Buy-to-let has been hugely popular over much of the past 20 years, buoyed by rising house prices, high tenant demand and a helpful tax regime. But for many landlords, the environment has got a lot tougher recently as the cost of borrowing money has increased and tax changes have bitten.
For those who already own a rental property or are considering becoming a landlord, this could affect the profitability of your buy-to-let. That means it may be time for a rethink.
About the expert – Tom Barton investment manager at RBC Brewin Dolphin
Tom Barton has thoroughly enjoyed his eight years so far at RBC Brewin Dolphin and finds it motivating to work with members of the team who've worked there for more than 30 years.
He loves the long-term thinking of the team and focusing on clients’s needs. He also values working for a national firm, with more than 30 offices across the UK, Channel Islands and Republic of Ireland, but, importantly, with a strong local presence in Cheltenham.
Real estate or stocks – which asset class has performed better?
The UK has long had an obsession with property ownership and for fair reason. Real estate has been one of the most popular investments over the past 20 years and has, in certain locations, delivered some truly exceptional returns following a surge in house prices since the 1990s. This has prompted many people to put more money into bricks and mortar, triggering a buy-to-let boom and creating an army of landlords looking to boost income at a time of generally low interest rates.
At the same time, global stock markets have also delivered stellar returns. Over the last 20 years, for example, the MSCI World index (a proxy for global stocks) is up +538.88 per cent in GBP terms [source: FE Analytics, data to 09/05/2023], implying a more than sextupling of funds over this period at an average 9.71 per cent return per year.
However, the question of ‘which has fared better’ is nigh on impossible to answer. This is because UK property performance varies massively by region and by property type. Similarly, almost every investment portfolio is different in terms of geographic and sector exposure.
What are the advantages of property over stocks?
Real estate is often considered a safe investment, one which most people are comfortable and familiar with. People also enjoy the fact that property is a tangible asset with tangible functions (people live in houses), compared with stocks which serve no real utility other than a store of value. Furthermore, properties can be rented out for a regular income and developed to improve returns.
Successful property investors can use leverage (via mortgages) to further enhance potential returns. For example, by using a mortgage you might be able to buy a house for £200,000 which may cost you only £50,000 (assuming a 25 per cent mortgage). If the property then increased in value over three years to £240,000, upon selling the property you would receive £90,000 (£240,000 minus the £150,000 mortgage), a return of 80 per cent on your £50,000. With stocks, generally speaking, you can only invest what is there.
What are the difficulties property investors face?
Owning a rental property is cash intensive, highly illiquid and requires a lot of upkeep. Furthermore, there are various other costs to factor in such as tax on rental income, letting agent fees, legal costs and repairs, as well as the risk of void periods.
Furthermore, the environment has become much more challenging as interest rates have climbed and tax reforms have made buy-to-let distinctly less attractive from a tax perspective. For example, since April 2016, second homeowners in England and Northern Ireland face a three per cent surcharge on top of normal stamp duty rates. Landlords are also no longer able to claim tax relief on 100 per cent of mortgage interest costs at their marginal rate.
What about the drawbacks of stocks?
Stocks are regarded by some as being riskier and more complex investments than property. 2022 is a stark reminder of how volatile stock markets can be over short time frames and, in turn, the need for a diversified portfolio and a long-term investment time horizon.
What are the advantages of stocks over property?
The stock market does have several advantages over real estate from an investment standpoint. There is very little capital required to get involved, losses are limited to the original investment (i.e. no risk of ‘negative equity’) and they take less time to manage. Stocks are highly liquid which allows for a quick and easy (and partial) exit should the need arise. Stock values are also constantly updated, meaning that you always know where you stand.
Furthermore, stocks are far more tax efficient. They can be held within tax-efficient wrappers such as ISAs and pensions, and their liquidity enables far greater tax planning, such as limiting a taxable capital gain to one’s available annual exempt amount.
If a reader took one key pearl of wisdom away on the topic of ‘property versus stocks’, what would you want them to know?
As with any investment, diversification is key. Real estate and stocks both have great cases for investment but might have their ‘time in the sun’ at different points in the economic cycle. Having some exposure to both would allow investors to benefit whenever that time might be. In the current environment of interest rates being lower than inflation, we think the bigger long-term risk is holding excessive cash.
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Opinions expressed in this publication are not necessarily the views held throughout RBC Brewin Dolphin Ltd. Forecasts are not a reliable indicator of future performance.