The FTSE 100’s performance has been disappointing this year, with the index declining by 5%. Its risk/reward ratio, however, suggests that it may still offer a more favourable investment outlook than a buy-to-let property.
Unexpected costs
One reason for this is the index’s lack of unexpected charges. A buy-to-let property may require the owner to contribute to building repairs, which in the case of modern flats can be excessive. There may also be a lack of payments from tenants due to a worsening financial situation, while higher interest rates than are forecast could squeeze the income return on a rental property.
In contrast, investing in the FTSE 100 requires no additional costs once shares are purchased. Although dividends are not guaranteed, history shows that investing in a wide variety of companies generally leads to a fairly robust income outlook.
Debt
While the purchase of shares can mean that an investor loses their entire investment, they are unable to lose anything beyond that. A buy-to-let that is financed through debt, though, can mean that an investor loses more than their entire investment.
Although house prices have been on a winning streak for two decades, no asset price has ever risen in perpetuity. Brexit could yet cause difficulties for the UK housing market, with Mark Carney suggesting that a 35% fall in house prices could be ahead. In such a scenario, an investor needing to sell a property may find themselves in negative equity. As such, the risk of loss remains higher with a buy-to-let than in shares, simply because of the debt levels that are generally used.
Liquidity
FTSE 100 shares are generally highly liquid. Should an investor need to raise cash, they can quickly be sold and the proceeds will appear in their bank account within a few days. This provides greater flexibility than a buy-to-let, which can take months to sell. The property will need to be advertised, then the process of exchanging contracts and completing is fraught with uncertainty, costs and difficulties.
As a result, for investors who feel they may need access to the capital invested at some point further down the line, shares could offer a more flexible experience over the long term.
Returns
As mentioned, property has been a good place to invest in the last 20 years. The shortage of supply versus demand is showing little sign of slowing down, and this could act as a positive catalyst on house prices over the medium term.
However, in recent years house prices have benefitted from government policies such as Help to Buy, while interest rates have been kept at a low level. This has encouraged activity in the housing market. Should either of these policies change, the returns available could fall significantly.
In contrast, the FTSE 100 is closely linked to the performance of the global economy. And with its prospects being relatively sound, the investment returns on offer from the index could be high over the coming years.
