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Why a FTSE 100 tracker looks set to thrash buy-to-let

Buy-to-let investors have done well with returns from rental income and rising property prices. However, the buy-to-let market is less attractive than it was. Rising interest rates could drag on property values, and the government’s new tax regime surrounding buy-to-let makes it pay less for landlords.

My Foolish colleague Royston Wild punched out an article explaining how you can make the property rental business more attractive, by setting up a limited company to own and run your property investments. But if you’re working in another career, do you really want all that hassle?

Is it worth the hassle and risk?

Physically owning property, developing it, maintaining it, finding tenants, collecting rent, arranging insurance, dealing with bad debts, and all the many other things you need to do to buy, hold and rent out property is all a big pain if you are already working. And the more you give an agent to do, the higher your costs will be. Buy-to-let means running a proper business, and it’s a long way away from the kind of passive, armchair investing that I believe will trounce returns from buy-to-let in the years to come, anyway.

What if you go to all the time and trouble to set up a buy-to-let business and property prices fall by 30% and stay there for 10 years or more? It could happen, and all you’ll have is the limited amount of rent you can collect while you wait to move out of the red and into the black again. Your money could be underwater and ‘dead’ for years. With property prices riding so high today in terms of affordability against the average wage, I reckon there’s more chance of a plunge in property prices, or at least stagnation, than there is the chance of meaningful rises in the years ahead.

The next great opportunity for investors?

Instead of buy-to-let, I think the next great opportunity for investors is to invest in the stock market. You don’t need to spend hours and hours researching, choosing and monitoring individual shares. You don’t even need to pick managed investment funds and take a chance on the investing prowess (or lack of it) of individual fund managers. Instead, you can buy the market itself by investing in a low-cost, passive index tracker fund, such as one that follows the FTSE 100 index.

Whereas I’m bearish on returns from buy-to-let for the next couple of decades, I’m bullish on the potential of the FTSE 100. Between 1984 and 1994, the index more than trebled in value, and some market watchers think it’s poised to perform like that again. I think that theory is attractive and it makes sense to me after a long period of economic recovery after last decade’s financial crisis.

However, you can profit from an FTSE 100 tracker regardless of whether it rises a lot. Choose a tracker fund that reinvests the dividends along the way and you’ll be on the road to compounding your money. If you drip regular money into your fund you’ll iron out the ups and downs of the index. That’s because you’ll get more for your money in the dips and won’t be investing all your funds on the highs. You’ll avoid the hassle of buy-to-let with a good chance of better performance from your investment.

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Kevin Godbold 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.