According to property agents Savills, property affordability constraints have driven more people to rent rather than buy their homes in recent years.
The firm reckons low interest rates have led to cheaper borrowing, and all that demand for buying property has pushed selling prices higher. And as prices have risen, Savills research shows that, across Europe, “the homeownership rate has fallen from 77% to 75% in the last decade.”
Maybe there’s an opportunity to get into the buy-to-let business if demand for renting property is rising. But I wouldn’t. At least not by starting from scratch and taking on a mortgage to buy a property to rent for the first time.
Great yields
Setting up and running a hands-on buy-to-let business would involve a lot of expense and inconvenience. But my first reason for shunning the idea is because I reckon there’s a more compelling opportunity with shares in the stock market.
The FTSE 100’s dividend yield is running around 4% or so. And plenty of individual names are yielding more than that, such as energy company SSE, smoking products provider British American Tobacco and pharmaceuticals giant GlaxoSmithKline.
I reckon a low-cost FTSE 100 index tracker fund would make a good vehicle for compounding gains if you roll the dividend income back into your investment. And you can take a similar approach with carefully selected individual company shares.
But you don’t have to stick with the FTSE 100 because it may be possible to harvest bigger gains if you look at other indices such as the FTSE 250 index of mid-cap shares or even America’s S&P 500. There are so many passive index tracker funds available these days, that investing beyond the FTSE 100 is easy to do, even if you don’t want to work hard at selecting individual company shares.
Low cost
Investing in shares and share-backed investments, such as managed and tracker funds is straightforward and low-cost compared to taking on buy-to-let property. And that’s my second reason for preferring shares over property. With a few clicks of a computer mouse, I can put my money to work in shares. And with a few clicks more, I can usually get it out again if I need to.
I think that kind of flexibility is worth having. Shares and share-backed investments give me the opportunity to harvest a dividend yield and to potentially gain from rising share prices. I think that compares with rental yields and property-price gains in the real estate market, but without all the expense and hassle that comes with buying, owning and selling property.
Share-backed investments can be less time-intensive than owning property, particularly if you opt to invest in managed and passive funds rather than individual company shares. And that’s my third reason for preferring shares over physical property. Life’s too short for me to spend all my spare time running a property business when similar investment outcomes can be achieved with passive, share-backed investments.
