Buy-to-lets have been a popular way for investors to generate an income. Property has generally offered a gross income return above 4%, with a significantly higher level available in parts of the UK. As such, many investors have sought to generate a second income, or even a retirement income, from a property portfolio.
However, following the FTSE 100’s recent decline, it may offer a superior income investing outlook. A wide range of shares could offer good value for money, while providing high yields and better liquidity than a buy-to-let. As such, now could be the right time to buy FTSE 100 dividend shares, rather than property.
Since the FTSE 100 has fallen by around 1,000 points in the last eight months, there’s a number of stocks which appear to offer wide margins of safety. The index itself trades at a similar level to where it was 20 years ago, which indicates that it may be significantly undervalued. Although there are risks facing the world economy’s future, they appear to be priced into the valuations of a wide variety of UK-focused and global shares.
In contrast, the value appeal of property seems to be somewhat limited. Yields have gradually fallen in recent years as rental growth has been somewhat lacklustre, and government policies such as Help to Buy have inflated prices. The end result is that property prices are at their highest-ever level, compared to wages. This could indicate that the asset offers poor value for money at the present time.
With the FTSE 100 having a dividend yield of over 4.5%, it offers an appealing income return. Buying shares through a tax-efficient vehicle, such as an ISA or a SIPP, could mean that the headline yield is the same as the net amount received by investors. This is twice the current rate of inflation, as well as being considerably higher than the income returns on cash and bonds.
Property yields have fallen in recent years so that it may even prove challenging in some areas to obtain a 4% gross yield. Since the income from property investment is taxable, the net yield is likely to be significantly lower than 4% for many landlords. With taxes towards property investing becoming increasingly onerous, this situation could worsen over the medium term.
While selling assets is something that may not be an obvious thought to investors who are considering where to invest their capital, FTSE 100 shares offer excellent liquidity compared to property. It’s possible to sell FTSE 100 stocks and have the cash available within just a few days. This could allow an investor to capitalise on investment opportunities which may present themselves in a short space of time. Property, meanwhile, can take months to sell – especially with Brexit fears being high at the present time.
As such, while buy-to-lets have proved popular for income-seeking investors in the past, the FTSE 100 now appears to offer superior investing potential over the long run.
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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.