The Motley Fool

Why I’d dump buy-to-let and head into this investment opportunity today

With house prices in the UK having risen significantly in the last couple of decades, the appeal of buy-to-let has been high. Added to this has been a favourable interest rate environment, as well as a lack of new supply, which has led to a variety of investors enjoying high returns.

Now, though, the risks involved with buy-to-let seem to be increasing. An uncertain outlook for the UK economy may mean that rental growth stalls. It could even mean rental arrears increase. Affordability remains a challenge for a large number of first-time buyers, which could lead to more modest growth rates in the coming years.

As such, now could be the right time to consider investing in property through listed companies in the FTSE 100 and FTSE 250, rather than through a buy-to-let. The risk/reward ratio from doing so could be much more favourable.

Diversity

While investing in a buy-to-let means purchasing one property in one location, investing in listed property companies can spread the risk among a large range of assets. For example, a number of FTSE 100 and FTSE 250 REITs have a mix of commercial and residential properties in a wide variety of geographies. This could help to reduce risks such as a tenant failing to pay rent. In a buy-to-let, such a scenario could be catastrophic for the investor involved – especially if they have only a small property portfolio. But for a major listed property company, it’s likely to be offset by rising rents elsewhere.

Value

As mentioned, the price of property in the UK has risen significantly in the last couple of decades. This has caused the house-price-to-earnings ratio to rise to its highest level since records began. In previous years, this has led to a disappointing period for house prices. For example, property prices fell heavily in the late-1980s as well as during the financial crisis. This could mean that the capital growth available within the buy-to-let sector is limited.

In contrast, a number of FTSE 350-listed REITs trade on low valuations. It’s not especially difficult to unearth a large number of property stocks that trade below net asset value. This suggests there may be a wide margin of safety on offer, and their return potential may ultimately be higher than owning a single property through a buy-to-let.

Simplicity

As well as having a more attractive risk/reward ratio, listed property companies may offer greater simplicity for investors. They can be purchased through a SIPP or an ISA, which means they’re tax efficient ways of making gains on property. And with it possible to buy them with a couple of clicks of a mouse, they may provide a more attractive ownership experience. As such, now could be the right time to ditch buy-to-let and buy into FTSE 350 property stocks.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.