Should you invest in property or the stock market? It’s one of the oldest debates in investing. Everyone’s situation is different and there are pros and cons on both sides. However, I believe that for most people, the FTSE 100 offers a number of significant advantages over becoming a buy-to-let landlord.
Here, I want to share four reasons why I’m investing my spare cash in stocks, not rental property.
1. Cheap as chips
As anyone who has owned a house will know, it isn’t cheap. Repairs, maintenance, and even just decorating eat into your monthly budget. Big jobs such as new windows, heating or roof repairs can run into thousands — easily three to six months’ rent.
If you’re buying a house to rent, you’ll have to fund the mortgage when your property is empty. You may also need to pay letting agency fees, which can be 10% of monthly rent.
By contrast, investing in the FTSE 100 costs very little. You can invest in a cheap FTSE 100 index tracker fund inside a Stocks and Shares ISA for as little as 0.5% per year. Cheap as chips.
2. Tax free
Recent governments have made life more expensive for buy-to-let landlords. Rules relating to stamp duty and mortgage tax relief mean many landlords will soon be facing bigger tax bills. Long-term landlords may also have to pay capital gains tax bills when they want to sell up.
By contrast, investing within a Stocks and Shares ISA means you’ll never have to pay capital gains tax or income tax on the gains from your investments. You can invest up to £20,000 per year in an ISA (£1,666 per month) which is probably enough for most people who are saving from their salaries.
3. Start small, aim big
If you’re buying a house to rent you’ll need a substantial deposit, even if you’re able to get a mortgage covering 80% of the property’s value. If want to start investing today but you don’t have a lump sum, then saving for a deposit and getting a mortgage could take some time. It could be a year or two before you can make an investment.
By contrast, you could start investing in a FTSE 100 tracker fund today with as little as £25 per month. The FTSE 100 currently offers a dividend yield of about 4.5%. You can choose to receive this income or have it automatically reinvested into your fund to boost capital gains.
4. Buying and selling is instant
You can sell most stock market investments instantly. With houses, it usually takes months. I’ll be honest here. Being able to sell a long-term investment instantly isn’t always a good thing.
When times are tough, it’s often best to sit tight and wait for market conditions to improve. It’s easier to make that decision if you know that selling it will be slow and difficult. When you can sell at the click of a button, you’re more likely to make a rushed sale you later regret.
The final word
Getting into buy-to-let makes sense when the housing market is down and property is cheap. That’s not true today. In my opinion, anyone buying houses to rent today is pinning their hopes on rising house prices and cheap mortgages. That seems a risky strategy to me.
