Buy-to-let property may be popular with some investors, but I’m avoiding it and here’s why.
Firstly, following the recent performance of house prices across the UK, rental yields in many buy-to-let property hotspots have plunged. This has made it harder to earn a decent return from the asset.
Second, tax changes. During the past few years, the government has made some significant changes removing the advantages rental investors used to enjoy. This has once again made it harder to earn a decent return from the asset.
Third, higher charges and regulation. The government has also improved tenants’ rights over the past few years. This was long overdue as some landlords were ignoring their responsibilities as business owners. Unfortunately, these changes have increased costs for everyone.
Changes to the amounts letting agents are allowed to charge tenants have also impacted landlords. Once again, I think these changes were long overdue, and they’ve helped improve the state of the market overall. Still, the changes have increased landlords’ costs overall too.Â
When I look at all of these changes, I’m convinced buy-to-let is no longer the golden goose it once was. That’s why I’m avoiding the asset class in 2021. I’d rather buy stocks and shares instead.
Buy-to-let alternative
There are a couple of crucial reasons why I believe stocks and shares are going to be a better investment than buy-to-let in 2021.
For a start, stocks have achieved higher returns. Historical data shows me that since 1990, the FTSE 250 has returned around 12% a year. I think I would be hard-pressed to earn the same return with buy-to-let property.
Stocks and shares can also be owned in an ISA. This comes with considerable tax benefits. No income or capital gains tax is due on profits earned in an ISA. I do not even need to declare the ISA on a tax return.
Stocks and shares can also be left alone. If I own a simple index tracker fund, such as a FTSE 250 tracker, all I need to do is buy and forget the asset.
Personally though, I favour a blend of index trackers and single stocks. Stocks like the blue-chip consumer goods giant Unilever and dividend champion Royal Dutch Shell sit in my portfolio alongside index funds.
I reckon this offers the best of both worlds, a mix of growth and income from the single blue-chips, as well as low-cost market tracking from the fund.
The bottom line
All in all, I’m avoiding buy-to-let in 2020 because I believe stocks and shares present a much better option. The tax advantages and higher potential returns suggest that owning these assets will prove more lucrative in the long run.
They also come with the bonus of diversification, which is very challenging to develop with rental property, unless one has millions of pounds to invest!