Thinking of investing in buy-to-let? Buying these FTSE 100 shares may be a better idea

A number of FTSE 100 (INDEXFTSE: UKX) shares could offer stronger risk/reward opportunities than buy-to-let.

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With house price growth having slowed in the last couple of years, many investors may be considering buy-to-let. This could be down to the relatively low level of State Pension currently available, or maybe due to the low interest rates on offer. And with the continued lack of supply of properties versus demand, the long-term outlook for UK house prices appears to be positive.

The reality, though, is that it may not be necessary to engage in buy-to-lets at the present time. A number of FTSE 100 companies appear to offer lower risks, as well as high returns. As such, they could be worthy of consideration instead.

Long-term potential

As mentioned, the demand/supply imbalance of the housing market means that it could offer investment potential over the long run. Based on current projections of population growth in the UK over the coming years, the housebuilding sector is unlikely to keep pace with demand. In other words, while there’s a shortage of supply of houses at the present time, there’s a good chance that this will worsen as the UK’s population rises at a faster rate than new homes are built.

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Alongside this, interest rates are set to remain relatively low. In fact, they’re expected to rise by only 125 basis points over the next couple of years. This could keep mortgages relatively affordable for buy-to-let investors, while rents could continue to rise due to a lack of supply. As such, the house price rises of the last two decades could continue post-Brexit.

FTSE 100

While engaging in a buy-to-let investment is one means of taking advantage of rising house prices, there are simpler and less risky options available. The FTSE 100 contains a number of housebuilders and real estate investment trusts (REITs) which could provide investors with access to the potential gains on offer in both the residential and commercial property markets over the coming years.

In many cases they offer a wide margin of safety in terms of their share prices being below their intrinsic values. They could therefore offer favourable risk/reward ratios, as well as improved diversity. Instead of buying one, or a small number of buy-to-let properties, an individual could have a FTSE 100 portfolio that includes property companies operating across the UK. This would significantly reduce overall risk from a geographic perspective. It could also mean that there’s more reliable cash flow for the investor, since a group of companies’ dividends may be more robust than rent received from one or more tenants.

Outlook

While the property market may be experiencing a difficult period, it seems likely to deliver high returns in the long run. An imbalance between supply and demand could provide growth opportunities for investors in the coming years. However, buying a range of FTSE 100 shares instead of engaging in a buy-to-let may be a less risky and easier way for an investor to capitalise on the growth prospects within the industry. Given the low valuations that are on offer, it may also be a more rewarding move over the long run.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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