While many people invest in the buy-to-let sector to improve their long-term financial future, they may be better off buying shares in FTSE 100 companies. Not only does the FTSE 100 potentially offer a higher dividend yield than the income return on properties in some parts of the UK, it is far easier to diversify among stocks than it is across properties.
Looking ahead, the UK economy may experience an uncertain period due to Brexit. As such, the FTSE 100’s international exposure may also make it a more appealing means of producing capital growth and an income when compared to buy-to-let.
Income potential While in previous decades it was possible to generate a generous yield from property, today that prospect is far more difficult. Certainly, there are still parts of the UK where an investor can purchase properties and obtain a yield that beats the FTSE 100’s income return of 4.5%. However, those places seem to be falling in number, with house price growth putting many landlords’ cash flow under pressure.
Looking ahead, interest rate rises could cause buy-to-let investors to experience a fall in income. A higher interest rate would increase mortgage costs. At a time when rental growth may be relatively sluggish, this could squeeze their net income return on property over the medium term.
Diversity While it is possible to build a diverse portfolio of properties, due to their cost this can be a challenging task which takes many years for all but the largest of landlords to achieve. This means that many buy-to-let investors have a somewhat limited property portfolio that leads to significant concentration risk. This is where one or more assets dominate their financial performance, with challenges such as repairs, void periods or even tenants failing to pay rent causing a significant negative impact on their returns.
By contrast, it is straightforward to buy a range of companies operating in different sectors of the FTSE 100. With dealing costs having fallen in recent years, having a diverse portfolio of stocks is becoming an increasingly accessible goal for a wider range of investors.
International exposure With the UK economy facing an uncertain period as a new Prime Minister takes office and the Brexit process continues, having some international exposure within a portfolio could be a sound move. Since the FTSE 100 has stocks that operate across the world economy, investing in it is a simple means for investors to mitigate the potential impact of significant political and economic change in the UK over the coming months.
Of course, the UK may present an investment opportunity right now. But for investors who are seeking to build a retirement nest egg, or live off their savings in older age, spreading the risk across multiple economies could be a shrewd move. As such, the FTSE 100 may offer lower risk, as well as higher returns, compared to a buy-to-let.
Peter Stephens has no position in any of the shares 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.
Motley Fool UK 2019