There is no denying that buy-to-let investing has created a considerable amount of wealth for investors over the past few decades. They have benefited from a double tailwind of rising property prices and rising rents, turbocharging investment returns.
But it now looks as if the best days are behind the market. The government has increased taxes and reduced tax breaks available to buy-to-let investors, and at the same time, regulation to protect tenants has increased the cost for landlords.
Indeed, I estimate that the average rental yield for landlords getting into the market today is just 3.4% after deducting fees from letting agents and tax, although this is only an average. There are many moving parts to the calculation so it is difficult to come up with an exact figure.)
With this being the case, I reckon the FTSE 100 is a much better investment than buy-to-let today. Here are the three reasons why.
Better than buy-to-let
Firstly, there is the issue of diversification. The FTSE 100 gives you instant exposure to 100 of the world’s largest companies, operating in countries around the world in various industries.
Unless you have tens of millions of pounds to invest, there is no way you are going to be able to achieve the same sort of diversification with buy-to-let. And even if you could achieve the same level of diversification, the amount of work required to keep the portfolio functioning effectively, managing tenants, rent and properties would be tremendous.
With the FTSE 100, you can build a globally diversified portfolio at the click of a button, and there is no requirement to commit any further effort on your part.
Keep more of your income
Secondly, when it comes to income, the FTSE 100 certainly offers a better proposition than buy-to-let.
For a start, the index’s dividend yield (around 3.8% at the time of writing) is above the average yield on offer from buy-to-let today (according to my figures as noted above).
Dividend income is also taxed differently to property income. Profits from renting out property (after deducting allowable costs) are taxed at your marginal tax rate, either 20%, 40% or 45%. The dividend tax rates for the 2018-19 tax year are 7.5% (basic), 32.5% (higher) and 38.1% (additional).
Of course, what you end up paying to the tax man will depend on many other different factors. Overall, however, dividends are a more tax efficient source of income, especially if you hold your FTSE 100 investment inside an ISA, which means any income and capital gains will be completely tax-free — you can’t do the same with property.
Liquid investment
Third, investing in the FTSE 100 gives you flexibility. Property wealth is not liquid wealth, which is probably its biggest downfall. As the stock market is highly liquid, if you desperately need cash in a hurry, you can liquidate your investment at the click of a button.
It is challenging to sell a house in the same time frame. According to residential property market specialist Hometrack, it takes on average six weeks to a sell house, although in times of market stress, it could take years to find a buyer.
