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Should I invest in property or the FTSE 100?

Whether to invest in property or in the FTSE 100 is an interesting question. But one factor is so prominent it makes me sure about the best way for me to jump.

I can understand the appeal of property to many people. Most understand it, and there’s a sense of solidity about owning a physical asset. But I reckon it’s well worth considering an investment in an FTSE 100 tracker fund as a realistic alternative to jumping into the buy-to-let market right now.

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Similar risk profiles

I think the risk profile of owning property as an investment is similar to putting money into Footsie tracker. For example, property values rise and fall in cycles and that’s what the FTSE 100 index tends to do as well. If you put money into property and rent it out, you’ll expect to receive a rental income, which compares with receiving a dividend from a tracker fund investment. Over the long haul, property prices tend to rise in line with general inflation, and so does the value of the FTSE 100.

However, rental yields from property vary from area to area because of factors such as demand and property valuations. I reckon if you buy a property and rent it out, you can expect to achieve a yield over the purchase price of the property of anything from 1% through 10% and beyond, in some cases, in today’s markets.

Meanwhile, the dividend yield from the FTSE 100 is close to 4.5% right now. I see that as attractive. If you invest in a Footsie tracker fund that’s all you need to do – just invest and then wait. But investing in property is like running any other business — there will be plenty for you to do. And on top of that, buying the property in the first place will almost certainly not be the only money you will need to plough into it when you consider management and maintenance over time.

The allure of passive investing

So it’s a little difficult to predict what your net or true yield will end up being from a property investment during the time you hold it. My guess is that when you factor in all the extra expenses and the value of your time running the show, the dividend yield from the FTSE 100 could start to look attractive by comparison.

I’d jump into a Footsie tracker fund rather than into property because the passive nature of the investment is a prominent factor. After investing, there would be nothing much else for me to do, and I wouldn’t have to worry about such things as void periods with no incoming rent.

The overall dividend yield of the FTSE 100 index can vary as the underlying companies adjust their dividend rates. And the value of the index can rise and fall too. But historically, it’s always bounced back from its lows and, since the index started in 1984, it’s risen by around 620%. I’m bullish about the Footsie’s potential in the years ahead.

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Kevin Godbold has no position in any 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.