Buy-to-let property and stocks and shares are assets I can use to generate passive income. However, both have different benefits and drawbacks. As such, I have been carefully evaluating which strategy I should use, considering my personal circumstances and goals.
Buy-to-let outlook
I believe the biggest hurdle for owning rental property is the cost. With the average UK property price now exceeding £260,000, I calculate I would need at least £100,000 to fund a deposit. This also assumes a mortgage lender would provide the remaining 60% of the purchase price.
By comparison, I can start buying stocks and shares today with just a few pounds.
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Despite this drawback, buy-to-let property does have some significant advantages over equities. Rental income can be more stable and predictable than dividend income. As dividends are paid out of company profits, they can be cut at a moment’s notice if earnings plunge.
What’s more, if the property’s value also increases, I should be able to benefit from both income and capital growth. The same is true of shares, but borrowing money via a mortgage can improve returns (although it can increase losses if values decline).
Income can be more stable and predictable from rental property but is not guaranteed. Finding tenants can be a lengthy and costly process. I may also have to foot the bill for repair costs, which will eat into my bottom line.
And then, there are the extra tax obligations to consider. In recent years, the government has been cracking down on buy-to-let landlords. This is something I am factoring into my analysis.
Passive income from stocks and shares
Unlike rental property, I can own equities inside an ISA. Any assets held in an ISA do not attract income or capital gains obligations. Although ISA contributions are capped at £20,000 a year, that is still a significant benefit.
It is also easier to diversify with stocks and shares than rental property. For example, with an investment of £1,000, I can buy a basket of shares in different sectors and markets worldwide. It would be impossible for me to do the same with buy-to-let property. I would need tens of millions of pounds to build an international property portfolio and the infrastructure to manage these assets.
Another advantage equities have over property when investing for passive income is time. I mean that it is a lot faster to buy and sell stocks, and I do not need to worry about managing the underlying businesses.
Indeed, I already own passive income champions British American Tobacco and Direct Line in my portfolio. These stocks currently support a dividend yield of around 7%. Earning this income requires absolutely no effort on my part. And with an investment of £100, I could make a passive income of £70 a year.
Therefore, while buy-to-let property does have its advantages, I think stocks and shares suits my own needs better.
