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Investing versus property – which could be right for you?

With more landlords exiting the property market and needing a place for their cash to work harder, we look at what investing in the stock market can offer over property.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Landlords have been cashing in and moving on, as rising costs and a tougher regime persuade them there could be easier and more profitable ways to make money. Former property landlords are then faced with the dilemma of where to invest next. So it’s worth weighing up how a foray into stock market investments might compare to property.

This article isn’t personal advice. If you’re not sure if an investment’s right for you, ask for financial advice. All investments can rise and fall in value, so you could get back less than you invest.

Why are landlords selling?

Listen to part of our latest podcast on why landlords are selling.

New regulatory requirements have kept a lid on charges and fees landlords can raise, while the rising tide of responsibilities and the paperwork that comes with it has also increased costs.

The renters’ reform white paper published in mid-June will only magnify this effect. It’s a vital step forward for tenants’ rights. But it adds more responsibilities for landlords, and includes measures making it more difficult to raise rents. There’s a reasonable chance it could persuade even more to sell up.

The tax regime has also got tougher. Six years ago, property investors were slapped with a 3% surcharge on Stamp Duty. Then, a year later, the tax relief on buy-to-let started changing. For the past two years investors have only been able to claim a flat 20% tax credit on mortgage interest.   

Capital gains tax thresholds have also been frozen at a time of runaway house price rises. We’ve also seen the freezing of income tax thresholds, while rents are rising through the roof. It means property investors are paying more tax on the way in, more as they go along, and then even more when they sell up.

At the same time, runaway property price rises (which peaked at over 13% in June last year) and an incredibly brisk property market (which saw more than 200,000 sales in the same month) have convinced some landlords that now is the time to sell.

The concerns for property investors

Former property investors might find themselves with money burning a hole in their pocket. And given that no savings account is currently coming close to keeping up with inflation, assuming they want to put the money away for 5-10 years or more, the stock market could well be the answer.  

Should I save or invest?

However, there are some common reasons that property investors tend to hesitate.

Despite all the drawbacks of investing in property, it offers the reassurance of a concrete asset. Shares and funds, meanwhile, exist on paper or a screen, so they feel less tangible. One of the ways to get to grips with this is to think less of the numbers on the screen, and more about the underlying assets. Knowing you own a share of a household name can feel more meaningful.

Property also holds the benefit of being familiar. It’s part of everyone’s lives, so we feel we already know it well before we start. Shares, meanwhile, can feel more remote. However, owning a property to live in, and understanding what goes into working out if you can afford the mortgage, is a world away from property investment. You need to make completely different buying decisions based on things like maintenance, rental demand and yields.

You also need to factor in all sorts of things to your calculations, including tax, void periods, possible rental arrears, and additional costs from repairs to legal expenses.

At the same time, far from being unfamiliar, shares are part of most people’s lives. Not only are they shares in companies that we interact with every day, but if we have a pension, there’s a very good chance we already hold them – whether we know it or not.

Property investors also tend to be used to being more hands-on, so they might worry about handing investments over to a professional – either a financial adviser or a fund manager. However, stock market investments allow you to be as hands-on as you like.

There’s plenty of information available online to help you get to grips with investment, and take as much or as little control as you want. You might opt to use a financial adviser, or you could prefer DIY investment.

When it comes to analysing shares, we can do a lot of the legwork for you. Sign up now to get the latest research and updates on more than 100 of the most popular stocks with our clients.

You might want to opt for funds to provide more diversification, but even in this case, the more hands-on you’re prepared to be, the better.

Investigating the objectives of the fund, the underlying investments, and the strategies employed by the manager – then making sure they’re right for you – is a great way to make sure the fund is doing exactly what you expect.

Why funds are the foundation to a diversified portfolio

Advantages of investing in the stock market

Investing in the stock market has a couple of advantages over property that shouldn’t be overlooked. It offers more diversification and is easier to access. You can buy a share with just a few pounds, whereas you’ll need several thousand to buy a single property – even before you start diversifying. The fact you have all your eggs in so few baskets is a major drawback for property investors.

Shares are also far more liquid, so when you eventually want to cash them in, you can normally sell shares quickly and easily. Compare that to property, which can take months to sell, and require a real discount in a difficult market. You can also choose to cash in whatever you want, whenever you need it. It’s much more difficult and expensive with a property if you want to free up some equity by remortgaging.

Then there are the tax benefits.

For the first £20,000 a year, you can invest entirely free of all UK taxes through ISAs – including dividend tax and capital gains tax. It means there’s no tax to pay on the way in, as you go along, or on the way out.

For any investments outside an ISA, the fact you can cash it in a bit at a time means you can stagger it over tax years. It also means you can make the most of your capital gains tax allowances. You can also take full advantage of your dividend tax allowance.

Remember, tax rules can change, and their benefits depend on your personal circumstances. 

For landlords who’ve been in the property game for years and are considering a move, it might feel like a lot to get to grips with. However, once you’ve read around the subject a bit, delved into some individual funds and shares, and understood the potential tax savings, it’ll feel far more familiar and manageable.

What’s more, a portfolio of funds and shares will never ring you at 3am to ask you to change a lightbulb.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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