Owning buy-to-let property used to be a surefire way to build wealth in the long run. However, recent rule changes have made it harder to earn a decent return in this industry. As such, I think owning a diversified portfolio of UK shares could be a better option for investors.
Today I’m going to explain why.
Buy-to-let drawbacks
Over the past five years, the government has overhauled the way buy-to-let property is taxed and regulated.
Investors now face higher tax charges and more regulation. The tenancy fee ban and deposit limit have also increased costs for property owners in some cases. All these changes have reduced the returns on offer for buy-to-let investors, while also increasing the risks. As profit margins have come under pressure, the prospects of landlords suffering substantial financial losses have increased. This may have made rental property unpalatable for risk-averse investors.
That’s why I would consider owning UK shares instead. Unlike rental property, stocks are easy to buy and sell, and experienced management teams run most listed companies. That means you don’t have to do any hard work yourself.
At the same time, many UK stocks currently offer better returns than buy-to-let property. For example, the average yield on a rental property in the UK after costs is around 2% to 3%. The average yield of FTSE 100 stocks, in comparison, is 3.6% today.
Time to buy UK shares
As well as higher returns, UK shares have other advantages compared to rental property.
It is easy to build a diversified portfolio with UK shares. In a few minutes, an investor could build a portfolio of UK shares such as GlaxoSmithKline, Unilever, and the London Stock Exchange.
This would give a portfolio of companies in three different sectors with broad global diversification and millions of customers. To build the same kind of diversification in a buy-to-let portfolio is virtually impossible.
Investors also have the option to buy shares with high dividends yields. Companies such as Direct Line and Phoenix Group currently offer dividend yields of between 6% and 9%.
If an investor bought these shares inside a Stocks and Shares ISA wrapper, there would be no further tax to pay on this income. Once again, it would be impossible to achieve these tax and income advantages with buy-to-let property.
The bottom line
So overall, while buy-to-let investing has produced large returns for investors in the past, the risks of owning rental property have increased over the past decade.
Therefore, holding a diversified basket of UK shares may be the better option. Equities could offer investors a higher return while also providing more diversification.
Further, owning equities inside an ISA is extremely tax-efficient, and anyone can buy a portfolio of stocks and shares. There’s no need for a large deposit or mortgage approval.
