Why this hassle-free investment could beat returns from buy-to-let

If you’ve ever been a property-owning landlord or landlady you’ll know that the whole process of managing tenanted property can end up being a right royal pain in the derrière. I can see that on paper the double attractions of rental income and potential capital gains are tempting, but if you are trying to work in another occupation as well as invest your money directly into property for rent you may find the problems outweigh the potential benefits.

Hands-on investment

Owning property is very far from being passive investing. You’ve got to find tenants, deal with maintenance and repair issues, organise rent collection, sort out insurance every year, deal with complaints and possibly unpaid rent. You might even get involved in evicting people. My guess is you’ll never stop worrying about your investment and, at the end of the day, any number of things could happen to prevent you from turning a profit. You might even lose money.

You could outsource some or even all of the tasks that fall to a landlord to a property service and letting agency, but the more you give them to do, the higher the fees, which will work against your income. Just when you think you’re getting ahead with things financially, maybe the property will need an expensive refurbishment. Yet in the buoyant property market that we’ve seen over the past 20 years or so, many buy-to-letters have done well as property prices shot the lights out. However, to me, the market looks toppy, and recent tax changes make the whole buy-to-let thing look less attractive than it once was. I wouldn’t be tempted into the game now even though I endured a few years of it (albeit profitably) during the previous two decades.

Regular and steady investing

Instead, why not sit back and invest from your armchair. All you really need is a passive investment vehicle such an FTSE 100 index tracking fund. The great thing about the FTSE 100 is that it gives you exposure to the property market as well as to lots of other sectors because of the variety of firms contained within the index. If you invest in a FTSE 100 tracker, part of your money will follow the fortunes of big Real Estate Investment Trust (REIT) companies Land Securities Group, British Land Company and Segro, as well as firms in other sectors such as BP and AstraZeneca. Straight away, that happy circumstance means you’ve overcome the problem of lack of diversity that you get when you invest in a buy-to-let property. If your money is all in one property, all your eggs are in one basket. But if your money is in the FTSE 100, it is spread over many different firms.

Another great benefit of investing in a passive index-tracking fund is that you can invest the money in stages and take full advantage of the pound/cost averaging effect. You can’t really do that with buy-to-let. There’s a big deposit to pay and a mortgage to service, or it’s all in with the full cost of the property right from the start, depending on your financial circumstances. To me, a regular investment in the FTSE 100 is far more attractive than buy-to-let today.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca, British Land Co, and Landsec. 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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