Buy-to-let (BTL) property is a popular investment among UK investors and many have made a lot of money through BTL in recent years.
At the same time, stock market investing is also a popular wealth creation strategy and there are plenty of investors who have made excellent money from stocks. For example, anyone who invested £5,000 in Fevertree Drinks four years ago would be sitting on a gain of nearly £50,000 right now.
But what’s the best investment right now? Do I think investors should stick their money into BTL or invest their cash in the stock market?
Capital gains
In terms of the outlook for near-term capital gains, it’s hard to get a read on either investment right now, in my view.
BTL has its challenges. Brexit adds uncertainty over house prices. They’ve fallen already and they may continue falling. You don’t want to be faced with negative equity.
Similarly, there are issues that could impact the stock market. We’ve just had a 10-year bull market run. Global growth is slowing. Stocks just had a great first quarter (the FTSE 100 rose 11%) but there’s no guarantee it will keep rising.
Yields
Looking at yields though, the stock market appears to have an edge over BTL at present. Of course, some areas of the UK do offer very attractive BTL yields. However, the average yield across the UK is really not that flash once expenses are factored in. For example, in London, you may only be looking at a net rental yield of around 3%.
By contrast, as I highlighted recently, there are some fantastic yields available on UK stocks right now. It’s not hard to put together a portfolio of blue-chip FTSE 100 stocks that yield 5-6%. And that income can be tax-free if the stocks are in an ISA. So, stocks have a clear advantage here.
Tax breaks
Tax is something else to consider. In recent years, the government has clamped down on BTL and buyers are now faced with the toxic combination of higher stamp duty and lower tax deductions, meaning that BTL is way less attractive than it used to be.
By contrast, through a Stocks & Shares ISA or a SIPP, you can invest in the stock market and your gains and income will be tax-free, so stocks win here.
Government bonuses
Additionally, the government is literally handing out free money to those who are willing to invest in stocks until retirement.
For example, invest in a SIPP and the government will top up your contributions by 25% if you’re a basic-rate taxpayer. Similarly, the Lifetime ISA also comes with 25% bonus top-ups. That’s another big plus for stocks.
Hassle
Finally, consider the hassle factor. BTL is certainly more hassle than it used to be because there’s a lot more regulation (minimum energy efficiency ratings, multiple occupancy rules etc.) now. Add in the fact that it could take months or even years to sell a property and it seems like a lot of work.
By contrast, it’s never been easier to open a stock trading account and you can usually access your money quite easily (depending on your account) if you need it too.
Overall, I think the stock market beats BTL right now. High yields, tax-free investing, bonus money, and less hassle… to my mind, stocks are the clear winner.
