The appeal of buy-to-let property has declined in recent years. High prices and an uncertain outlook for the UK economy have been partly responsible for this, with buy-to-let investment returns falling compared to levels seen in the aftermath of the financial crisis.
As such, now could be the right time to buy FTSE 100 dividend shares. They offer higher income returns than buy-to-let properties in many cases, while the index’s international focus may make it less risky than owning a small number of properties in the UK. And with it being relatively simple to buy FTSE 100 shares, now could be the right time to do so.
While the FTSE 100’s dividend yield of 4.3% may not be all that different to the gross yields available on buy-to-let properties, it is likely to be more attractive on an after-tax basis. Buying shares through low-cost products such as a Stocks and Shares ISA means that an investor receives the same level of income on a net and gross basis. In other words, they would receive a 4.3% yield on the FTSE 100 at the present time, since no tax is levied on amounts invested through an ISA.
By contrast, the yields on buy-to-let properties are subject to tax and to a range of other deductions. They include management fees, service charges and repair costs, which could mean that in many parts of the UK, the net income return on property is lower than for FTSE 100 shares. Therefore, investors looking to generate a passive income may be better off with shares rather than property.
The FTSE 100 generates around two-thirds of its income from outside of the UK. As such, it is an international index that is arguably more representative of the world economy’s performance, rather than the UK’s macroeconomic outlook.
At the present time, this could prove to be highly appealing. Brexit negotiations are ongoing and are not expected to conclude until the end of 2020. This may mean that business and consumer confidence stays at low levels, which may cause the UK’s economic performance to be more muted than it otherwise would be.
In such a scenario, owning stocks that operate internationally, instead of having a limited number of properties in the UK, could produce greater diversity. This could reduce risk, and offer higher long-term returns for investors.
Buying a property is still time-consuming, expensive and difficult. Buying FTSE 100 shares, on the other hand, is simple and straightforward. It can be done in a very short amount of time from the comfort of your own home, with ongoing administration being modest compared to the requirements of some buy-to-let properties that require updating and repairs.
As such, now could be the right time to buy a range of FTSE 100 shares. They could offer higher returns, lower risk and greater simplicity than buy-to-let property in 2020 and beyond.
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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.