Should You Invest in the Stock Market or Buy to Let Property

Return on Investment

In terms of Total Return on Investment over the long term (capital gains + income), investing has provided higher returns over Buy to Let property (BTL).

While BTL rental income can provide a steady cash stream, property prices have not kept pace with stock market growth, particularly since the 1950s.

If we focus on the capital gain for property in the UK, it has been poor in real terms for the last two decades. The Nationwide house price index adjusted for inflation shows that the current average price of a home today is exactly where it was in 2004 - two decades ago:

But, with a BTL property, you also get rental income usually around 5%-8%, which offsets the maintenance and mortgage costs. Generally over the long term, the total return of income and capital gain is quite attractive.

A paper called ‘The rate of return on everything from 1870 to 2015’ provides a ‘like for like’ real rate of return comparison between investment property and the equity market and it shows that historically, property and equity have been pretty evenly matched - but equity is the winner.

In the UK, Equity Total Real Return on Investment has beaten BTL property returns by 2% in the long term, and by 2.5% since 1980. Both provide a decent rate of return…but there’s more to it than just profit.

More than just Profit

Deciding between investing in the stock market and BTL can be a tough call. Both offer distinct advantages and disadvantages, and the ideal choice hinges on your financial goals, risk tolerance, and lifestyle. Let's delve deeper into the pros and cons of each asset class to guide your journey.

Stock Market Pros

Tax-advantaged accounts: Using ISAs, LISAs and Pensions to invest in equity, you can take advantage of significant tax benefits. By taking advantage of these accounts, you can compound bigger returns at a faster rate and achieve your financial goals sooner.

Cost-effective: Compared to property, investing in stocks incurs lower fees. Platform charges and fund fees are typically below 1%, especially for Global Index funds.

Effortless diversification: With a single global index fund, you can spread your risk across numerous companies and markets, achieving instant diversification. This reduces your dependence on the performance of any single company or sector.

High liquidity: Global Index funds can be bought and sold in a flash, providing easy access to your capital when needed. This liquidity is particularly valuable during emergencies or unexpected financial needs.

Stock Market Cons

Market volatility: Stock prices can fluctuate significantly in the short term. This volatility can be psychologically challenging, especially for those with a low tolerance for risk.

Investing is seen as complicated: Many people don’t understand how simple investing can be as it is not taught in school. Investing is seen as complicated, risky and “not for me”.

Investing requires discipline and confidence: Successful stock market investing demands the ability to maintain composure during downturns and resist the urge to panic-sell. Investors who are easily swayed by market fluctuations or lack an investment plan may find themselves making impulsive decisions that can erode returns.

Intangibility: Owning stocks can feel less tangible compared to physical property. This lack of tangibility can be a psychological hurdle for some investors, particularly those who prefer more concrete assets.

Buy to Let Pros

Reliable income stream: BTL properties provide a regular rental income stream, boosting cash flow and potentially contributing towards retirement income. This steady income can be a valuable asset for those seeking financial security and predictability in their cash flow.

Inflation hedge: Property prices often rise alongside inflation helping to preserve purchasing power. This can be beneficial during periods of high inflation.

Tangible ownership: Unlike stocks, property provides a physical asset you can see and touch. This tangibility can offer a sense of security and comfort for some investors.

Leverage potential: Property allows you to leverage debt through mortgage loans to magnify returns. While leverage can amplify gains, it can also exacerbate losses during market downturns as you could be left in negative equity.

Lower volatility: Property prices tend to be less volatile than stock prices in the short term. While property markets can experience corrections, they typically don't experience the same dramatic swings as stock markets.

Buy to Let Cons

Landlord responsibilities: Owning rental properties comes with the burden of maintenance, repairs, and dealing with tenants. This can be time-consuming and expensive, especially if you encounter problematic tenants or significant damage.

Vacancy periods: There can be stretches where your property sits vacant, meaning you lose rental income. This risk is higher in areas with less rental demand.

Illiquidity: Unlike stocks that can be sold quickly, selling a property takes time and effort. Factoring in agent fees and closing costs, it can take months to turn an investment into cash.

Geographic concentration: The value of a property is tied to the local economy. If the housing market slumps in your area, you could face difficulty selling or see a decline in rental income.

The Bottom Line

There is no doubt that the stock market is scary as it is much more volatile than the property market. It is a roller coaster and is not suitable for those scared of making losses - even if it's just paper losses. Although the housing market does suffer setbacks, they tend to be shorter lived and more shallow than those you see in the stock market.

Investing can be simple, but the majority of people are not aware of the simplicity and benefit of investing in Pensions and ISA’s / LISA's using a Low Cost Global Index Fund. It is therefore perceived as complex and scary. With a little knowledge, maintaining an investment portfolio involves almost no effort at all; set up a monthly direct debit, forget about it and leave compound interest to work over the long term. You can't do that with property.

However, the psychological factors shouldn't be underestimated. People like having something tangible, something steady, something which doesn't feel risky and that would favour property.

Ultimately, the best investment is the one that you are most comfortable with and that fits your financial goals. For those seeking potentially higher long-term returns and easier management, stocks might be a good option. For those who prefer a steady income stream, tangible ownership, and lower volatility, property could be a better fit.

Bottom Line: It does not have to be one or the other – it can be both. Buy to Let property and equity together do provide diversification and some degree of negative correlation.