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Buy-to-let profits have slumped to just £2k! I’d rather invest in FTSE 100 stocks

Royston Wild
Models of houses on top of pound coins

Buy-to-let is under intense attack. It’s a topic we at The Motley Fool discuss on a regular basis. But even our writers find themselves shocked by some of the evidence that shows just how far this once-lucrative investment sector has fallen.

Howsy was the latest to chime in on this front late last week. Research from the online letting agent shows that, from an average annual return of £13,000, landlords can expect to make an actual profit of around £2,000 after a variety of costs are accounted for.

Landlord profits get pounded

So how exactly does this break down? Well Howsy’s analysis takes the average UK annual rental income of £8,112 and divides this by the mean property cost of £183,278. This gives you a yield of 4.4% which equates to a yearly sum of £8,119. It then accounts for property price growth which, over the past decade, has registered at 2.85% a year, or £5,223 in monetary terms.

These sums combined provide landlords with a total return of £13,343 on their investment per year. But now comes the horrible part.

The vast majority of landlords buy with a mortgage and so each year they have to shell out £6,921 in interest costs, according to the letting agent. On top of this they pay on average £1,622 in agency management fees and £2,077 on maintenance and repairs during the course of the year. They have to face an average of 23.75 days per year between tenancies when the property is vacant, a period which accounts for an average of £527 in lost rent.

All of these factors come out at a whopping £11,147 and take a huge bite out of that initial return. In fact, by the time the dust settles, landlords can expect to make a profit of around £2,196 over the duration of the year.

A better way to invest

The bad news doesn’t end here, however. Buy-to-let investors also need to fork out on average around £7,475 before they even start accruing rental income, Howsy says, reflecting the impact of hefty stamp duty bills (sitting at £6,663 on average) and initial agency fees to find a tenant (£811).

It’s no wonder that buy-to-let sentiment is sinking through the floor right now. But bigger bills are not the only problem as landlords also face a sea of regulatory red tape and a gradual erosion of rights in favour of tenants, too. So why bother with the hassle here when you can get rich with the FTSE 100 instead?

Indeed, with the Brexit saga rumbling on and on, I would argue that buyer demand for the UK’s premier share index is only going to get stronger and stronger, given it’s high weighting of stocks with low (or zero) exposure to the British economy, not to mention those that report in foreign currencies and so stand to gain from further weakness in the pound.

Stock investors can expect to make returns of 10% over the long-term, and a great way of maximising your profits is buying into a tracker fund. This is a relatively low-cost way to buy into share markets whilst offering the benefit of reducing risk by investing in dozens and dozens of companies. So forget about buy-to-let, I say, and put your spare cash to work more effectively with the Footsie.

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Royston Wild 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