Forget buy-to-let! I’d follow these 3 steps to retire early on a rising passive income

The stock market could be more appealing than a buy-to-let in my opinion.

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Buy-to-let investing has been highly profitable for many people over recent decades. Even though the financial crisis and recent economic uncertainty contributed to a disappointing period for house prices, they have generally risen over the long term to produce high returns for landlords.

However, tax changes and an uncertain outlook for the UK economy mean that the stock market could be a better place to invest than property in the long run. Here are three steps to getting started in the stock market to eventually produce a rising passive income that could provide an improving retirement outlook.

Tax efficiency

Property investors have seen an increase in the amount of tax they pay over recent years. Tax changes such as an additional rate of stamp duty on second homes and mortgage interest payments no longer being offset against rental income mean that property investing is relatively tax-inefficient.

By contrast, opening a Stocks and Shares ISA can mean that your net returns from owning shares are the same as your gross returns. In other words, there is no tax levied on amounts invested through a Stocks and Shares ISA, while withdrawals can be made at any time and without penalty.

Since Stocks and Shares ISAs are cheap to open and administer, with their costs often amounting to the price of one transaction, they are likely to be a worthwhile platform through which to capitalise on the opportunities provided by the stock market.

Diversification

Another weakness of buy-to-let investing is that it is difficult to reduce risk through diversification. The cost of buying a property, and the deposit required, means that many landlords own a very small number of properties, or just one. Should a tenant fail to pay their rent, or repairs be required, this can mean that returns are severely impacted.

Therefore, when investing in shares it makes sense to diversify. The cost of doing so has fallen significantly over recent years, with online share-dealing being available for as little as £1.50 per trade through a regular investing service. By diversifying across a range of industries and economies, it may be possible to reduce your potential risk of loss, as well as build a more resilient portfolio that has a higher chance of meeting your long-term financial goals.

International exposure

With the UK’s economic outlook being relatively uncertain at the present time, investing in other countries could be a sound idea. This is difficult to achieve through property investing, but is relatively straightforward through buying shares.

With half of the FTSE 250’s income and two-thirds of the FTSE 100’s income being generated abroad, buying UK-listed shares can provide sufficient international exposure for most investors. Since the world economy is expected to deliver continued growth over the coming years, now could be the right time to switch your focus from property to FTSE 350 shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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