In the past, buying UK property and renting it out (buy-to-let) was an easy way to make money.
With the average house price in the UK rising from just under £85,000 at the start of the millennium to around £215,000 by the end of 2016, you could buy a property, rent it out, pay the mortgage with the rent collected (and claim a tax deduction for the mortgage interest) and use the bank’s money to profit from the prolific rise in house prices.
In short, it was a brilliant investment.
Uncertain outlook for buy-to-let
Heading into 2020, however, the outlook for buy-to-let looks far less certain.
For starters, house price growth has slowed considerably in recent years. According to the UK House Price Index, property prices have increased by just 8.9% over the last three years, which equates to annualised growth of less than 3%. With Brexit uncertainty lingering, I think this lower growth could persist for a while, which obviously makes buy-to-let less attractive as an investment.
I’ll also point out that the government has really cracked down on buy-to-let recently, making it far more challenging to generate high returns from the asset class. Not only have stamp duty surcharges (an additional 3%) for buy-to-let properties been introduced, but mortgage interest tax relief has also been phased out. On top of this, there are now many regulations that landlords have to comply with, which add extra costs.
Weighing everything up, I’m just not convinced that buy-to-let is the best place to invest in 2020.
How I’ll be investing my money in 2020
So, where will I be investing in 2020? Well, one asset class that I continue to believe has significant long-term investment potential is stocks.
Yes, stocks have had a great run in recent years, meaning we could potentially see a short-term pullback in the near future. Yet looking at the long-term growth potential of top companies such as iPhone maker Apple, Windows owner Microsoft, Dove soap owner Unilever, and Johnnie Walker owner Diageo, I think there’s a very good chance that stocks will continue to generate excellent returns over the long run.
I’ll also point out that you can invest in stocks completely tax-free through a Stocks & Shares ISA (up to £20k per year), and that it’s much easier than investing in buy-to-let because you can open an account in just minutes and you don’t have to worry about getting a mortgage.
So, next year I simply plan to buy more individual high-quality stocks, such as the four I mentioned above. These have risen 151%, 153%, 44%, and 58% respectively over the last three years thrashing buy-to-let. And I will also put more money into top global equity funds such as Fundsmith Equity and Lindsell Train Global Equity (up 60% and 70% respectively over the last three years), which provide exposure to world-class companies listed both here in the UK and internationally.
I believe that this simple investment strategy should eventually lead to a seven-figure portfolio.
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Edward Sheldon owns shares in Apple, Microsoft, Unilever, and Diageo and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Apple, Microsoft, and Unilever. The Motley Fool UK has recommended Diageo and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2021 $85 calls on Microsoft. 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.