Buy-to-let is dead. Long live the FTSE 100!

Man shuffling cards
Man shuffling cards

According to a study published by estate agents Savills, in the five years between 2009 and 2014, residential property landlords made of total profit of £177bn from capital growth. That shows just how profitable buy-to-let investing has been since the financial crisis.

Indeed, figures show that between the end of the financial crisis and 2015, the total value of private rented housing in Britain grew by 57%.

Including rental income, the returns are even more impressive. In April 2014, a study conducted by the Wriglesworth Consultancy showed that £1,000 invested in buy-to-let property in 1996 was worth £4,800 by 2014, eclipsing the returns from equities. Over the same period, a similar investment in shares grew to be worth just £3,000, according to the study.

Buy-to-let investing has been a fantastically profitable strategy over the past few decades, as these figures show. However, the environment has changed drastically over the past few years, and it now seems to me that the good times are over.

With this being the case, I think an investment in the FTSE 100 a much better investment today than buy-to-let.

Attractive returns

One of the reasons why owning a buy-to-let portfolio can be so profitable is the ability to gear up your money with a mortgage. For example, if the property you buy is worth £200,000, you can usually borrow around 75% of this value. As a result, the potential profit you can make on your initial investment is significantly higher.

If you put down just £50,000, and the property increased in value by 10% to £220,000 your profit would be £20,000, a total return of 40% on your initial investment.

This works the other way as well. If the property falls in value by 10%, your profits could evaporate quickly.

Another benefit of using gearing is that it boosts your income return. If you invest £50,000 buying a property worth £200,000 with a yield of 5%, you could make an annual return of £10,000 in rent, a 20% yearly return on the cash you invested.

This is an extremely simplified example. In reality, there are a lot of other factors to consider when managing a buy-to-let property, which will reduce your income. If you can’t find the right tenant, for example, your returns could fall into negative territory as you will still have to pay to maintain the property.

Uncertainty growing

With the outlook for the buy-to-let sector becoming more uncertain by the day, I think it’s now time to avoid the asset class. Using borrowed money to improve returns in a bull market is an excellent strategy, but when the tide turns, losses can mount quickly.

According to data from online property portal Rightmove, house prices fell by more than £5,000 on average in November and analysts believe this trend could continue. With this being the case, it looks to me as if buy-to-let is dead money.

So today, I reckon an investment in the FTSE 100 is a much better use for your money. At the time of writing, the UK’s leading blue-chip index supports a dividend yield of 4.5%.

Unlike buy-to-let, you don’t have to do any work to receive this income. What’s more, this income stream is an aggregation of dividends from companies operating all over the world — so the distribution is protected against Brexit uncertainty.

That’s why I believe the FTSE 100 is a much better hands-free income investment today compared to buy-to-let.

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Rupert Hargreaves owns no share 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.