Investing in buy-to-let property used to be an easy way to save for the future and generate a passive income.
However, recent government changes to the tax regime, rising house prices and additional regulation for landlords have made it harder than ever to earn a passive income from rental property.
Selling up
This explains why so many landlords are now selling up. According to HMRC, the number of buy-to-let landlords with multiple properties fell by 1.3% in the 2017/18 tax year. That’s the first decline since the financial crisis.
The number of landlords with multiple properties has fallen even though it is cheaper than ever to borrow.
Lenders are fighting over each other to offer the best rates, with a five-year fixed-rate mortgage now available with a rate of just 3.2%. That’s the lowest level since the financial crisis.
The problem is, landlords are now no longer allowed to deduct all of their interest expenses from rental income, and that’s increased their costs.
Therefore, the economics of buy-to-let investing have changed dramatically over the past three or four years. Consequently, it no longer makes sense for the average investor to own rental property.
The stock market
With this being the case, if you have £10,000 to invest, the stock market could be a better home for your money.
Stock market investors have one advantage available to them that buy-to-let investors don’t. They can open a Stocks and Shares ISA.
These products allow you to invest £20,000 a year in the stock market, with no tax obligations. Income and capital gains earned on investments inside a Stocks and Shares ISA do not attract either income tax or capital gains tax, however much money you make on your investments.
What’s more, the stock market has the potential to produce much better returns than buy-to-let property over the next few decades.
Over the past few decades, the FTSE 250 has produced an average annual return in the region of 12%. It is unlikely that this sort of performance will continue going forward, but it is not unrealistic to suggest that the index could produce high-single-digit per annum returns for the foreseeable future through a combination of income and capital growth.
Achieving the same sort of returns from rental property is not impossible, but with the cost of doing business increasing, it’s going to be difficult for the average landlord to hit this target.
Anyone can invest in the stock market. Indeed, most Stocks and Shares ISA providers will allow you to open an account with a nominal sum.
Plenty of options
A low-cost index tracker fund, tracking an index like the FTSE 250, is one way to invest in the market. You can also buy real estate investment trusts (REITs).
These trusts invest in property on your behalf. As a result, you don’t have to worry about managing the properties or paying any additional tax. All you need to do is sit back and collect the income stream.
Some of these trusts offer a dividend yield of 5% or more. This allows investors to build a ‘synthetic’ real estate portfolio with just a few clicks.
When held in a Stocks and Shares ISA, there’s also no additional tax to pay, of course. That dramatically increases the appeal of owning REITs instead of physical property.
