Investing in property may seem like a more obvious choice than buying shares in FTSE 100 stocks for UK investors. After all, there’s a shortage of housing which could mean that demand continues to outstrip supply for a number of years.
The reality though, investing in property through a buy-to-let scheme is challenging. It may deliver high levels of capital growth in the long run, but lacks the liquidity and diversity of FTSE 100 shares. As such, buying FTSE 100 shares could be a better idea when seeking to boost your retirement savings.
The process of buying and selling property in the UK remains long and arduous. There are risks in every step of the process, and this can mean that an investment in property is highly illiquid. For example, finding a buyer can be challenging, while capital gains can eat away at potential profit alongside estate agent/listing fees. In the event that capital is required in a matter of days or weeks, property can provide little help due to the time it takes to realise an investment.
Shares, in contrast, can be sold at the click of a mouse. Three working days later, the cash is available to be withdrawn, and can be used to fund an emergency, or top-up an income in the short run. The cost of selling shares is now under £15 per trade. This means that an investor in the FTSE 100 has considerably more financial flexibility than a counterpart who owns one or more investment properties.
While many investors dream of owning a large portfolio of properties, the reality is that rising house prices mean that many property investors have a limited portfolio. In many cases, a large proportion of an individual’s retirement savings are invested in just one property. This equals relatively high risk, since a tenant can fail to pay rent, or there could be maintenance/structural issues with the property that require repairs. Similarly, having just one property exposes an investor to the risk that a particular area becomes less desirable over time. This could hurt the return on their investment.
The FTSE 100, by contrast, offers significant diversification benefits. The Index generates 75% of its income from non-UK markets, and it’s relatively straightforward to build a portfolio of 20 or more shares with relatively limited retirement savings. As such, it’s possible for an individual to capitalise on the growth potential of countries such as China and the US with relative ease. This could lead to stronger returns in the long run, as well as lower risk versus a buy-to-let.
The long-term prospects for the housing market may remain positive. But with shares offering lower risk and the potential for a higher return through diversification, they could be a better place for retirement savings. And with greater liquidity, they may offer greater financial flexibility to an investor over the long term.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.