Investing in buy-to-let properties has been a highly profitable move for many people over recent decades. They have enjoyed capital gains, rental growth and relatively robust performance, despite major financial shocks such as the global financial crisis.
However, the appeal of buy-to-let could be declining. Not only do house prices now appear to be overvalued, being a landlord is becoming increasingly complicated. With the FTSE 100 offering international diversity and potentially higher returns, it could prove to be a better home for your capital than buy-to-let.
House prices in the UK have enjoyed a long period of high growth. This now means that they are exceptionally high when compared to average incomes. Were it not for low interest rates, house prices may be unsustainable at their current level. This could mean that if interest rates gradually revert to their normal levels of 4%-5% over the long run, the prospects of generating high levels of capital growth on buy-to-let properties prove to be somewhat low.
By contrast, the FTSE 100 contains a wide range of companies that appear to offer margins of safety. Evidence of this can be seen in the FTSE 100’s dividend yield of over 4%, which is significantly above its long-term average and may suggest that there are opportunities to buy high-quality stocks while they trade on low valuations.
Buying and managing a buy-to-let property has become increasingly challenging over recent years. Additional stamp duty on second homes, coupled with an end to mortgage interest relief for some landlords, means that the industry is more complex than it was in the past.
This trend seems to be continuing, as there appears to be a political consensus towards making second home ownership more challenging. This may be in response to a continued imbalance between demand and supply, with an increasing number of people finding it difficult to get on the property ladder. As such, it would be unsurprising for further tax and regulatory changes to come into force that seek to dissuade people from even considering buy-to-let transactions.
FTSE 100 shares, meanwhile, can be purchased in a matter of minutes through tax-efficient accounts such as a Stocks and Shares ISA. This could mean that an investor has more time to spend on other activities, rather than managing their assets.
The FTSE 100’s international focus means that its risk/reward ratio may be more appealing than that of buy-to-let investments. With the latter, it is difficult to obtain diversity due to the large cost of buying a single property, while buying property abroad may lead to legal and regulatory risks that prove to be costly.
As such, focusing on the FTSE 100 could provide an investor with exposure to fast-growing economies such as India and China. Not only does this have the potential to increase their returns, it could reduce overall risk through having less exposure to a specific geographical location.
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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.