Investing in buy-to-let properties could produce disappointing returns, as well as higher risks, compared to buying FTSE 100 shares.
The UK housing market appears to be overvalued in many regions, while the prospect for rental growth may be inhibited by the uncertainty caused by Brexit. Furthermore, the risk of further regulatory and tax changes could hold back investor sentiment towards the sector.
By contrast, the FTSE 100 appears to offer a wide margin of safety, with many of its members having bright growth prospects. As such, now could be the right time to invest in a diverse range of FTSE 100 shares.
Growth potential
With Brexit still hanging over the UK economy, and expected to remain so over the coming months, rent rises may be somewhat subdued for many landlords. With consumer confidence weaker than expected given wage growth data, the rate of rental growth seen in previous years may not be recorded in the medium term.
The FTSE 100, meanwhile, appears to offer strong growth potential. For example, a number of its members have exposure to fast-growing economies such as those of the emerging countries worldwide. They could benefit from an increase in demand for a variety of products, with consumer goods being an area where growth may be particularly strong.
Value
With house prices relatively high compared to average earnings, the scope for further house price growth may be somewhat restricted. The prospects for house price growth may be even more limited due to the prospect of rising interest rates, with this potentially making property prices even less affordable, certainly for a variety of first-time buyers.
By contrast, the FTSE 100 appears to offer excellent value for money at the present time. It has a dividend yield of around 4.5%, while it trades only a few hundred points higher than it did almost 20 years ago. Since all asset prices move in cycles, this suggests the index may now experience strong performance from a capital growth perspective over the coming years.
Risks
With the potential for void periods and a failure by tenants to pay rent, there are obvious risks facing landlords. Owning a large number of properties is a means of reducing risks, but the cost of doing so may mean it’s not possible for all landlords to follow this path.
The FTSE 100 offers the chance to diversify among a wide range of stocks at minimal expense. Regular investing could be a means for smaller investors to achieve this goal, costing as little as £1.50 per trade to buy shares in a stock or fund. Doing so may help to reduce volatility and risk of loss, while also providing exposure to multiple regions and industries that could lead to higher returns over the long run.
