This week’s meltdown has put yet another nail in the coffin of buy-to-let, which now looks like a costly way of generating passive income in retirement. I have favoured shares for some time, and this only confirms my view.
Buy-to-let was once a glorious investment, as property prices and rental income rolled ever higher. It has slowly been destroyed by higher taxes, reduced allowances, tougher regulations, and now rising interest rates.
I’m buying stocks for passive income
Stock markets have also taken a beating this year, but they still look like a far better way of building a steady stream of passive income to me.
A portfolio of shares seems much easier to manage than a buy-to-let property. I can buy and sell shares in seconds, take all my returns free of tax inside a Stocks and Shares ISA, then basically ignore them, if I choose. By contrast, buying property takes months, has high upfront and ongoing costs, and involves a lot of bother in finding tenants, completing tax returns, and paying tax to HMRC.
I wouldn’t buy a property right now even if I could get a mortgage, but I am happy to go hunting for bargain UK shares. The FTSE 100 has fallen this year, by 8.73%. That means I can buy top companies on the index at low prices.
Barclays now trades at just four times earnings and yields 3.97%. Tobacco maker Imperial Brands Group trades at 7.6 times earnings and yields 7.37%. Mining giant Rio Tinto is valued at just four times earnings, and its yield is a staggering 15.08%.
The FTSE 100 can even give me exposure to the property market through a housebuilder such as Barratt Developments. It trades at 4.5 times earnings and would give me a passive income of 9.95% a year.
Tax-free returns inside a Stocks and Shares ISA
Of course, buy-to-let could bounce back. If house prices fall sharply, there could be some real bargains around. Mortgage rates may only see a temporary spike. Good property is still in short supply, and that drives tenant demand.
Shares can be risky. Global markets are in meltdown right now. Dividends can be cut, at any time. Profits could fall, and share prices follow.
Barratt, as a house builder, is exposed to a house price crash. Its share price is down 11.51% in the last week alone. Over five years, it has fallen 38.93%. If the Bank of England hikes interest rates to 6% as many predict, demand for new builds will fall because buyers will no longer be able to afford them.
Yet I think UK shares are a much better way to build the passive income I’m after. My strategy would be to buy them at today’s dirt-cheap prices, and hold them for years and years.
I will build a balanced blend of a dozen FTSE 100 stocks or so, to spread my risk. When I retire, the passive income they pay will underpin my pensions. It all seems a lot more straightforward than buy-to-let.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
