As I plan to stop working in the next 10-15 years, I’m keen to accelerate my efforts to generate passive income in retirement.
So far, I have mostly done this by investing in UK dividend shares, but as house prices wobble I’m wondering whether buy-to-let will offer an opportunity again.
I have shunned buy-to-let for years. As well as the sheer effort of buying and maintaining a property, and finding and replacing tenants, it’s expensive. Investors have to pay a 3% stamp duty surcharge, while higher rate tax relief on mortgage interest has been scrapped.
Full speed for passive income
Another disadvantage is that all rental income is subject to income tax, while any house price growth will attract capital gains tax. By contrast, if I invest in top FTSE 100 companies inside a Stocks and Shares ISA, all my income and capital gains are free of tax for life.
That makes life simpler as well, because I do not have to mention them on my self-assessment tax return. Buy-to-let involves a lot more paperwork. But I’ll admit there’s excitement in buying bricks and mortar, and over the long term UK property has been a hugely rewarding investment.
I wouldn’t buy today though because property prices have not actually fallen so far, while share prices have. The FTSE 100 is down 8.2% this year, and trades at 6,890. That is a better performance than most global markets, but it still leaves the index packed with top blue-chip shares trading at low prices.
These bargains are available right here, right now. If I wanted property market exposure, I could buy housebuilder Barratt Developments. It now trades at an astonishingly low 4.18 times earnings, while paying passive income 10.38% a year. There aren’t many buy-to-lets that would give me a double-digit yield.
Given the ease of buying shares, this looks a much more tempting option. I could open my investment platform and complete the trade in less than a minute. By comparison, choosing a property would take hours trawling Rightmove, and between three to five months to complete.
Naturally, there are risks to buying shares. The stock market could have further to fall, given current economic problems. Customers are being squeezed, so are profits. Borrowing costs are rising. Things are likely to get worse before they get better.
I favour UK shares over buy-to-let
Yet I can reduce some of the dangers by investing in a spread of top UK dividend paying shares. I can further spread my risk by investing in different sectors, not just housebuilders. I certainly couldn’t afford to buy a spread of buy-to-let properties.
Also, I don’t have to borrow money to buy UK shares, as I would with a property. I just purchase them (in seconds) whenever I have cash to spare. There’s no leveraging involved, which further reduces risks.
My position could shift if we see a major house price crash, but that will take several years to play out. I reckon it makes more sense to buy shares today, and reinvest those dividends for growth over the next 10-15 years. Then when I finally retire, I can draw my dividends as passive income.
That certainly looks like a better approach than becoming an amateur landlord, although every investor is different.