Investing in buy-to-let properties has historically been seen as a dependable means of generating high returns in the long run. After all, property prices in the UK have generally risen at a brisk pace over recent decades. This has provided landlords with capital growth, while rental growth has offered them an above-inflation increase in income.
However, property is a cyclical market. It may now be set to experience a period of slower growth due to factors such as affordability concerns, tax changes, and a challenging economic outlook. As such, there may be a better place to invest £20k, or any other amount, to improve your prospects of retiring early.
A changing outlook
The ratio of average house prices to average incomes is currently close to a record high. This indicates property is becoming increasingly unaffordable, which may limit its potential to deliver ongoing capital returns in the coming years.
Of course, low interest rates have been a contributing factor to house price growth since the financial crisis. While they may not move higher in the short run, the Bank of England is likely to adopt a tighter monetary policy in the long run. This could make it more difficult for prospective buyers to afford properties, and may force prices to moderate.
In addition, demand could be negatively impacted by tax changes to buy-to-let investing. Additional stamp duty and landlords being unable to offset mortgage interest payments against rental income in many cases could lead to lower overall demand for property. This may mean price rises are less favourable than they have been, and could reduce the returns available to investors.
An improving outlook
While the outlook for buy-to-let investing could change significantly in the coming years, the prospects for the stock market seem to be relatively attractive. For example, the FTSE 100 and FTSE 250 currently contain a number of stocks that offer low valuations given their growth prospects. Buying those companies could produce market-beating returns, while the indexes themselves have solid track records of generating total returns of around 9% per annum over recent decades.
Moreover, both indexes provide investors with the chance to invest in the growth potential of the world economy. The FTSE 100, for example, generates two-thirds of its revenue from non-UK markets, while the FTSE 250 obtains half of its income from international economies. At a time where the political and economic risks facing the UK are potentially higher than they have been in the past, geographical diversification could be a useful ally for investors.
In addition, investing in the stock market can be undertaken on a tax-free basis. Accounts, such as a Stocks and Shares ISAs, are cheap and easy to open, and offer tax efficiency. As such, now could be the right time to avoid buy-to-let investing and, instead, focus your capital on the stock market to improve your chances of retiring early.
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.