Great in theory

Now, don’t get me wrong; the arguments for buy-to-let look pretty compelling on paper. The idea of someone paying my mortgage combined with the gradual (or perhaps not so gradual) rise in the property’s value is undeniably attractive.

The reality, of course, would be a lot different for me. The average cost of a house in the UK hit £255,000 at the end of December, according to Nationwide. That’s all well and good were I already invested. But becoming a landlord from scratch means I’d need a big deposit. The prospect of rising interest rates isn’t exactly appealing either. 

I also don’t feel I have time to find tenants who will consistently pay their rent (and not prove a nuisance), nor to keep the flat or house in good working order throughout the time I own it and abide by all the regulations imposed on landlords. So, I’m leaving buy-to-let to others.

A better source of passive income

To be frank, investing via the stock market appeals to me as it involves a lot less fuss. Assuming I’m comfortable with the sort of price volatility we’re experiencing right now, I simply need to buy and hold investments that deposit money in my account on a regular basis. In other words, I’m looking for shares and funds that pay dividends. And there’s no shortage of options that do just this. Given that I did once consider buy-to-let, however, it’s worth highlighting that some will allow me my property fix.

Real Estate Investment Trusts (or REITS) are companies that invest in and manage property portfolios. These could include residential homes, warehouses, self-storage facilities, healthcare buildings, office space and retail stores. The choice is staggering. And all allow me to become a landlord just through buying some shares. 

Another great thing about holding REITS (actually, any dividend stock) is that I don’t need to pay any tax on the passive income if I keep them in a Stocks and Shares ISA. This gives me more cash to reinvest and grow, assuming that’s what I choose to do. And over the long term, equities have consistently been the best-performing asset I can own.

Safety in numbers

Of course, it’s worth making it very clear that no passive income stream is ever guaranteed. A company may decide to suspend paying dividends if earnings hit a sticky patch. It may also refrain from increasing the payouts if it needs to pay for things that will allow the business to grow. 

One way of protecting myself from this eventuality is to hold a diversified bunch of shares and funds. This way, the pain caused by one company cutting its dividend can be mitigated by others perhaps increasing theirs. 

The post Buy-to-let? I’d buy stocks and shares for passive income instead! appeared first on The Motley Fool UK.

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Paul Summers 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.

Here, I’m going to look at the outlook for buy-to-let and stocks in 2021. I’ll also explain where I’ll be investing my own money next year.

Buy-to-let vs stocks: 2021 outlook

During the last half of 2020, the UK experienced a property boom due to stamp duty cuts. This momentum is expected to continue into 2021. However, the second half of the year could be more challenging for the UK property market. That’s because the furlough scheme is set to end in April.

Overall, Rightmove forecasts national average house price growth of 4% in 2021 while Knight Frank and Savills expect 1% and 0% respectively.

Turning to stocks, most market commentators are generally quite optimistic about their prospects for 2021. The International Monetary Fund (IMF) expects global economic growth of a high 5.4% next year as the world recovers from the coronavirus. This should provide a nice backdrop for stocks.

Of course, the beauty of the stock market is that there are always amazing opportunities for stock pickers. Just look at the performance of Tesla last year. While most stock indexes struggled, it rose 690%, turning $10,000 into nearly $80,000. As CNBC’s Jim Cramer said: “There’s always a bull market somewhere.”

Yields

Regarding yield, buy-to-let continues to offer an attractive return in the current low-interest rate environment, although yields depend on location. In Scotland and the North East, for example, yields average 7.3% and 6.6% respectively, according to Zoopla. But in London, the average yield is only 3.1%. Overall, average UK rental yields are about 5.2%.

The yields from stocks, as a whole, aren’t as attractive as they were in recent years as many companies cut their dividends in 2020. However, plenty of UK companies such as Unilever, Diageo, and Legal & General do still pay attractive dividends. It’s not hard to assemble a high-quality portfolio of UK stocks that yields 3-5%.

Tax breaks

Buy-to-let is way less attractive from a tax point of view than it used to be. Today, it’s no longer possible to deduct mortgage expenses from rental income to reduce tax liabilities.

By contrast, stock investors have the opportunity to take advantage of a number of attractive tax breaks. For example, investing £20,000 in a Stocks and Shares ISA in 2021 is completely tax-free. All gains and income will be sheltered from the taxman. Alternatively, an investor could save into a Self-Invested Personal Pension (SIPP) and receive tax relief.

Hassle and costs

Finally, let’s talk about the hassle and costs. Buy-to-let is very much a hassle. Owners need to worry about finding the right tenant, property maintenance, government regulation (energy efficiency ratings etc.), and selling a property can take time. Transaction costs are also high. Legal fees are significant and buy-to-let owners face higher stamp duty charges.

By contrast, stocks are much less hassle. You can open an account in minutes and once you’re invested, you can sit back and relax. Costs are also very low these days.

I’m picking stocks over buy-to-let in 2021

Weighing everything up, stocks are where I’ll be investing in 2021. They’re much less hassle than buy-to-let, more cost-effective, and the economic environment should provide a nice backdrop for stock markets. Plus, there’s always the chance I could discover the next Tesla or Amazon.

The post Buy-to-let vs stocks: here’s where I’ll be investing in 2021 appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Rightmove, Unilever, Diageo, Legal & General Group and Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Tesla. The Motley Fool UK has recommended Diageo, Rightmove, and Unilever and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

Of course, many people will simply consider this element of their wealth to be covered by the house they live in, which they will own outright once the mortgage is wiped. Others will want to take things further.

Today, I’m looking at a relatively fuss-free way of making extra cash from property.  Before doing so, however, it’s worth mentioning why this solution isn’t buy-to-let.

Whole lotta hassle

There are, of course, attractions to becoming a landlord. Rent received will cover (or go some way towards covering) the mortgage payments on the property that’s being let.

The fact that house prices gradually rise over time, albeit through a few inevitable market wobbles, also means the owner could/should benefit handsomely when they come to sell. Aside from this, tangible assets like an extra house or flat give some people peace of mind compared to numbers on a screen.

That said, the idea that becoming a landlord as an easy route to riches is most definitely flawed. As well as ongoing maintenance, tax considerations and legal hoops-a-plenty, those wanting to let a property need to be prepared for periods in which they may struggle to find a tenant. Owners must also have to contend with troublesome renters who don’t treat the flat or house with quite as much care as they would like.

Should the life of a landlord not be what you expected, it’s worth remembering that selling any property can also take a lot longer than you think. 

So, what’s the alternative? 

Here at the Fool UK, we think there’s a far less stressful way of getting exposure to this asset class beyond your own home. Real Estate Investment Trusts (REITs) are quoted companies that own and manage all sorts of commercial and residential property. Through buying into these companies, investors get a massive slice (usually a minimum of 90%) of the trust’s rental income.

Unlike the underlying properties, REITs are also liquid in that you can buy and sell them just like ordinary shares. A further benefit is that they allow investors to focus on niche areas of the market. 

If you think the demand for warehouses from companies like Amazon will continue growing, for example, then Tritax Big Box — which rents out such spaces — may be worth investigating further. It’s set to generate a yield of 4.8% for investors this year, based on the current share price.

If you suspect our tendency to hoard stuff isn’t going to disappear anytime soon, self-storage players Big Yellow or Safestore — yielding 2.8% and 2.2% respectively — could also be ideal additions to your portfolio. 

For those who prefer the passive approach, US giant iShares offers the UK Property UCITS ETF. For an ongoing charge of 0.4%, you can track the performance of an index composed purely of REITS and UK-listed real estate companies, the yield from which is currently 3.3%. 

Although nothing can be guaranteed — REITs have a tendency to be volatile during housing/general market downturns — these options should, in my opinion, be far more appealing to busy private investors.

The post Forget buy-to-let. I’d make money from property this way! appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tritax Big Box REIT. 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.

Is investing in buy-to-let instead of a pension actually a sensible strategy though? Let’s take a look at some of the risks.

All your eggs in one basket

One major problem with buy-to-let as a pension is that all your eggs are in one basket. This adds risk. If UK house prices were to tumble (which shouldn’t be ruled out as it’s happened before) or rents were to fall, your retirement plans could be jeopardised.

By contrast, with a pension, you can invest your money over many different companies across different sectors and countries. This lowers your overall investment risk substantially.

Lack of liquidity

Another major issue with buy-to-let is that it’s not liquid. If you need access to some money when you retire, you can’t just sell off a bedroom or a bathroom. And selling a property can take months or even years.

With stocks, however, you can literally sell a proportion of your portfolio within minutes and have the cash within days. This is a key advantage that stocks have over property.

Unfavourable tax setup

Next, consider tax on buy-to-let. It’s quite unfavorable. For starters, you’re looking at stamp duty surcharges when you buy a buy-a-let property. Then, you’re looking at tax on your rental income (20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate). 

Finally, if you sell your buy-to-let property for a profit, you could be looking at a substantial Capital Gains Tax bill. Currently, tax is payable on any capital gains over £12,000 (18% or 28% depending on your tax bracket).

By comparison, the tax setup for pensions is attractive. For starters, investments within pensions grow free of Capital Gains Tax and Income Tax. Secondly, you can take 25% of your pension tax-free when you turn 55.

Thirdly, when you put money into a pension, the government actually tops up your contributions. This is known as tax relief. Put £800 into a pension, and the government will top it up to £1,000 (higher rate taxpayers get an even better deal). Overall, from a tax perspective, pensions are superior to property, in my view.

It’s a hassle

Finally, don’t forget the hassle of buy-to-let. If you were to hold on to your buy-to-let property in retirement in an effort to generate an income, you could experience a number of challenges. Do you really want to be dealing with issues such as finding tenants (and dealing with bad ones) and taking care of repairs when you’re 80? It’s not ideal.

This is another area where pensions have a clear advantage. Build up a portfolio of dividend-paying companies within your pension, and you’ll get paid a regular income in retirement for doing absolutely nothing.

All things considered, investing in buy-to-let as an alternative to a pension appears quite risky, in my view. I think you’re better off sticking with a pension and investing in a diversified portfolio of stocks to grow your wealth.

The post Is buy-to-let a good alternative to a pension? appeared first on The Motley Fool UK.

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Views expressed 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.

That said, there are certain areas of the UK property market that do look attractive right now, to my mind. For example, the market for large, strategically-located warehouses is booming at the moment due to the growth of online shopping – for every extra £1bn in online spending, an additional 1.125m square feet of warehouse space is required. And I’ll point out that it’s possible to invest in this niche area of the real estate market, tax-free, through an ISA account. Here’s a look at how I’d invest.

Online shopping play

One of the best ways to get exposure to this exciting area of the real estate market is an investment in FTSE 250-listed real estate investment trust (REIT) Tritax Big Box (LSE: BBOX).

It owns a £4bn portfolio of advanced warehouses (known as ‘big boxes’) across the UK that are let out to some of the biggest names in retail such as Amazon, Tesco, B&Q and TK Maxx. These big boxes are modern, highly efficient, and strategically located, enabling retailers to hold goods for distribution to other parts of the supply chain or directly to consumers.

You can invest in BBOX shares, tax-free, through a Stocks and Shares ISA. 

Capital growth potential

The investment case for Tritax looks compelling, in my opinion. Not only does the company operate in an industry that should benefit from a powerful long-term trend (the growth of e-commerce) but it also has a highly experienced management team with a strong track record of delivery.

Given the stock’s reasonable valuation (P/E ratio of 20.7) today, I see the potential for decent capital gains over time as the company grows in size and expands its portfolio. I’ll point out that analysts at Citigroup recently raised their price target for the stock to 186p – nearly 30% higher than the current share price.

Big dividends on offer 

In addition, the stock has substantial income appeal. Since paying its first dividend in 2014, BBOX has notched up four consecutive dividend increases. For the year just passed, its dividend target is 6.85p per share, which at the current share price, equates to a healthy yield of 4.7%.

The company has said that, due to the quality of its portfolio and its customer base, it’s confident that it can continue to deliver secure and growing dividends to shareholders, as part of an attractive total return over the medium term, irrespective of conditions in the wider economy.

Overall, I see considerable investment appeal in Tritax Box Box and see it as a great (hassle-free) way to get exposure to a high-growth area of the UK property market. I hold the stock in my own ISA and I plan to hold it for the long term.

The post Forget buy-to-let. Here’s a UK property investment I’d buy in 2020 instead appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Tritax Big Box. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tesco and Tritax Big Box REIT. 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.

Yet looking ahead, I’m not convinced that buy-to-let property is the best asset class to invest in. Here’s a look at why I won’t be touching buy-to-let in 2020 and where I’ll be investing instead.

House price uncertainty

One thing that concerns me about buy-to-let is that house price growth has slowed considerably in recent years.

According to the UK House Price Index, between the start of January 2000 and the end of December 2016, the average property in the UK increased in value from £85,000 to £216,000. That equates to annualised growth of around 6%. However, since January 2017, the average property price has only increased to £234,000, which equates to annualised growth of less than 3% over that period.

I suspect that this lower level of growth is likely to persist in the near term due to Brexit and general economic uncertainty. Do I want to be throwing a ton of money into an asset class with low growth prospects? Not particularly. 

Extra stamp duty and higher mortgage rates

Next, I don’t like that fact that you have to pay extra stamp duty (an additional 3%) on buy-to-let properties as well as higher mortgage rates. Mortgage interest tax relief is also being phased out. To my mind, these extra costs and the removal of interest tax relief make the asset class far less attractive as an investment.

The hassle of it all

Finally, there’s the hassle of investing in buy-to-let. Not only do you have to find good tenants who will look after your property and pay their rent on time, but you also have to take care of repairs and maintenance. And don’t forget all the buy-to-let regulation that you need to stay on top of such as minimum space requirements and minimum energy efficiency standards.

All things considered, I think there are better investments than buy-to-let right now.

Here’s where I’ll be investing instead

One asset class that I will be investing in next year, however, is shares. In my view, shares offer a number of advantages over buy-to-let.

For starters, I really like the fact that you can invest £20,000 per year in shares through a Stocks & Shares ISA completely tax-free. This means that investing in shares can be very tax-efficient.

Secondly, I love how easy investing in shares has become. These days, you can open an account in just minutes and monitor your account and place trades from your smartphone wherever you are.

Thirdly, I like the fact that shares are very liquid. If you need access to your capital, it’s easy to sell some shares. 

Finally, compared to buy-to-let, I see a lot more growth potential in shares, despite the fact that global equity markets have had a good run over the last decade. Given the growth that companies such as Apple, Microsoft, and Google are generating right now, I expect stocks to continue delivering healthy returns in the years ahead.

The post 3 reasons I won’t be investing in buy-to-let property in 2020 appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Apple, Microsoft, and Alphabet (Google). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Apple, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft. 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.

According to my research, most buy-to-let mortgages allow investors to borrow up to 60% of the property’s value.  According to the Land Registry, the average house price in the UK is £234,853, implying investors can get into the buy-to-let market with an average deposit of just £93,941.

However, as well as boosting purchasing power and profits, leverage also has a dark side. It can magnify your losses as well. And now that the government has decided to remove the mortgage tax relief tax break that buy-to-let investors used to be able to claim, the appeal of borrowing to buy a rental home has decreased dramatically.

This is just one of the issues buy-to-let investors now have to deal with. In recent years the government has been clamping down on the sector in an attempt to force rogue landlords to improve the quality of their properties. These new laws have had a knock-on effect across the rest of the industry and have, in my opinion, drastically reduced the attractiveness of buy-to-let property as an investment. 

The better investment

Instead, I think the stock market is a much better home for your money. Granted, borrowing money to increase your returns in the stock market should be avoided, but investing in the market has many other benefits.

These include the fact you can own stocks in an ISA, so you don’t have to worry about any additional tax obligations, the liquid nature of the stock market, which means you can get in and out whenever you want, and the ability to diversify your portfolio to click of a button.

On top of these benefits, stocks and funds come with their own managers so you don’t have to worry about managing anything yourself. Meanwhile, the stock market also offers much higher returns than the buy-to-let market. 

Over the past 10 years, the FTSE 100 has produced an average annual return for investors in the region of 7%. The FTSE 250 has produced an average annual return of 9%. You can still get yields of 10% in some buy-to-let markets, but the UK average is closer to 5%, although that excludes capital growth, maintenance charges, and interest costs. 

The road to a million

At an average annual return of 9%, I calculate it would take 27 years to make £1m in the stock market, with an initial deposit of £93,941. If this money were invested in an ISA over several years, there would be no taxes to pay on income or capital gains. 

Further, by using a low-cost tracker fund, you could get the annual management fee down to below 0.8%. By comparison, most letting agents charge 10%, and many landlords spend as much as 40% of their rental income on property maintenance.

That’s why I would ignore the buy-to-let market and invest my money in the stock market instead to make a million. 

The post Forget buy-to-let, I’d aim to make a million using this simple strategy appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.

With the average house price in the UK rising from just under £85,000 at the start of the millennium to around £215,000 by the end of 2016, you could buy a property, rent it out, pay the mortgage with the rent collected (and claim a tax deduction for the mortgage interest) and use the bank’s money to profit from the prolific rise in house prices.

In short, it was a brilliant investment.

Uncertain outlook for buy-to-let 

Heading into 2020, however, the outlook for buy-to-let looks far less certain.

For starters, house price growth has slowed considerably in recent years. According to the UK House Price Index, property prices have increased by just 8.9% over the last three years, which equates to annualised growth of less than 3%. With Brexit uncertainty lingering, I think this lower growth could persist for a while, which obviously makes buy-to-let less attractive as an investment.

I’ll also point out that the government has really cracked down on buy-to-let recently, making it far more challenging to generate high returns from the asset class. Not only have stamp duty surcharges (an additional 3%) for buy-to-let properties been introduced, but mortgage interest tax relief has also been phased out. On top of this, there are now many regulations that landlords have to comply with, which add extra costs.

Weighing everything up, I’m just not convinced that buy-to-let is the best place to invest in 2020.

How I’ll be investing my money in 2020

So, where will I be investing in 2020? Well, one asset class that I continue to believe has significant long-term investment potential is stocks.

Yes, stocks have had a great run in recent years, meaning we could potentially see a short-term pullback in the near future. Yet looking at the long-term growth potential of top companies such as iPhone maker Apple, Windows owner Microsoft, Dove soap owner Unilever, and Johnnie Walker owner Diageo, I think there’s a very good chance that stocks will continue to generate excellent returns over the long run.

I’ll also point out that you can invest in stocks completely tax-free through a Stocks & Shares ISA (up to £20k per year), and that it’s much easier than investing in buy-to-let because you can open an account in just minutes and you don’t have to worry about getting a mortgage. 

So, next year I simply plan to buy more individual high-quality stocks, such as the four I mentioned above. These have risen 151%, 153%, 44%, and 58% respectively over the last three years thrashing buy-to-let. And I will also put more money into top global equity funds such as Fundsmith Equity and Lindsell Train Global Equity (up 60% and 70% respectively over the last three years), which provide exposure to world-class companies listed both here in the UK and internationally.

I believe that this simple investment strategy should eventually lead to a seven-figure portfolio.

The post Forget buy-to-let. Here’s how I’ll be targeting 7-figure wealth in 2020 appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Apple, Microsoft, Unilever, and Diageo and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Apple, Microsoft, and Unilever. The Motley Fool UK has recommended Diageo and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2021 $85 calls on Microsoft. 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.

Both the Conservatives and the Labour party are promising further restrictions on landlords. Labour’s proposals are by far the most severe. The party has discussed the possibility of introducing legislation that would let tenants buy property from their landlords at a price below the market rate.

On the other hand, the Tories will undoubtedly push ahead with their plans to remove mortgage interest tax relief for landlords entirely from April 2020.

New eco-friendly standards are also set to come into force from the beginning of April, and there has been talk of introducing a minimum three-year term tenancy agreement, although this plan seems to have stalled for the time being.

Considering all of the above, I think the best option for buy-to-let investors is to get out of the industry altogether and diversify into international blue-chip stocks instead.

International income

The best vehicle to use to invest in global stocks is the FTSE 100, in my opinion. A low-cost FTSE 100 tracker fund will give you exposure to the index at the click of a button.

With more than 70% of the index’s profits coming from outside the UK, the FTSE 100 should continue to produce healthy returns for investors no matter what happens when voters go to the polls in December.

Another bonus of investing with a passive index tracker fund is that you don’t have to worry about managing the portfolio yourself. All you need to do is sit back and watch the income roll in, which is undoubtedly a lot less effort than managing buy-to-let property. There will be no unforeseen costs or charges either if you fail to keep up with property maintenance. And there’s absolutely no risk whatsoever of having a tenant who does not pay their rent.

Global diversification

The other advantage of the FTSE 100 is its diversification. The 100 different companies that make up the index operate in a range of industries around the world, so you don’t have to try to predict the success or failure of just one particular sector.

The index also offers one of the highest levels of income of any primary stock market around the world.

At the time of writing, the FTSE 100 supports an average dividend yield of 4.5%. As this payout is an income stream from 100 different companies, I think it is much more secure than any income from a rental property.

So that’s why I would dump buy-to-let and invest in the FTSE 100 instead. Its global diversification and income stream should protect you against any general election uncertainty and produce a steady income, no matter what happens to the UK economy in the weeks and years ahead.

The post Why I’d dump buy-to-let and buy the FTSE 100 with the general election looming appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.

There was a time when purchasing a property with the aim of renting it out was a great strategy for building wealth. Not only did the monthly income contribute towards (or completely cover) mortgage payments, but landlords also stood a good chance of making a profit when selling the property due to consistently rising house prices.

These days, however, making a mint is a lot more difficult. Prospective landlords now pay higher stamp duty when buying their property and higher mortgage rates compared to your typical homeowner. There are numerous new regulatory hoops to jump through and the likelihood of bigger tax bills, to boot. There’s also the ongoing maintenance costs to consider. 

On top of all this, concerns over a slowing economy, Brexit-induced or otherwise, could mean house prices stay as they are or possibly fall in the short-to-medium term. So what options are available for those looking to generate income, but unwilling to take on the inherent messiness of the buy-to-let market? 

A better way…

Well those willing to put in the effort could pick individual company stocks. These days, a large number of the UK’s biggest companies, such as Royal Dutch Shell and Lloyds Bank, pay dividend yields of over 5%. The key is to select those that are able to sustain these payouts from those who will end up needing to cut them. 

Another option would be to pick a bunch of income-focused funds run by professional investors. While a less demanding strategy, this still involves trying to separate the (human) wheat from the chaff. Actively-managed funds can also be expensive and some may do little more than imitate the benchmark they’re required to beat. Remember, the more of your returns you give back to the person running the fund, the less money you’ll have to compound over time.

Go passive

For me, passive investing is the best way for time-poor people to generate a second income, specifically through the use of cheap, exchange-traded funds. 

US giant Vanguard, for example, offers the FTSE All-World High Dividend Yield fund. For an ongoing charge of 0.29%, this tracks the performance of an index featuring a huge number of high-yielding large and mid-cap companies from developed and emerging markets. In addition to giving you instant diversification (thus reducing risk) the dividend yield was 3.53% at the end of September.

Alternatively, iShares provides the MSCI World Quality Dividend fund. This is composed of higher-than-average yielders that also exhibit characteristics of quality businesses. It charges 0.38%, and pays out 2.9%. 

If you’d like to stick to companies closer to home, however, iShares also offers the far-more-concentrated FTSE UK Dividend Plus. For an ongoing charge of 0.4%, your money will be invested in ‘just’ 50 stocks generating a stonking 6.8% yield (at the time of writing).

Of course, you don’t need to stick to income-focused, exchange-traded funds to get your dividend fix. By simply investing in a low-cost product that tracks the FTSE 100 or FTSE 250, you’ll receive yields of around 4.5% and 2.8%, respectively.

The only thing worth considering here, however, is that the latter contains more companies with a domestic focus, meaning that your capital isn’t as well spread out around the world as it would be with the former.

The post I’d forget buy-to-let and use these low-cost dividend funds for income instead appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.