Investing in buy-to-let property used to be a sure-fire way to generate a passive income stream.
However, over the past few years, it has become harder and harder to make money from rental property.
Several factors have contributed to this outcome.
A decade ago, many regions in the UK offered double-digit buy-to-let yields. Today there’s only one region in the country where it’s still possible to get this return, according to Simply Business.
As well as falling rental yields, landlords have also had to get to grips with a tidal wave of new regulation aimed at the sector. The number of new laws affecting landlords has soared 32% since 2010. That means there are now 156 pieces of legislation landlords have to comply with.
These developments mean that landlords do not only have to deal with lower returns, but the chances of being fined or prosecuted have also increased.
Therefore, buy-to-let is not the golden goose that it once was. As a result, it might be better for investors to seek higher returns elsewhere.
The stock market could be an excellent alternative.
While it is difficult to tell which course the market will take in the short term, there’s plenty of data showing that over the long run, patient investors are well rewarded.
Indeed, since 1900, UK equities have produced an annual real (after inflation) return of around 5.5%. The size of this dataset makes it extremely reliable. There are few assets that have been able to achieve a similar performance.
Over the past 35 years, the FTSE 250 has produced an average annualised return of around 12%. That’s enough to turn an investment of £10,000 at inception to £653,000 today.
And unlike buy-to-let, replicating this performance doesn’t require a tremendous amount of time and effort or a substantial initial investment.
To match the market’s performance, all investors need to do is buy a low-cost tracker fund. The fund managers then take care of dealing with regulation and buying and selling investments. All you need to do is sit back, relax, and watch your money grow.
As such, an investment in the stock market could prove to be a better investment than buy-to-let.
Investors also have more choice when it comes to picking stock market investments.
The FTSE 250 is a great way to get exposure to the UK economy, and so is the FTSE All-Share Index. Both of these indexes are quite easy to track.
If you are looking for a more international portfolio, the FTSE 100 could be a great alternative. More than 70% of the index’s profits come from overseas, and it currently supports a dividend yield of 4.6%.
Investors seeking even greater diversification can buy international stocks. A handful of investment managers offer exposure to global indices like the S&P 500 with pound hedging. So, there’s no need to worry about foreign exchange movements.
All in all, not only is it easier to invest in stocks than it is buy-to-let property, but they could generate better returns over the long run as well.
Rupert Hargreaves 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.