property. Take small-cap growth star Games Workshop for example. The company’s return on capital employed — a measure of profit for every £1 invested — is around 56%. Even the best buy-to-let property yield is only approximately 6% a year, according to my figures.
The higher rate of return on assets suggests Games Workshop has the potential to produce large total returns for its investors in the long run. The stock has produced a total annual return of 37% for its investors over the past decade, turning every £10k invested into £240k.
As such, I’d target similar high quality, highly profitable companies for my portfolio over buy-to-let property. Some other opportunities include Rightmove and PayPoint.
I believe that by using this strategy, I have a much higher chance of building a seven-figure fortune than using rental property. If owned inside a Stocks and Shares ISA, equities also attract tax benefits as well. These certainly aren’t available with buy-to-let property.