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Why I believe Royal Dutch Shell beats buy-to-let every time

Buy-to-let investing has generated a tremendous amount of wealth for investors over the past few decades. Favourable tax treatment and light-touch regulation have helped everyday investors make money from this asset class with relatively minimal effort. Falling interest rates, rising rents and rising property prices have helped as well.

However, times are changing for landlords. The government is clamping down on tax loopholes and bad landlords, interest rates are starting to push higher, and property prices are stagnating. 

These changes mean it is becoming harder to make a comfortable living from buy-to-let, and I believe this chill blowing across the sector is only going to intensify in the years ahead, especially if a Labour government gets into power.

Time to dump buy-to-let

Considering the above, I think stocks are now poised to outperform buy-to-let going forward, and one of the companies that I believe is best positioned to make money for investors no matter what the future holds is Royal Dutch Shell (LSE: RDSB).

According to my numbers, buy-to-let investors getting into the market today will receive an average return on their investment of around 4% per annum. This is only an average estimate and excludes factors such as tax and maintenance costs. In reality, the average annual cash return received is likely to be much lower, although rental yields do vary by region.

Nevertheless, when it comes to annual cash distributions, Shell wins hands down. Today shares in the company support a dividend yield of around 5.9%. The firm has been paying a dividend to investors since the Second World War. There are several other advantages to owning Shell shares as an income investment compared to buy-to-let.

First of all, it has tax advantages because you can own Shell shares in an ISA. Secondly, once you have bought the shares, there is no obligation to do any further work. Unlike buy-to-let, where you have a legal responsibility to ensure your property is maintained to a reasonable standard, and where you need to find suitable tenants. All of these costs add up, both regarding money and time spent fixing problems. All you need to do with Shell is buy and hold. It really is as easy as that.

Capital growth 

There is more to buy-to-let than just receiving rental income. Capital growth has also been a major contributor to returns over the past few decades. Whether or not this trend will continue depends on many different factors and how they will influence the UK economy. In comparison, Shell should be able to grow no matter what happens to the UK.

With its international operations, the company is an integral part of the global energy infrastructure. And by purchasing shares in the business you can gain exposure to an international portfolio of assets, rather than a few properties in the UK. To be able to build a property portfolio that is as diversified as Shell’s operations, you would need many millions of pounds to invest all over the world.

Overall, investing in buy-to-let property has been a sensible way to save for the future over the past few decades, but with the potential for gains from this asset class now deteriorating, I reckon equities are a better buy for long-term investors. Shell, in particular, stands out to me.

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Rupert Hargreaves owns shares in Royal Dutch Shell plc. 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.