Investing in buy-to-let properties has turned many people into millionaires over the past few decades. Rising house prices and strong demand for rental properties have combined to produce high total returns. And with low interest rates over the past decade, those returns have been amplified in many cases over recent years.
However, the future prospects for buy-to-let investors could prove to be relatively disappointing. High house prices could mean that the sector lacks value for money and may experience a period of slower growth.
As such, now could be the right time to avoid buy-to-let property and instead buy undervalued FTSE 100 shares to boost your chances of making a million.
High house prices
Clearly, house prices are significantly higher than they were in the past. This in itself, however, doesn’t equate to a lack of value in the property market. Comparing house prices to incomes though, suggests the run of house price growth since the financial crisis could be nearing its end.
For example, average house prices compared to average incomes are close to a record high. Should interest rates increase over the coming years, which seems likely as they’re close to historic lows, the affordability of houses could become highly relevant. It may lead to reduced demand for property, and could hurt the overall returns of buy-to-let investors.
Low FTSE 100 valuations
By contrast, the valuations of many FTSE 100 shares suggest that they could offer significant investment appeal at the present time. The index itself trades only 10% higher than it did over two decades ago, while its dividend yield of 4.4% is above its long-term average.
Furthermore, many UK-focused shares in the FTSE 100 are currently unpopular among investors due to Brexit risks. This could mean that there are numerous buying opportunities. Likewise, risks facing the world economy, such as coronavirus, and uncertainty in the US political outlook appear to be holding back stocks with international exposure.
Despite those risks, the prospects for the global economy seem to be relatively bright. For example, it’s expected to grow at a faster pace in 2020 than it did in 2019, while the long-term prospects for emerging economies, such as India and China, seem to be highly encouraging. This could catalyse the financial performances of FTSE 100 companies, help to improve investor sentiment towards the wider stock market, and boost share prices over the coming years.
Based on the relatively attractive valuations of large-cap shares, they could offer superior total returns in the coming years compared to buy-to-let property. As such, now could be the right time to switch your capital from buy-to-let investments and towards FTSE 100 stocks. They could boost your overall returns in the coming years and thus increase your chances of making a million.
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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.