Buy-to-let property is a popular choice with Britons wanting to build a retirement nest egg. But I think that the good times for buy-to-let investors are over, at least for new landlords.
The last few years have seen the government reduce the amount of mortgage tax relief available to landlords. Second home buyers now have to pay an extra 3% in stamp duty as well. And high house prices mean that rental yields have also come under pressure.
Established landlords with several homes and small mortgages should continue to do well. But for first-timers, I think it makes more sense to invest in property stocks at the moment.
For many of us, one buy-to-let property is the limit of what we could afford, even with the help of a mortgage. This means that even quite small problems can result in a cash loss for the year.
By contrast, FTSE 100 property stocks such as British Land, Land Securities and Segro own large portfolios of property. Problems with one site — or one tenant — should only have a small impact on overall rental income and annual profits.
Buy the best
As private investors, investing directly in top-end commercial property is impossible. We don’t have the kind of money required to buy a seat at that table.
In reality, most buy-to-let landlords restrict themselves to mid-market residential properties.
That’s okay, but it means missing out on the opportunity to invest in high-growth areas such as logistics property. It also means that you won’t be able to invest in prime London sites, such as City office blocks and top-end retail property.
I invest in property stocks because they give me exposure to a diversified mix of good quality locations that I couldn’t otherwise own. I see this as a big attraction.
Low cost and hassle-free
Even in a good year, most rental properties will need money spending on maintenance and repairs. You also face the risk of being stuck with bad tenants who fall behind on rent or neglect their home.
Each time your existing tenants move out, you have to find new ones yourself or pay a letting agent to do it for you. In addition, you’ll need buildings insurance and perhaps other maintenance contracts, such as boiler servicing and repair. Owning a house is expensive, whether you live in it or rent it out.
But owning shares is incredibly cheap. Inexpensive online stockbrokers tend to average about £10 per trade these days. Stamp duty on share purchases is just 0.5%, compared to between 3% and 15% for rental property.
These stocks could provide a tax-free income
Assuming your shares are held in a tax-free Stocks and Shares ISA, most property stocks will provide you with a tax-free dividend payment every six months.
For example, FTSE giant Landsec currently offers a forecast yield of almost 4.8%, while British Land has a 2020 forecast yield of 5%. Both shares trade at an attractive discount to their book value, providing some protection against falling prices.
Logistics specialist Segro is a little more expensive. Booming demand for e-commerce warehouses has pushed up prices and SGRO stock now trades 33% above its book value. I wouldn’t buy at this level, but if you think the logistics property boom has further to run, there could still be an opportunity here.
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Roland Head owns shares of British Land Co. The Motley Fool UK has recommended British Land Co and Landsec. 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.