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FTSE 100 vs buy-to-let: which could make you a millionaire first?

Over the last few decades, investors in the FTSE 100 and in buy-to-let have been able to generate handsome returns. For example, the average UK house price has risen from around £32,000 in 1984 to reach over £212,000 today. That’s a rise of around 7.9% per year.

The FTSE 100, meanwhile, has risen from 1,000 points just over 25 years ago to trade at around 7,500 points today. That’s an annualised gain of 8.4% per year.

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While both asset classes have performed well over the long run, the FTSE 100 may now have an advantage versus buy-to-let in terms of its valuation. Furthermore, it may offer less risk when the political and economic outlook for the UK is somewhat uncertain.

Return potential

While buy-to-lets have been a highly profitable investment for a wide range of people in recent decades, their future prospects may be less appealing. House prices are now towards their highest ever level when compared to average incomes. This means that many first-time buyers are being priced out of the market, which could be why housing transaction volumes are at relative lows.

Government policies such as Help to Buy are supporting first-time buyers to get onto the property ladder. Likewise, low interest rates are making mortgages more affordable. But those two catalysts are unlikely to remain in place over the long run, which could lead to a more challenging period for house price growth.

By contrast, the FTSE 100’s future looks relatively bright at present. Since it’s an internationally-focused index, it’s more dependent on the outlook for the world economy than just the UK’s prospects. With the US and China’s economies performing well, the prospects for many of the index’s members appear to be bright. And, with the index having a dividend yield of 4.6%, it seems to offer good value for money compared to its historic levels.

Risks

As well as lower potential returns, buy-to-let investing also has greater risks than buying FTSE 100 stocks. For example, void periods, a failure by tenants to pay rent, and higher charges from regulatory changes, such as an end to tenancy fees, could all restrict a landlord’s cash flow over the coming years. Added to this are tax changes that make it more costly to buy second properties.

Meanwhile, the FTSE 100 continues to be a relatively straightforward place to invest. Opening an ISA and enjoying tax benefits is simple and accessible to anyone. Dealing charges have fallen in the last decade, while it’s possible to put in place a diverse portfolio of stocks through analysing freely available annual reports and other information.

Takeaway

Therefore, while property prices may continue to rise over the long run, from a risk/reward standpoint the FTSE 100 appears to offer a more favourable future. It could, therefore, be a better means of seeking to make a million over the long run.

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Peter Stephens has no position in any of the shares 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.