While buy-to-let has been a popular means of generating wealth over recent decades, it could become increasingly risky in the coming years. Many property investors have become used to low interest rates which are unlikely to remain in place over the long run. Similarly, a weak consumer outlook may extend void periods and could even lead to increased arrears.
As such, avoiding buy-to-let in favour of another investment opportunity could be a sound idea in my view. It could be a less risky option to make a million in the long run.
With UK interest rates likely to rise over the coming years, leverage could become increasingly undesirable. Many property investors have taken on significant loans to fund their buy-to-lets in previous years. With interest rates having been low for a decade, this has not caused too many issues in terms of rental income covering mortgage payments. However, even a modest rise in interest rates could hurt the returns of a wide range of landlords – especially since interest-only mortgages were common in previous years.
The buy-to-let sector may also be negatively impacted by a difficult outlook for the UK economy. It is due to grow at its slowest rate in almost a decade in 2019, while consumer confidence is at its lowest level in around five years. This could mean that landlords experience extended void periods, while arrears may also rise across the sector. Ultimately, this may mean lower returns at a time when there are various tax changes taking place that are set to cause a reduction in the net profit of buy-to-let investors.
As such, the risks involved in investing in buy-to-let appear to be rising. Slowing house price growth could also lead to a lack of capital growth relative to other major assets.
In contrast, the stock market could provide less risk than buy-to-let, as well as a higher return. From a risk standpoint, it is possible to invest in a variety of listed property stocks, as well as companies from a wide range of other industries. Doing so does not require a significant effort on the part of the investor, nor does it cost a great deal due to the growth in online sharedealing.
With the FTSE 100 offering a dividend yield of over 4%, it may have a higher net income return than a buy-to-let at the present time. Once taxes, service charges, agents’ fees and allowances for void periods have been deducted from the gross yield on property, the FTSE 100 could provide an investor with superior cash flow – especially if a product such as an ISA or a SIPP is used. And with there being no debt when investing in shares, the risk of life-changing losses may be lower.
While buy-to-let investing was popular in the past, it appears as though the stock market may now offer a superior risk/reward opportunity for the long run.
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