For many years, income-seeking investors have sought to generate a passive income from buy-to-let. This has often proved to be a sound move, with rental growth and capital returns being strong due to an ongoing supply/demand imbalance in property across the UK.
Now though, rising house prices have pushed yields across the sector to relatively low levels. Combined with higher costs and taxes for landlords, this means the income returns available across the industry are relatively low.
As such, investing in equities through a Stocks and Shares ISA could be a much better idea. Following a period of uncertainty, yields are relatively high and the scope to generate capital returns seems to be favourable.
With UK house prices having surged higher over the last decade, they now trade close to record highs compared to average incomes. This means that, in many cases, the yields that can be obtained are relatively unattractive. Furthermore, it could lead to reduced scope for capital growth, since housing is becoming increasingly unaffordable for many first-time buyers.
In addition, the cost of being a landlord is increasing. The end-of-tenancy fees may mean estate agency management costs increase for landlords, while changing taxes, aimed at making it easier for first-time buyers to get onto the property ladder, could mean the net return available to property investors declines. Rental growth may also be negatively impacted by an uncertain outlook for the UK economy.
Adapting to change
Although the stock market has also enjoyed a period of strong growth over recent decades, its potential to generate a high and growing passive income seems to be encouraging. In fact, it’s possible to generate a higher passive income through buying a range of FTSE 350 companies in a Stocks and Shares ISA than from purchasing a buy-to-let property.
The reasons for this include the fact that no tax is charged on investments held in a Stocks and Shares ISA. In addition, the stock market appears to be undervalued, rather than overvalued as in the case of UK property. And since the FTSE 350 is focused on international markets, rather than the UK economy, it could benefit from a tailwind as emerging economies are expected to grow at a rapid rate over the coming years. This may provide a stimulus to dividends that leads to an even greater income return.
Therefore, while many investors may naturally look to property to generate a passive income due, in part, to its historic performance, now could be the right time to utilise a Stocks and Shares ISA.
The stock market seems to offer better value for money, stronger growth prospects and more favourable tax treatment that may produce a more impressive return profile in the long run.
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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.