Buy-to-let vs the stock market – which is better?
Buy-to-let property investment is a popular way of generating wealth in the UK. And many buy-to-let investors have done well over the last decade, as not only have they received rental income but they have also generated sizeable capital gains as property prices have soared.
But is buy-to-let investing better than stock market investing? That’s hard to say, as both have their advantages and disadvantages. If you’re considering whether you should invest in a buy-to-let property or buy stocks, here are four issues to consider:
The first big difference between buy-to-let investing and the stock market is the amount of capital you’ll need to get started. If you’re looking to buy a property, it’s likely you’ll need a fairly large deposit. Buy-to-let mortgage requirements are stricter than ordinary mortgage requirements (and you’ll have to be approved) so you may need a deposit of 20%-40% of the value of the property. Also, don’t forget stamp duty. This varies depending on the value the property but could make your purchase considerably more expensive. For example, stamp duty on properties valued between £250,001 to £925,000 is 8%. You could be looking at a large sum to invest in a buy-to-let property.
In contrast, with stocks you could potentially get started with just a few hundred pounds. So, in this regard, stock market investing does have an advantage.
It’s also important to consider how easily you can cash out of your investment if you wanted to. Again, stocks have an advantage here, as in general, they are very easy to sell. Normally, you’ll have your cash back in your bank account in a matter of days. In comparison, it could take months to sell a property. And you’re likely to incur significant fees in the process.
Spreading your risk
Another issue to think about is diversification. With a buy-to-let property, all your eggs are in one basket, which adds risk to the investment case. For example, what if you buy a UK property and prices fall by 20% due to Brexit?
In contrast, with stocks, it’s easy to spread your capital over many different investments and reduce your risk. Stock market investors can invest across different geographic regions (UK, US, Europe, Asia, emerging markets etc.), different sectors (technology, financials, healthcare etc.) and different sized companies (large-cap, mid-cap, small-cap). That way, if one particular area underperforms, it should be offset by stronger performance in other areas.
Lastly, don’t forget regulation. In recent years, the UK government has had buy-to-let investing in its sights, and there are now far more regulations that impact investors. For example, landlords now need to check whether tenants have the right to live in the UK, and buy-to-let properties now need to have a certain energy rating. There’s also talk of a UK-wide landlord licensing system and regular rental property inspections. When you consider the extra stamp duty payable and the fact that by 2020 no mortgage interest will be deductible from your tax bill, the attraction of buy-to-let has certainly diminished in recent years.
When you consider the four issues above, stock market investing clearly has advantages. That’s not to say buy-to-let doesn’t have a place within a diversified investment portfolio, but investors do need to be aware of its drawbacks.
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