Investing in bricks and mortar has long been considered a reliable path to wealth accumulation through buy-to-let properties.
Understandably, the allure in part stems from the tangible and familiar nature of real estate. After all, investors can see, touch, and even walk through the assets they own.
Buy-to-let allows investors to leverage borrowed capital (typically in the form of a mortgage) to acquire properties. Subsequently, the expectation is that future rental income will cover costs and provide a consistent stream of passive income.
However, as the dynamics of the housing market evolve and economic landscapes shift, I think an alternative strategy for earning passive income could be superior. Namely, investing in UK stocks.
Buy-to-let vs stocks
As with buy-to-let, buying shares brings with it the potential for growth and income generation. But I think there are several distinct advantages that make investing in stocks a superior and more accessible strategy.
First and foremost, shares require less hands-on management compared to physical buy-to-let properties. To illustrate, property investment demands ongoing attention to maintenance, tenant management, and regulatory compliance.
In addition, buying shares offers greater diversification opportunities. With relatively small investments, I can access a range of companies across different sectors. I thereby reduce the risk associated with holding a single, large, and illiquid asset like real estate.
I could even choose to invest in a single investment fund that would give me exposure to a huge range of companies across different sectors and geographies. For example, the Vanguard FTSE All-World UCITS ETF is an exchange-traded fund made up of stocks of large and mid-cap companies in developed and emerging countries around the world.
Undervalued UK shares
However, to maximise returns while still being diversified I’d adopt a strategy of investing in a basket of individual British stocks.
Moreover, plenty of them appear significantly undervalued in my eyes. And I’m not alone in holding that view. Analysts at Fidelity and Goldman Sachs are convinced that UK shares are seriously cheap.
For example, some dividend stocks such as Legal & General (8.5% yield) and British American Tobacco (8.3% yield) are trading with relatively low P/E ratios (5.8 and 7.1 respectively) yet remain in robust financial positions. So much so that their whopping yields are still well covered by earnings at current levels.
Embracing a long-term mindset
Once I’d hoovered up a selection of undervalued shares, I’d aim to hold them for as long as possible. Ideally for decades.
By adopting a long-term investment horizon, I’ll not only give my portfolio the chance to recover from short-term setbacks but I’ll also be able to harness the power of compound returns.
This would be key to building a bumper passive income stream, at which point I wouldn’t be regretting my earlier decision to prioritise buying dirt-cheap UK stocks over investing in buy-to-let property.
