Buy-to-let? I’d buy stocks and shares for passive income instead!

Letting out a property as a way of generating passive income once appealed to me. But I came to realise that the stock market would always be the best option for me personally to make money on the side. 

Great in theory

Now, don’t get me wrong; the arguments for buy-to-let look pretty compelling on paper. The idea of someone paying my mortgage combined with the gradual (or perhaps not so gradual) rise in the property’s value is undeniably attractive.

The reality, of course, would be a lot different for me. The average cost of a house in the UK hit £255,000 at the end of December, according to Nationwide. That’s all well and good were I already invested. But becoming a landlord from scratch means I’d need a big deposit. The prospect of rising interest rates isn’t exactly appealing either. 

I also don’t feel I have time to find tenants who will consistently pay their rent (and not prove a nuisance), nor to keep the flat or house in good working order throughout the time I own it and abide by all the regulations imposed on landlords. So, I’m leaving buy-to-let to others.

A better source of passive income

To be frank, investing via the stock market appeals to me as it involves a lot less fuss. Assuming I’m comfortable with the sort of price volatility we’re experiencing right now, I simply need to buy and hold investments that deposit money in my account on a regular basis. In other words, I’m looking for shares and funds that pay dividends. And there’s no shortage of options that do just this. Given that I did once consider buy-to-let, however, it’s worth highlighting that some will allow me my property fix.

Real Estate Investment Trusts (or REITS) are companies that invest in and manage property portfolios. These could include residential homes, warehouses, self-storage facilities, healthcare buildings, office space and retail stores. The choice is staggering. And all allow me to become a landlord just through buying some shares. 

Another great thing about holding REITS (actually, any dividend stock) is that I don’t need to pay any tax on the passive income if I keep them in a Stocks and Shares ISA. This gives me more cash to reinvest and grow, assuming that’s what I choose to do. And over the long term, equities have consistently been the best-performing asset I can own.

Safety in numbers

Of course, it’s worth making it very clear that no passive income stream is ever guaranteed. A company may decide to suspend paying dividends if earnings hit a sticky patch. It may also refrain from increasing the payouts if it needs to pay for things that will allow the business to grow. 

One way of protecting myself from this eventuality is to hold a diversified bunch of shares and funds. This way, the pain caused by one company cutting its dividend can be mitigated by others perhaps increasing theirs.