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Considering buy-to-let? I’d rather buy FTSE 100 shares to build a passive income

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The British love bricks and mortar. And when it comes to investing, many people seem to head straight for the property market and buy-to-let. But I’d aim to build a passive income with FTSE 100 shares.

Why I’d buy FTSE 100 shares instead of buy-to-let property

I tend to think of the UK as a nation wedded to the idea of property ownership. But, perhaps surprisingly, the UK has one of the lowest rates of owner-occupied property in Europe, according to market and consumer data provider Statista.

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The company reckons homeownership rates extend from just over 51% in Germany to as much as 96% in Romania. And, in the UK, the homeownership rate averaged about 68% between 2005 and 2018. It then reached an all-time high of around 73% in 2007 falling to a low of just over 63% in 2016.

And Statista reckons the more-developed European countries, such as France, Germany and the UK tend to have lower homeownership rates compared to “the frontier countries,” such as Lithuania and Slovakia. 

Meanwhile, the flip side of relatively low homeownership is that many people rent a property to live in. And that suggests a buoyant market for the buy-to-let market. However, if I buy and own an investment property, I’ll be committing to an illiquid asset. And that means it could be hard to sell when I need to. Meanwhile, the execution costs of buying and selling can be huge and that will eat into my investment returns from property.

On top of that, property ownership can be a hands-on activity that will demand lots of my time when I’m holding and managing the asset. Or I could pay someone else to do it, such as an agency. But, again, those extra costs will diminish my returns.

And all I want is a passive income and a bit of capital appreciation. Is it worth all the hassle? Not to me. Especially when I can get exactly those two benefits from owning shares in the FTSE 100 index.

Some great dividend yields

The mechanics of share ownership are straightforward these days. And the transaction costs are low  compared to buying and selling real estate. I’d proceed by opening a Stocks and Shares ISA and then populating it with solid, high-yielding stocks.

Right now, some FTSE 100 companies are yielding dividends above 5%. I’d start off by going for defensive, evergreen, cash-generating businesses that tend to be little affected by the cyclical ups and downs of the economy.

Among all the high yielders in the FTSE 100, I like the look of pharmaceutical giant GlaxoSmithKline, transmission system operator National Grid and electricity supplier SSE. I’d also seriously consider investing in a FTSE 100 tracker fund. The index typically yields north of 4% while providing wide diversification over many underlying stocks.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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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