Due to the State Pension being relatively low, some investors may wonder whether buy-to-let property could provide a rising passive income in retirement. After all, interest rates are low and property prices in some parts of the UK have fallen in the last few years.
However, there continues to be risks facing buy-to-let investors. Tax changes, the prospect of rising interest rates and affordability issues could mean returns are somewhat disappointing. As such, now could be a good time to buy FTSE 250 shares – especially since many of them appear to offer wide margins of safety.
With the UK economy having experienced an uncertain political and economic period over the past few years, many UK-focused assets could offer good value for money. Property, though, may not prove to be one of them. Even though house price growth has slowed, the price of an average property compared to an average wage remains close to a record high.
Furthermore, tax changes mean the net returns on offer from buy-to-let properties could be relatively disappointing. And with interest rates likely to move higher in the coming years, the era of significant returns from buy-to-let investing may be over for now.
UK growth potential
This contrasts with the outlook for the FTSE 250. Its valuation suggests it offers a wide margin of safety, with a dividend yield of 3% and low earnings metrics for many of its members indicating it may currently be trading at a low ebb.
Since around 50% of the FTSE 250’s income is derived from the UK, the election and Brexit clearly matter to its short-term performance. However, with the index having always recovered from its downturns to post record highs, its long-term return potential seems to be highly attractive.
Furthermore, with the remaining 50% of its income derived from international economies, it may be more diversified than many investors realise. This may protect its performance from geopolitical risks in the UK, as well as offer a brisk growth rate as emerging economies continue to grow.
Buying a property is a complicated process most of the time. It’s costly, slow and can be time consuming. Investing in FTSE 250 shares, on the other hand, is far simpler and easier. Opening a tax-efficient account such as a Stocks and Shares ISA takes minutes, while an investor can buy a tracker fund that aims to follow the performance of the index if they are short of time or capital.
However, with the index appearing to have a number of undervalued shares on offer at present, it may be possible for an investor to beat its performance in the long run. This could lead to high and consistent returns that boost your retirement nest egg and reduce your dependence on the State Pension in older age.
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.