ANALYSIS: Does buy-to-let still beat the stock market?

If you had £50k to invest right now, where would you put it, buy-to-let property or stocks and shares?

Certainly leaving it in a traditional savings account, with interest rates as they are at rock bottom, that’s out of the question. And with the threat of rising inflation eating away your cash pot, you need to think seriously about what you are going to do about it – where does that money go?

Property has traditionally been a very good hedge against inflation. During the 1970s, when inflation peaked at around 27%, those who were asset rich and cash poor – houses, commercial property, farms, land and to some extent equities – did very well out of inflation, while those with fixed interest investments were losing money hand over fist. At inflation’s peak, people were losing money at the rate of over a quarter of their savings every year.

But the stock market has its advantages too; it’s far more liquid that property assets, meaning you can get your money out at the click of a mouse, as compared to the prolonged process of selling a rental property.

More recently house prices have been rising at a fair old lick. Could rising house prices far surpass the gains you can achieve in stocks, even if you are lucky or skilled enough to pick the winners? The stock market can be volatile, with setbacks or corrections as much as a 50% drop in values, so you will need strong nerves.

If your savings in stocks dropped in value by 50%, would you have the nerve to stick it out and wait for a recovery? Or would you, like a lot of people, just panic and sell out, and thereby turning your paper losses into realised ones? Investing in the stock market is not for everyone.

Red tape and more and more regulations

Over the past few years the Government has subjected buy-to-let landlords to a punishing regime of increasing taxes and more and more rigorous regulations. You have got to be a very diligent landlord today to be sure of being on the right side of the law. There are literally hundreds of rules and regulations to be followed.

This mountain of Government imposed red tape, a punishing regime that is enough to make any landlord despair, is responsible for driving many out of the business. At the same time it is exacerbating a housing crisis and pushing up rents. There’s a severe shortage of properties to let in many areas, with demand often far outstripping supply.

Unexpected revival

Covid on the other hand has brought about a revival in investment in the buy-to-let market that nobody really expected. Rishi Sunak’s stamp duty holiday, steadily rising average rents levels, steadily increasing property values and ultra low mortgage interest rates have acted together to spur on buy-to-let landlords’ interest.

With the older experienced end leaving the market, many new entrants have been tempted to have-a-go, full of the expectation that they can reap the rewards of putting their savings into a buy-to-let.

Most regions in England have seen landlords’ incomes rising, with prospects looking better than they have done for some time. According to Hamptons the estate agents, up to July 2021 the North, the East of England, the South West and the South East have all recorded double-digit growth in rents. Across England rents have risen by 6.2% year-to-date.

It’s labour intensive

Buying, renovating and renting out a property can be a lot of hard work, especially if you manage the tenancy yourself. Even when an agent does the letting, the process is never completely hands off.

As is intimated above, its a complicated process involving a fair amount of management skill, and high costs such as refurbishing, maintenance and repairs, stamp duty, legal fees, insurance and maybe agent’s fees. Wouldn’t it be a lot easier and more lucrative to invest in the stock market?

To help us with that question, conveniently Telegraph Money recently crunched the numbers to help us see whether say a £50,000 investment would perform better, invested either in properties or in companies on the stock market, over a typical 10-year period.

1 – Investing in property

Soaring house prices mean landlords with £50,000 to invest would need to be savvy when choosing where to buy because they would be priced out of the most expensive parts of the country, typically London and the South East.

But, there are parts of the country where values are much lower and the prospects for buy-to-let returns are excellent. For example, Telegraph Money took a town like Sheffield.

On the Telegraph’s behalf, Private Finance, a mortgage broker, analysed the potential returns in Sheffield, with the best and worst scenarios for a buy-to-let property. The town has a lot going for it. Its a popular location for landlord investors as it has modest house prices, a large student population and strong employment prospects.

Taking £50,000, according to Telegraph Money, a landlord would need to set aside £2,500 for fees and would need to borrow around £147,500 to purchase a four-bedroom property with a market value of £190,000.

Taking the best-case, the property would be let for about £850 per month, rising every year in-line with inflation and a full 10-year investment period. Mortgage costs would be around £297 per month, and assuming they would stay the same for the full decade on a long-term fixed deal, currently are available at 2.5pc.

First year profit is calculated at £4,638, rising to £6,225 in the final year, giving an overall profit at £54,106.

That of course is best case. It does not allow for any void periods, expensive repairs or having a bad non-paying tenant. However, with skilful management and a bit of good luck, there’s no reason these returned could not be achieved.

What this does not take into account is the potential rise in the value of the property during this period. Historically property price rises have more than outpaced inflation and indeed if inflation takes off over the next few years there’s probably no better hedge against it than property.

Telegraph Money makes theassumption that house prices will grow at 2.1pc each year, so in a decade the example property would be worth £229,079 – a rise of £39,079. When this is factored in to the returns, it means a best-case scenario landlord will get £93,185 back on their £50,000 initial stake. They suggest a less successful scenario would still leave the landlord with a £74,485 return.

2. Investing in the stock market

Would you be better off investing in the stock market instead?

Here there’s no risks of getting a bad tenant or having a long void period, but your returns depend on how well you select your companies or funds, and the ups and downs of the stock market.

AJ Bell, an investment platform, told Telegraph Money the results of its analysis oftwo potential outcomes: In its first case scenario an investor places cash in company stocks, which have historically returned 5.3pc per year, that’s based on data from the past six decades.

A £50,000 sum invested this way would return £2,525 in the first year, and by the end of the decade, with compounding growth, this investor would have a pot worth £81,833.

But as AJ Bell argues, many people would “shy away” from investing directly in companies. More often they would be cautious and prefer gilts and bonds. AJ Bell said these investments have typically returned 2.7pc over the past six decades. If this were to continue for 10 more years the investor would have £63,693.

Both scenarios assume stockbroker charges of 0.25pc, and should the investor decide to invest in managed funds, management charges would also have to be deducted.

Avoiding risk altogether by keeping money in cash is hardly an option, with cash savings accounts paying on average around 0.6pc. Your cash investment would grow £50,000 to just £53,082 over the 10 years, well below the rise in inflation, which is currently running at 4.2pc.

So, which investment comes out best, stock market or buy-to-let?

In this analysis, taking the best case, the buy-to-let property gives by far the best returns overall. The landlord would have made a profit of £54,106 from rent, plus a further £39,079 from the growth in the value of the property, making a total return of £93,185.

The stock market by contrast, would, on average return a profit of just £31,833.

Take taxation into account as well

In each case taxation would need to be taken into account. These example profits are before tax, and both would be subject to capital gains tax, though is is possible to shelter stock market returns in an ISA, but with a maximum annual investment allowance of £20,000.

Bother investments will also be subsect to income tax at the taxpayer’s marginal rate, apart from any proportion in an ISA. Dividend tax is also deducted from shares that may have paid out to investors, again unless the proportion is sheltered in an ISA..

Stock market investors can shelter themselves in an ISA, but their ISA investment must be spread out over a number of years as the personal annual allowance is currently £20,000.

Both investment types are be subject to stamp duty but landlords pay more at three percentage points above the standard property banded rates. In the example, a property purchase of £190,000 would attract a £7,000 bill, something else for landlords to factor in.

Which one is the best option in practice depends on the prevailing circumstances and the skill and luck of the investor. And don’t forget. buy-to-let can require significant amounts of time and effort which should really be factored in as a cost.

Investing in the stock market depends on the skill and luck of the individual investor, but given the uncertainty and volatility of the markets, although it’s a hands-off affair, it’s not for the faint hearted. And as has been shown here, average returns can be lower than buy-to-let.

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