Buy-to-let property and stocks are two of the most popular investments in the UK. Over the long term, both have made investors a lot of money.
Here, I’m going to look at the outlook for buy-to-let and stocks in 2021. I’ll also explain where I’ll be investing my own money next year.
Buy-to-let vs stocks: 2021 outlook
During the last half of 2020, the UK experienced a property boom due to stamp duty cuts. This momentum is expected to continue into 2021. However, the second half of the year could be more challenging for the UK property market. That’s because the furlough scheme is set to end in April.
Overall, Rightmove forecasts national average house price growth of 4% in 2021 while Knight Frank and Savills expect 1% and 0% respectively.
Turning to stocks, most market commentators are generally quite optimistic about their prospects for 2021. The International Monetary Fund (IMF) expects global economic growth of a high 5.4% next year as the world recovers from the coronavirus. This should provide a nice backdrop for stocks.
Of course, the beauty of the stock market is that there are always amazing opportunities for stock pickers. Just look at the performance of Tesla last year. While most stock indexes struggled, it rose 690%, turning $10,000 into nearly $80,000. As CNBC’s Jim Cramer said: “There’s always a bull market somewhere.”
Yields
Regarding yield, buy-to-let continues to offer an attractive return in the current low-interest rate environment, although yields depend on location. In Scotland and the North East, for example, yields average 7.3% and 6.6% respectively, according to Zoopla. But in London, the average yield is only 3.1%. Overall, average UK rental yields are about 5.2%.
The yields from stocks, as a whole, aren’t as attractive as they were in recent years as many companies cut their dividends in 2020. However, plenty of UK companies such as Unilever, Diageo, and Legal & General do still pay attractive dividends. It’s not hard to assemble a high-quality portfolio of UK stocks that yields 3-5%.
Tax breaks
Buy-to-let is way less attractive from a tax point of view than it used to be. Today, it’s no longer possible to deduct mortgage expenses from rental income to reduce tax liabilities.
By contrast, stock investors have the opportunity to take advantage of a number of attractive tax breaks. For example, investing £20,000 in a Stocks and Shares ISA in 2021 is completely tax-free. All gains and income will be sheltered from the taxman. Alternatively, an investor could save into a Self-Invested Personal Pension (SIPP) and receive tax relief.
Hassle and costs
Finally, let’s talk about the hassle and costs. Buy-to-let is very much a hassle. Owners need to worry about finding the right tenant, property maintenance, government regulation (energy efficiency ratings etc.), and selling a property can take time. Transaction costs are also high. Legal fees are significant and buy-to-let owners face higher stamp duty charges.
By contrast, stocks are much less hassle. You can open an account in minutes and once you’re invested, you can sit back and relax. Costs are also very low these days.
I’m picking stocks over buy-to-let in 2021
Weighing everything up, stocks are where I’ll be investing in 2021. They’re much less hassle than buy-to-let, more cost-effective, and the economic environment should provide a nice backdrop for stock markets. Plus, there’s always the chance I could discover the next Tesla or Amazon.