While house price growth continues to be positive, a variety of risks currently face buy-to-let landlords. They include additional costs, tax changes and the uncertain outlook for the UK economy. As such, relying on buy-to-let investments in retirement could be a major mistake.
In contrast, the stock market may offer a higher net return, with there being a variety of tax-efficient products available. Since stock market valuations declined last year, it may also be possible to generate a high income return from a diverse portfolio of shares.
Tax changes are set to lead to a significant fall in returns for landlords. Tax changes include a stamp duty surcharge of 3% for second homes, as well as the end of mortgage interest deductions from rental income for many landlords. Together, these changes could lead to a squeeze on landlord incomes at a time when tenancy fees are coming to an end. Since estate agents will need to recoup the lost income somehow, fees for managing properties could realistically rise over the medium term.
Another cost facing landlords is more demanding energy performance requirements. This could require landlords to invest in their property in order to make it more energy efficient. At a time when the prospects for rental growth may be somewhat limited as a result of weak consumer confidence and an uncertain outlook for the UK economy, this may mean that returns available on the sector are disappointing.
Stock market prospects
Although a number of UK-focused shares have been impacted negatively by weak consumer confidence, the downturn in the FTSE 100 and FTSE 250 during 2018 may mean that there are wide margins of safety on offer. This could suggest that, even though many stocks have risen so far in 2019, investors have factored in the potential risks facing sectors such as retail as the Brexit process moves ahead.
Furthermore, while buy-to-let investing requires an investor to be subject to the ups-and-downs of a specific area, it is possible to invest in a variety of regions, industries and types of company through tax-efficient accounts such as an ISA. This could significantly reduce the risks for an investor, as well as improve their returns due to the growth prospects of emerging economies such as China. This may mean that investors are able to put in place a more liquid, lower-risk portfolio that has superior growth potential when compared to a buy-to-let investment.
It appears as though there is a constant move to limit the profitability of the buy-to-let sector, whether through tax changes or additional charges that are payable by landlords. The impact of this on total returns could be significant over the long run, and may mean that the opportunity cost of buying property versus shares is growing.
Therefore, relying on a buy-to-let investment in retirement could be costly and stressful, while buying a variety of shares may be far simpler and more rewarding in the long run.
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