There’s no denying that over the past few decades, buy-to-let investing has generated a tremendous amount of wealth for investors, but so has the stock market.
However, equities are generally perceived as being riskier than property because they go up and down a lot. Property prices do gyrate, but they don’t fluctuate as much as stock prices, which regularly rise or fall by 5% in a single day.
Still, when we smooth out short-term volatility, over the long term, the stock market has produced an average real return for investors of around 5.4% per annum — that’s going back to 1900 including reinvested dividends.
I don’t have the data for UK home prices back to 1900, but Nationwide has compiled an index of home prices going back to 1952. According to this, UK property prices have increased at a compound annual rate of 7.3% over the past 67 years, but without taking inflation into account (which in some years has been very high). I do not think it is unreasonable to say that on a real basis (after the impact of inflation) equities and home prices have produced a similar annualised return over the past seven decades.
Half the picture
These numbers suggest that property and equities are relatively similar in terms of returns, and there’s no noticeable difference between the two assets. But these numbers only give us half the picture.
For example, they do not take taxes and fees into account. Also, with property, there are things like maintenance costs and council tax to consider.
Generally speaking, with buy-to-let, rental income covers mortgage costs and maintenance and tenants take care of utility bills and council tax. So, for simplicity’s sake, in this example, we can exclude these added costs as they are balanced out by income. This means but the bulk of returns from buy-to-let comes from capital gains, which as the data above shows, has produced the same kind of profits for investors as equities over the long term.
Is it worth the effort?
This poses the question, is it worth the effort of investing in buy-to-let and going to all the trouble of finding a tenant, making sure the property is habitable, managing the property and dealing with any issues for a return that is virtually the same as equities?
By comparison, if you were to invest your money in a simple tracker fund, all you would need to do is sit back and collect a regular dividend cheque. Everything else is taken care of for you and there is no need to worry about managing tenants or maintaining a property.
With this being the case, on balance I think the FTSE 100 is a much better pick then buy-to-let. The returns are fairly similar, but with the FTSE 100, you can buy in small amounts, sell easily if you need to and you do not have to worry about getting called out in the middle of the night to fix a leaky boiler, or having to evict tenants who have not paid their rent.
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.
Motley Fool UK 2019
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