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Warning! A buy-to-let can destroy your wealth: I’d buy FTSE 100 stocks instead

With the Brexit process continuing to be highly uncertain, the prospects for buy-to-let investors could become increasingly challenging. House prices in a number of the UK’s regions have already fallen over the last year, while continued low sentiment among consumers may lead to a continuation of this trend.

Furthermore, interest rate changes, a revised housing policy and tax changes could all weigh on the financial outlook for landlords. This may mean that they face a period of significant risks.

By contrast, the FTSE 100 could deliver continued high returns. Its international focus and low valuation may mean that it offers a superior risk/reward opportunity than a buy-to-let.

Uncertain future

At the time of writing, the prospects for the UK remain unclear from an economic and political perspective. Brexit looks set to be delayed, which may lead to continued weak sentiment towards the housing market.

Therefore, further house price falls could be ahead that cause capital losses for property investors. Furthermore, a weaker outlook for the economy may mean that rental growth is somewhat limited, while a possible election and change in government could lead to regulatory changes that reduce the profitability of the sector.

Having risen to record highs when compared to average incomes, property prices may naturally experience a weaker period over the next few years. The track record of the sector suggests that its cyclicality may mean that it lacks investment appeal on a relative basis.

Growth potential

Although the FTSE 100 may also experience a period of uncertainty, its geographic diversity could mitigate some of the risks facing buy-to-let investors. Since many of the FTSE 100’s members operate either partly, or fully, in international markets, they are less reliant on the prospects for the UK economy during a period of major political change. And, should the pound weaken, they could experience a positive currency translation benefit that boosts their financial outlook and valuation.

While property prices appear to be high at the present time, the FTSE 100 offers a wide range of high-quality businesses that trade on low valuations. In many cases, they can be purchased for a relatively low multiple of their annual net profit, while their improving financial outlook could lead to improving investor sentiment over the long run.

Lower risks

Since investing in the FTSE 100 does not require debt, and it is highly liquid, its risk profile seems to be more appealing than a buy-to-let. When combined with the growth potential of emerging economies, as well as major developed economies such as the US, the case for buying large-cap shares seems to be easier to make than for buying property at the present time.

Therefore, investors may wish to buy a diverse range of FTSE 100 shares instead of undertaking a buy-to-let. Doing so could enhance their long-term financial prospects, as well as improve their risk/reward profile compared to a property investment.

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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.