02 July 2015

Stocks and shares or buy to let?

It’s estimated that there are close to 2 million private landlords in the UK today1; people who’ve chosen buying property and letting it out as the investment for them. The government expects the number of private landlords to grow to the point that they will own a third of all properties in the country by 20322.

A key point to consider before making an investment of any kind is to consider your appetite for risk. We take a look at how some of the risks and rewards of investing in Buy to Let property compare to investing in stocks and shares.

How much money do you need to get started?

One of the biggest differences between becoming a landlord and investing in the stock market is the amount of money you need to get started. Through Nationwide, you can invest in the stock market with as little as £20 via a collective fund. To become a landlord, you need a property, and with the average UK house now costing £193,048 according to the Nationwide House Price Index, even a 25% deposit represents quite a substantial amount. There’s also the cost of stamp duty, solicitor fees, property searches and surveys to add on to the cost of the property.

The price of buying property means that many of those putting money into becoming a landlord will take out a Buy to Let mortgage. There are 2 ways you can take out a Buy to Let mortgage, capital repayment and interest-only. Interest-only reduces the monthly cost to landlords, but it means that they need to factor in the cost of repaying the mortgage when they sell the property because the monthly payments won’t reduce the amount owed.

How volatile is the investment?

As anyone who has ever considered investing in the stock market knows, the value of shares can go down as well as up – and they can do so quite dramatically. House prices have had less daunting peaks and troughs in recent times. Over the last 30 years, the average UK property has increased in value year-on-year far more often than it has lost value. 

However, whilst share prices have been more volatile over short periods, over the past 30 years the FTSE All Share Index has increased in value year-on-year more often than its value has been reduced3. Nationwide’s Financial Planning Managers advise investing for a minimum of 6 years, because on most occasions over the past 30 years, the index has maintained or increased its value over a 6 year period.

It’s important to remember that house prices aren’t wholly immune from downturns either, putting landlords at risk of negative equity. UK house prices fell by 7% in 2008 and by a further 7% the following year – and they didn’t recover fully until half way through 2014, all of which would reduce the equity in the property and therefore the potential profit. However, for those happy to hold onto their Buy to Let properties during the downturn, there was a substantial upside. The average rent in England continued to rise from £288 per month in 2007 to £383 per month on average in 20134.

How do you hope to make money?

Part of the appeal of becoming a landlord is the opportunity that it provides to make money in two different ways. You hope that your buy to let property will increase in value and allow you to make a profitable return when you sell it, and in the meantime, you aim to get a regular monthly income from the rent that you charge to tenants. As the above example shows, the fact that your property can make money in two ways is reassuring – if house prices aren’t actually increasing then you at least hope to make a return from rent.

However, buy to let isn’t the only form of investment that can give you this combination of income and capital growth. When you invest in shares or bonds, you can receive a regular income at the same time as gaining increases in share or bond price when you sell. You can choose to balance your mix of investments to prioritise either growth or income – or you can aim to keep an even focus between the two.

It’s important to remember though, that regular income isn’t always guaranteed. When you’re a landlord, it depends on having tenants. If you’re faced with a period when your property is standing empty, you could find that you have to make mortgage payments on a buy to let mortgage at a time when you are not receiving an income from rent (as well as being potentially liable for council tax and ground rent service charges if your property is leasehold.) Similarly, if investments in the stock market don’t perform, then they won’t produce the dividend income that an investor might have expected.

What are the additional costs?

Buy to let properties come with overheads such as landlord insurance and rental agent or legal fees. However, there’s also the cost of maintaining the property itself, in order to protect the value of your investment and its appeal to tenants. Any potential landlord needs to make sure they budget for such maintenance when working out their likely returns.

There are fees involved in investing in the stock market too – including fund manager charges, platform charges, adviser charges and tax.

Any profits made may also be subject to income tax deductions whether you invest in Buy to Let property or in stocks and shares.

How easy it is to sell your investment?

One of the advantages of investing in the stock market is that there is almost always someone ready to buy when you are ready to sell. Cashing in investments like shares and bonds takes no longer than a week (if you’re investing in a combination of assets through collective funds).  Of course, if you have to sell in a hurry, you may not be selling at the peak of the market – so you may not get the best price. And there can be exit fees and taxes to pay on top.

But by and large selling investments is relatively straightforward. Selling property, by contrast, can be much more difficult. You have to market your property (involving estate agent fees), find a buyer at the right price, and then negotiate the chain. You can’t rely on being able to sell in a hurry – and if you are forced to do so it can force down the price. To secure a quick sale, you may be forced to sell for less than the market value of your property at the time.

How will your investment make you feel?

Both investing in Buy to Let  and in stocks and shares could help your money grow if you're prepared to put your money away for a period of time and expose it to some risk. However, as we've explained in this feature, these different types of investment have different attractions and drawbacks. It's important to pick an investment that you are genuinely comfortable with, and that you fully understand the pros and cons. 

At Nationwide, we can't tell you whether Buy to Let or stocks and shares is the right choice for you. However if you decide that you would like to explore how to become a landlord in more detail, Nationwide’s guide to becoming a landlord gives you more information. And if you decide that you want to find out more about investing in stocks and shares, see how Nationwide could help here.

Please note, many Buy to Let mortgages are not regulated.

Past performance is not a guide to future performance.

Please note that the value of investments can go down as well as up and you may not get back the money originally invested.

1The Telegraph, Buy-to-let boom: one in five homes now owned by landlords, October 2014: http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11179073/Buy-to-let-boom-one-in-five-homes-now-owned-by-landlords.html

2The Telegraph, Birth of Buy to let Britain, October 2014: http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11176988/1996-the-birth-of-buy-to-let-Britain-in-numbers.html

3FTSE Indices since 1985, June 2015: http://swanlowpark.co.uk/ftseannual.jsp

4Direct Gov: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/385120/LT_704.xlsx

Nationwide is not responsible for the content of external websites or apps. Reference to any organisations' websites or apps is not an endorsement of that website or app or the organisations' products or services.

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