Buy-to-let? Investors should consider FTSE 100 shares instead

Buy-to-let property is immensely popular. Yet investing in FTSE 100 shares is a far simpler and potentially more lucrative alternative to building long-term wealth.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Mature people enjoying time together during road trip

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The companies among the ranks of FTSE 100 shares are some of the largest enterprises in the UK. And while there is some debate about investing in real estate versus the stock market, the latter has historically proven to be simpler and more lucrative for most individuals.

Obviously, buy-to-let can be immensely profitable. But it requires:

  • Expert knowledge within the property markets
  • Enough income to afford sizable mortgages
  • A mental map to navigate the labyrinth of taxes
  • And active management to find and retain tenants

Investing certainly isn’t a walk in the park either. But it does come with far fewer headaches:

  • Expert knowledge isn’t essential when investing in passive index funds
  • Cheap trading fees mean lower capital requirements to get started
  • Taxes can be entirely avoided by using a Stocks and Shares ISA

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.

Footsie shares vs being a landlord

Since 1984, FTSE 100 shares have generated an average annualised return of 7.6%, including dividends. That means for every £1,000, investors can realistically expect to earn £76 a year in the long run.

What about buy-to-let? In some regions of the UK buy-to-let can offer a significantly higher renter’s yield, net of taxes. But according to PropertyData, the average across the country is only 4.75%, or £47.50 a year.

Of course, this figure doesn’t consider the potential gains generated from increases in property prices. However, it’s important to remember that, just like the stock market, the property market does have a tendency to crash every once in a while. Not to mention selling real estate can take months compared to seconds for stocks.

That’s why, all things considered, investing in top-notch British businesses is the wiser move, in my mind.

Building wealth in the stock market

With the invention of index exchange-traded funds (ETFs), investors can easily replicate the performance of FTSE 100 shares with minimal effort. While annual management fees are involved, these are typically less than 0.1%, making them largely negligible.

Assuming the UK’s flagship index continues to deliver its average historical return moving forward, injecting just £500 a month for 20 years is enough to start generating around £20,210 in annual passive income from both share price gains and dividends. Not to mention the accumulation of a £280,290 pension pot in the process.

Of course, as with any investment, there are risks. And even the most skilled investor can watch their portfolio derail during a market crash, or correction.

In the long run, the British stock market has a 100% success rate of recovering before reaching new heights. However, depending on the timing of these adverse events, investors may have considerably less than expected. And inexperienced investors who prematurely sell shares in a panic may destroy wealth rather than create it.

Nevertheless, by taking a patient, disciplined approach, investing in FTSE 100 shares through an ETF has generally yielded better results for novice investors versus buy-to-let.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing For Beginners

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing For Beginners

With my first £1k, I’d buy this growth stock but steer clear of this disaster

Jon Smith highlights an unusual growth stock that he feels could do very well, while staying away from a stock…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Surprise! The FTSE 100 is closing in on 8,000 points and a new record

It's a story of better late than never for the FTSE 100 as it finally begins to move higher in…

Read more »

Investing Articles

Forget buying lottery tickets! I’d rather follow Warren Buffett and build passive income

They say statisticians don't play the lottery for obvious reasons. Fortunately, Warren Buffett has shown us a great way of…

Read more »

Investing Articles

1 FTSE 250 stock that’s on my buy list this month

The FTSE 250 is leading the charge among UK indexes, rising by double-digits in the last six months. But this…

Read more »

Investing Articles

£5,000 in cash? Here’s how I’d aim for a second income worth £3,815

Millions of us worldwide invest in stocks for a second income. Here, Dr James Fox picks one stock he thinks…

Read more »

Buffett at the BRK AGM
Investing Articles

Under £1,000 in savings? I’d use the Warren Buffett method to start investing now!

Our writer explains why he would learn from an investing master in trying to keep things simple if he was…

Read more »