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People have different ideas about how to build wealth. Some imagine themselves building a large property portfolio (e.g. of Buy To Lets) and living off the rental income, whilst others may see their monthly expenses getting covered by stock market investments – such as dividends. Yet which route offers the best way to retire comfortably?
In this post, our team at Cedar House examines the case for building a property portfolio versus concentrating on stocks and shares. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
The allure of property
Britons arguably have a fascination with bricks and mortar. Property feels more “real” to us since we can touch and see it. Moreover, a property can also rise in value (which, historically, it has) over time whilst providing rental income along the way to generate a profit. For instance, if you use a deposit to get a Buy To Let and rent it out for £850 per month – with a £600 mortgage – then, on paper at least, this could generate £3,000 in profit per year. If you then repeated this process with, say, 10 or more properties, then it is easy to see why many people think they can fund their lifestyle with a Buy To Let portfolio.
The difficulty, of course, is that investing in property is rarely this simple. First of all, finding the large up-front deposit required for a Buy To Let is often difficult for most people. Only a minority have £10,000s stored away, ready to invest in this way. Secondly, profits are often lower than would-be landlords anticipate. The costs involved with storage, letting agents and maintenance (repairs) can reduce profits by £1,000s – even when landlords are managing things carefully. The problem can also be compounded by periods where tenant inoccupancy or if the property market crashes – leading to reductions in rental income. This is also setting aside the problems that could arise from a rise in interest rates (by the Bank of England), which would likely put up the cost of monthly Buy To Let mortgage payments – squeezing profits further.
The case for stocks and shares
Unlike Buy To Let and similar property investments, investing in the stock market does not need a large up-front lump sum. Rather, a portfolio can be built with as little as £100 per month using an investment platform. Investment risk can also be mitigated through diversification, whereby funds are spread across many different companies in different markets, countries and stages of the business lifecycle. With property, your eggs are typically in one or two baskets (i.e. 1 or 2 Buy To Lets) which may be vulnerable to the risks mentioned above. With a stock portfolio, on the other hand, you could invest in 100s or 1000s of companies simultaneously. As such, if any of them underperforms, hopefully the others will help keep the portfolio growing.
Finally, investing in stocks and shares is often more tax-efficient than investing in property. For instance, if you invest in a Buy To Let, then the rental income is subject to income tax (and corporation tax, if held within a company structure). Moreover, the property will be subject to capital gains tax (CGT) when eventually it is sold. Stocks and shares, however, can be held within an ISA – where dividends, interest and capital gains can be generated, tax-free. Outside of this structure, you can also make use of your tax-free yearly allowances – such as your dividend allowance (£2,000 per year) and your CGT allowance (£12,300).
However, stocks and shares do have their drawbacks. First of all, it is arguably harder to cope with the psychological aspects of this type of investing. With your Buy To Let properties, for example, you cannot see their prices fluctuating each second. Large, sudden dips in price can lead to a strong urge to sell and “cut your losses” – rather than focusing on long-term growth. Secondly, the stock market has historically performed well, yet they may not necessarily do well over your investing period. Between 1950 to about 2013, the Dow Jones Industrial Average only produced an average return of 0.3% during the May to October period.
What to do?
There is no universal answer to the “stocks vs property” investment debate. As you can see, a range of pros and cons exist for both approaches. With that said, the reality is that most people will be able to invest more readily in the stock market, compared to Buy To Let (due to the large up-front cost). There is also the matter of time commitment. Looking after even one property – with its tenants, maintenance and tax obligations – is likely to be too burdensome for many. Yet investing in stocks and shares involves picking a strategy for your portfolio, contributing to it regularly (e.g. once per month) and making periodic readjustments (rebalancing) to keep it all on track. Using a financial adviser can make this process even easier.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk