Investing in a buy-to-let property can be a great method to produce a steady stream of income. Although many people have earned a lot of money with this strategy, it is not one I intend to pursue.
Here’s why.
The cost of buy-to-let
First and foremost, there is a significant, up-front financial commitment. I’d need a huge lump payment or a hefty mortgage to purchase a rental home in the UK, where the average property price is currently over £260,000. Compared to investing in shares, which I can start doing with just a few pounds, the barrier to entry is almost impossibly high for me.
The expenses of owning a buy-to-let home are also an important factor. For rental investors, mortgage and stamp duty rates are greater than for homeowners, and there will be an annual operating expense. That’s not even taking into account the cost of finding renters in the first place. With stocks and shares, I may have to pay a fund management charge or an investment platform fee, but these are minor and predictable in contrast.
Finally, there is the time investment required. A buy-to-let property isn’t a true passive income investment. Renting out a house is a business and it takes time and effort to make it work.
When I buy stocks, on the other hand, I am also investing in the time and effort of the company’s leadership. They are in charge of the company on behalf of all shareholders. I don’t have to do anything.
There are still a lot of advantages to a buy-to-let property. In the long run, property values have outpaced inflation. There is also a reasonably consistent market for rental houses, implying that investors will be able to generate an income stream at any time.
If I had the capital to spend, a buy-to-let might be a good option for me. But unfortunately, I don’t.
Alternative opportunities
Instead of purchasing real estate, I’m investing in firms that have global presence and portfolios of very well-known brands.
One of the companies I’m already invested in is Berkshire Hathaway (BRKB: NYSE). This conglomerate is owned and run by none other than Warren Buffett. Because of that, I have the benefits of a company that owns Apple, Coca-Cola, and Bank of America, and is managed by one of the most successful investors of all time.
However, one disadvantage of buying individual stocks and shares over a buy-to-let, is that I do not influence how a company is run. Owning a buy-to-let is far more work, but with that work comes control.
If I change my mind
Property can be a lucrative investment and if I ever think of adding it to my portfolio, I would invest in Lloyds Bank. Lloyds has been helping to build rental properties up and down the country and could see a significant return on investment in the years to come.
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James Reynolds owns Berkshire Hathaway (B shares). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
