Investors across the UK have made tens of billions of pounds from buy-to-let investing over the past few decades.
However, times are changing, and it is no longer as easy as it once was to make money from a rental property.
New rules
Landlords now have to deal with a host of new regulations and tax laws that have been designed to take the air out of the buy-to-let industry.
In some respects, these changes are working. Figures show that small-time landlords are leaving the sector in record numbers, selling their properties to either professional investors or owner-occupiers. It doesn’t look as if this trend is going to come to an end any time soon.
At the beginning of April next year, more tax changes are slated to come into force. These will reduce the capital gains tax relief landlords are entitled to, on top of further changes to the mortgage tax relief law.
Having said all of the above, there are still pockets in the buy-to-let market where professional landlords can make money. In some areas of the country, you can achieve rental yields of 6% or more, significantly above the rate of interest most mortgage providers are currently demanding.
Unfortunately, there is no getting around the additional regulations policymakers have introduced. It is for this reason that I would rather own the FTSE 100 over buy-to-let property.
A better buy
Over the past decade, figures show that the FTSE 100 has produced an average annual return of around 7%. Buy-to-let property has returned slightly more, approximately 10% when you factor in both rental income and capital gains, but these numbers exclude maintenance and upkeep costs.
So, buy-to-let wins on returns, but this is only an average figure and varies from region to region. Some areas of the UK, particularly the South, have fared much better, and some regions have fared worse.
While buy-to-let investing may depend on where you make your initial investment, the FTSE 100 is easily accessible for anyone in the UK or indeed the world. On top of this, the index provides much more in the way of diversification.
More than 70% of the constituents’ profits come from outside the UK, so you’re not reliant on any one particular country or sector to yield a return. As your investment is spread across 100 companies as well, there’s only a slim chance that you will ever suffer a permanent capital impairment on your investment.
Keep borrowing under control
Another factor to consider is leverage. The average home price in the UK is more than £250,000, which for most people is out of reach. This figure implies that to obtain just one buy-to-let property, a £100,000 of deposit would be required for a 60% mortgage.
The borrowing might help you acquire the property, but if you end up with no tenant, the leverage could come back to haunt you. On the other hand, you can invest in the FTSE 100 today with as little as £100 with no need to borrow money.
So that’s why I would rather invest in the FTSE 100 than rental property. Not only does it offer much more in the way of diversification, but returns are much more universal, index investing requires less work, and you do not need to borrow money to get involved.
