Buy-to-let investing used to be a great way to grow your wealth and save for the future. However, in recent years, the government has introduced a whole host of new rules and regulations that have made it harder than ever to earn a profitable income from this asset.
After these changes, I think the FTSE 100 is a much better investment and today I’m going to lay out the three main reasons why I believe this is the case.
The first reason is diversification. The index allows you to build an internationally diversified portfolio of companies at the click of a button. You can’t do this with buy-to-let property.
As well as international diversification, owning the FTSE 100 also gives you exposure to 100 different companies across a selection of various industries.
Once again, it would be complex to achieve the same kind of diversification with rental property, unless you have several million pounds to invest. If you own one or two properties, there’s always going to be the risk that one might be left unoccupied, which could jeopardise the profitability of the entire enterprise.
The other benefit of the FTSE 100’s international diversification is the global income stream it provides. At the time of writing, the UK’s leading blue-chip index offers a dividend yield of 4.5%. You could achieve the same level of income from buy-to-let properties, but if the income from just one property vanished, your income stream would drop to zero.
By comparison, every single company in the FTSE 100 would have to collectively decide to eliminate their dividends for the index’s income to vanish. This is unlikely to happen even in the most severe economic downturn.
The final reason why I would buy the Foostie 100 over buy-to-let is cost. As one of the largest and most liquid equity indexes in the world, it’s relatively easy to buy a low-cost FTSE 100 tracker fund. According to my research, you can buy a tracker for an annual fee of just 0.07% (that’s excluding any broker platform fees), meaning you’ll pay an annual management fee of 70p per year for every £1,000 invested.
If only it were so easy for buy-to-let investing. The first cost you’ll have to consider when buying a rental property is stamp duty (of at least 3%). Then there are mortgage fees and property maintenance costs. On top of this, additional tax changes have removed the ability for landlords to deduct mortgage interest from the rental profits. What’s more, you will almost certainly have to appoint a rental agent who might take as much as 10% of the rent.
The bottom line
So overall, if you want to save money on costs and build an instantly diversified income portfolio, I think the FTSE 100 is a much better investment than buy-to-let.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
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.