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Forget buy-to-let! Here’s how I’d invest today to make a passive income

Buy-to-let property has historically provided an attractive passive income which has grown at a generous pace. However, a variety of factors mean its appeal could now be lower than it has been in the past.

As such, buying a range of FTSE 100 and FTSE 250 shares could be a better means of obtaining a growing passive income. They appear to offer greater tax efficiency, stronger growth potential, and more diversity than undertaking buy-to-let investments.

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A diverse portfolio

Building a diverse portfolio of FTSE 350 shares isn’t an especially challenging process. The falling cost of buying shares and the global nature of the FTSE 100 and FTSE 250, which together generate the majority of their income from outside of the UK, mean most investors can put together a portfolio containing a range of stocks which operate in different sectors and geographies.

This could improve their risk/reward ratio compared to buy-to-let investments where, in many cases, a landlord owns a small number of properties in a limited geographic area.

With Brexit likely to dominate news headlines in 2020, and risks such as US political uncertainty and a slowdown in China’s growth rate set to continue, diversifying geographically could become increasingly important for income investors. It may provide a more reliable income stream in 2020 and in the coming years.

Growth potential

As well as offering less risk, FTSE 350 shares could deliver rising dividends in the long run. In some cases, mid- and large-cap shares may be able to access higher rates of economic growth across the emerging world. This may enable them to pay rising dividends.

Similarly, UK-focused companies may offer relatively high yields at the present time due to investor apathy towards the UK during the Brexit process. They may be able to deliver inflation-beating dividend growth to complement their high yields.

Meanwhile, high house prices mean that even if there’s rental growth potential for landlords, a low yield could lead to them receiving a disappointing level of income. This situation is compounded by rising taxes for buy-to-let investors, which could make purchasing FTSE 350 shares through tax-efficient accounts, such as a Stocks and Shares ISA, more attractive on a net basis than holding property.

Starting today

Now could be the right time to build a portfolio of FTSE 350 shares to generate a growing passive income. By diversifying across a range of geographies and sectors, you may be able to obtain an attractive and resilient after-tax income return – especially when compared to the prospects on offer through buy-to-let investing.

Although the FTSE 100 and FTSE 250 have experienced a volatile start to 2020, their valuations, growth potential, and track records suggest now could be the right time for income investors to buy a range of companies and hold them for the long term.

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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.