Buy-to-let investing has been hugely popular over recent decades. It has created wealth for a large number of people, and in doing so has made some of them millionaires.
However, the prospects for buy-to-let investing could prove to be challenging. Rising house prices mean the amount of capital required to invest in property is extremely high, while it is difficult to diversify to reduce risk.
In addition, the growth potential of the FTSE 100 could be higher than buy-to-let properties. As such, now could be a good time to buy a range of large-cap shares for the long run.
Investing modest amounts
Since the average UK house price is around £232k, an investor would need a deposit of around £58k (25%) to undertake a buy-to-let. Most people are unlikely to have such a large amount of capital available today, which could make the stock market a better place to invest.
In fact, it is possible to invest in shares with a relatively small sum of money. Many share-dealing providers offer regular investing schemes that start from as little as £25 per month. This could be a good way for almost anyone to get started investing for their future, and for them to beat the paltry returns on cash that come with interest rates being close to historic lows.
A key tenet of investing is diversification. It reduces overall risk, and can help an investor to avoid major losses from one specific investment being a disappointment.
Diversification is difficult to achieve when investing in property. Not only does it mean further capital is required that may make it unaffordable for most people, it requires knowledge of different locations to avoid local risks which could harm the performance of properties in a specific area.
As such, buying a range of FTSE 100 shares could be a better idea. All of the information that an investor requires to understand a business is available online. In addition, dealing costs are lower than they ever have been, which reduces the cost of buying 20-30 stocks within a portfolio to reduce overall risk.
As mentioned, house prices have risen significantly over recent years. This may mean that there is limited scope for them to keep increasing over the coming years, since they may be unaffordable for many people.
By contrast, the FTSE 100 currently has a dividend yield of around 4.4%. This suggests that it offers a margin of safety, since its yield is above its long-term average. Furthermore, with many of its members currently having strong growth prospects, they may be worthy of higher valuations that cause them to deliver capital growth in the coming years.
Buy-to-let investing may have been a worthwhile idea in the past, but the relative growth potential and accessibility of the FTSE 100 could make the index a superior opportunity at the present time.
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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