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Here's why the FTSE 100 should thrash buy-to-let as an investment

Here's why the FTSE 100 should thrash buy-to-let as an investment

Author: Harvey Jones

Published by
Motley Fool

3m read

19 October 10.36am

Hargreaves Lansdown is not responsible for this article's content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest. Article originally published by Motley Fool.

Pity the poor buy-to-let market. It enjoyed almost 20 years of unbroken success, filling people’s heads with dreams of becoming property tycoons, until the Treasury tax crackdown cut it down to size. You can still dream, but the reality is sobering.

Buy-to-let down

The market has been shrinking for three years now, with the number of buy-to-let mortgages falling another 13% in the last 12 months. There are still some hotspots, figures from Private Finance show you can get a rental yield of 6.6% in Southend-on-Sea, followed by 6.4% in Nottingham, but most offer much lower income, notably London.

Die-hard investors could still make the sums work, with mortgage rates near record lows and property prices slowing, but it’s a lot of effort, especially since you pay a 3% stamp duty surcharge on purchases and higher rate tax relief is being phased out.

Mortar life

I resisted the allure of buy-to-let, even in the glory years. Stamp duty, mortgage arrangement costs and legal fees add up, plus you also have the effort of finding a property, doing it up, advertising for tenants, chasing rent, and so on. Who needs all that, especially as you move into retirement?

+1.89%

FTSE 100

6384.73 +118.54

Buy-to-let looks even less tempting as house price growth slows, reducing your potential capital gains, while landlords have to jump through more and more regulatory hoops. Sometimes I wonder why they bother at all. Many no longer do.

Cheap as blue-chips

Personally, I prefer to stick money in a FTSE 100 index tracker. First, you can buy one in seconds, whereas purchasing a property can take months. Also, they are cheap. If you buy, for instance, the iShares Core FTSE 100 you will incur share dealing costs of around £10 then pay annual charges totalling just 0.07%, and that’s it. Similarly, unit trust tracker HSBC FTSE 100 Index has no upfront fees and an annual charge of just 0.17%.

iShares plc
630.3p 0.00%
HSBC ETFs Plc
6,390.5p 0.00%

Market closed | Prices delayed by at least 15 minutes
Switch to live prices |

You get an attractive yield too, currently 4.01%. True, that is lower than the yield on a Southend buy-to-let, but it will be a lot less troublesome to collect. This is also a tempting time to invest in the FTSE 100, because as Peter Stephens points out here, the index has slumped 10% since May, offering you a cheaper entry point.

Liquid investment

The FTSE 100 could fall further if we see a repeat of the recent global stock market sell-off. However, it always recovers, if you give it time, and you should be looking to hold for five or 10 years at a minimum, and preferably longer.

The FTSE 100 has another advantage over bricks and mortar - it is highly liquid. You can buy and sell in seconds, for next to nothing, while you could be stuck with an unwanted property for months or even years, and your estate agent and the taxman will take a chunk of any profit when you do sell. Buy the FTSE 100 inside your ISA allowance, and you pay no tax at all.

Instead of buying the whole index, you could also pick out a few of the best stocks: these are worth considering. Either way, it’s a lot less bother than property.

This article was written by Harvey Jones from The Motley Fool UK and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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Article originally published by Motley Fool. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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