There’s no denying that over the past few decades, buy-to-let as an asset class has generated a considerable amount of wealth for investors. However in recent years, the returns available from buy-to-let investing have slumped.
According to research conducted by property investment specialists BondMason, between 2014 and 2016, buy-to-let investors saw an average net return of between 5.5% and 5.1% per annum from rental income and capital growth, but after deducting mortgage expenses and tax.
Following the government’s shake-up of taxes applicable to buy-to-let investors, which began in 2016, the profit available from buy-to-let investing has contracted considerably. Combined with a slowdown in the capital growth of properties, an increase in the tax burden means the average total net return available from buy-to-let investing declined to around 2.7% in the 2017/18 tax year, and just 0.7% for the tax year ending April 5.
Assuming property prices return to growth in the years ahead, then the analysts at BondMason expect the returns from buy-to-let investing to pick up going forward, although they’re not expecting much more than an average annual return of around 2.5%.
A clear trend
These returns are only a snapshot of the buy-to-let industry, and the actual performance will undoubtedly vary significantly from investor to investor due to factors such as where the rental properties are located and the amount of leverage used.
Nevertheless, the numbers clearly illustrate buy-to-let investing is no longer the guaranteed gold mine it once was. These numbers also don’t take into account unforeseen costs, such as maintenance and other transactional expenses involved with buying a property and finding a tenant.
By comparison, over the past two decades, the FTSE 250 has produced an average annualised return for investors in the region of 10%. Now I can’t guarantee this return will continue for the foreseeable future (last year, for example, the index lost 13.4%), but I firmly believe the FTSE 250 will continue to outperform buy-to-let over the long term.
The better buy
There are two main reasons why I believe the FTSE 250 is a better long term buy. Firstly, this is an index of 250 of the largest companies listed on the London stock market. Many of these businesses have large international divisions and pay a dividend to shareholders so investors can sit back and pocket a regular income as well as benefiting from capital growth, without having to worry about the tax or regulatory environment here in the UK.
Secondly, the FTSE 250 gives you exposure to a range of companies operating in a variety of industries across a range of countries. With buy-to-let investing, you’re relatively limited to where you can invest and the diversification you can achieve (unless, of course, you have tens of millions of pounds to spend).
The bottom line
So overall, as the returns from buy-to-let investing flag, I think a better place to invest your money is the FTSE 250. The portfolio of fast-growing businesses with international exposure has a much brighter outlook, in my opinion, compared to the private rental sector here in the UK, which seems to be under attack from all sides.
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Rupert Hargreaves owns no share 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.