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Forget buy-to-let! I’d invest in 4%+ yielding FTSE 250 stocks to make a passive income

Rising house prices over the past decade have caused the income return on property to decline. In many parts of the UK, rental growth has lagged house price growth. The end result means it’s increasing difficult to generate a 4%+ gross return.

Furthermore, once tax, repair bills and the cost of void periods is subtracted from that figure, it can lead to disappointing income returns for landlords.

As such, now may be the right time to buy FTSE 250 income shares that offer a dividend yield in excess of 4%. They may also deliver improving capital returns as the UK’s financial performance improves.

FTSE 250 income potential

While the FTSE 250 may have a dividend yield of around 3%, 62 of its members currently offer an income return that’s in excess of 4%. As such, it’s entirely feasible for an investor to build a portfolio of shares that has a combined average yield that’s well in excess of 4%.

Since it’s possible to buy shares in tax-efficient accounts such as a Stocks and Shares ISA, the gross return on stocks can be the same as the net return for investors. As such, it may be possible for investors to generate a higher income return on a net basis from a range of mid-cap shares rather than from buy-to-let investments.

FTSE 250 growth prospects

As well as its potential income return, the FTSE 250 also offers strong capital growth prospects. Certainly, the near-term outlook for the UK economy could prove to be challenging, mainly due to political risk from Brexit.

However, this may present a buying opportunity for long-term investors. In many cases, the valuations of UK-focused stocks reflect their uncertain outlooks, and this may enable investors to purchase them while they trade at discounts to their intrinsic values.

Furthermore, the prospects for the UK economy are possibly more positive than many investors realise. At a time when the world economy faces risks, such as a global trade war and geopolitical challenges in the Middle East, the UK’s forecast 1.4% growth rate for 2020 could prove to be stronger, relative to other developed economies, than previously anticipated.

Buy-to-let risks

As well as pull factors to focus on FTSE 250 shares rather than buy-to-let properties, there are also push factors. Namely, higher taxes for new investors through an additional rate of stamp duty, as well as affordability concerns in many parts of the UK that could limit capital growth.

As such, now may be the right time to switch from property to shares. The FTSE 250 has a strong track record of delivering growth following difficult periods that produce short-term downturns. Investing during such periods could lead to higher returns in the long run that enable you to generate a generous passive income over the coming years.

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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.