Stocks and Shares vs. Buy-to-Let: Which is Right For You?

A question I get asked a lot is: “Would I be better investing in stocks and shares or buy-to-let?” 

If you’ve managed to save a decent amount of capital, you might find yourself asking this very question, and wondering where to turn to for advice. 

If so, you’re in luck as we’ll be discussing stocks and shares vs buy-to-let in this very blog (the title may have given it away). 

As an experienced property professional, I’ve learned the value of explanation alongside guidance, so I’m going to enlist the help of Stuart McAdam, Chartered Financial Planner and Partner of St James’ Place Wealth Management.

Together, he and I will battle it out (in a friendly way) with stocks and shares vs. buy-to-let so the end result is that you feel more informed and get a clearer picture of what works for you.

Psst! Although Stuart McAdam is absolutely qualified to give financial advice, I’m not, so always get advice from a qualified financial adviser before you finalise any investments.

Stocks and shares vs. buy-to-let

How to choose between them? The good news is that it’s relatively simple to decide when it comes to stocks and shares vs buy-to-let, but you do have to ask yourself some searching questions:

1. Is your main aim long-term capital growth or a steady income stream? 
2. Is your lifestyle compatible with your chosen investment strategy?
3. Have you figured out an investment plan involving short-term, medium term and long-term goals? 
4. How risk-averse are you? 

Now you’re on the right track, let’s have a look at those questions in more detail. 

ROUND ONE: Capital growth vs steady income 

If you prefer a regular income, then buy-to-let has a definite advantage over stocks and shares. A tenanted property can provide income from day one, whereas it’s generally understood that stocks and shares are long-term.

As Stuart McAdam says “If you are considering a stocks and shares investment, are you prepared to invest these funds for the medium to longer term? If access is required to these funds within five years, are you prepared to possibly receive back less than you originally invested?” 

However, if it’s capital growth you’re looking for, then step forward, stocks and shares! You could choose a shorter term than a buy-to-let investment AND have the benefits of compounded growth. 

A recent article in The Telegraph mentioned a scenario where company stocks had historically returned 5.3pc per year. If we’re talking an initial investment of £50,000, that’s a pot worth £81,833 after a decade. 

Of course, there’s no denying that property also offers capital growth, but at a much longer term. The amount of capital growth will depend on the type (and location) of the buy-to-let investment, as this graph from Registers of Scotland demonstrates:

Your investment strategy will also play a part. In fact, speaking of that…

ROUND TWO: Your lifestyle vs investment strategy 

Is your lifestyle community-based, with a focus on helping others? This is one mindset that is compatible with owning a buy-to-let property. Landlords really don’t deserve their fat-cat image when so many of them actively enjoy providing a safe home for tenants. 

You may also enjoy being hands-on with the day-to-day running of the property, choosing to be on call if your tenants need you, and making sure all your certificates and insurance are up-to-date. 

However, you can still combine being a landlord with the demands of day-to-day living and hire a management company to take care of the tenants’ needs and running of the property. It just depends on what’s manageable for you. 

Stocks and shares can be more of an attractive prospect if your lifestyle doesn’t leave much room for the responsibility of a tenanted property. It’s definitely an intelligent move to make a decision based on careful consideration and sound advice.

Stuart recalls one such occasion: 

“My client wanted to make money from buy to let but did not know where to start so I asked a few questions and quickly determined that he wanted no hassle, no involvement in the maintenance of the properties but did not want to pay any property management fees. 

“I quickly established that his expectations did not match the reality and took the view that his investments suited him better. Due to him enjoying various holidays abroad annually, he would not be contactable should any tenant queries arise.”

ROUND THREE: Your investment goals

Stuart McAdam was kind enough to provide us with some key advice. He says: 

“Consider all areas of your investment planning – short term, medium term and long-term goals.”

Short-term goals 

Stuart says: “Accessible cash where a purchase can be made immediately, or funds are available for an unseen emergency e.g. car repairs. The minimum recommended cash reserve would be equivalent to three months income.”  

Speaking as a property professional, I couldn’t agree more. It’s only reasonable to consider possible void periods and (although this is less likely to happen when purchasing tenanted property)

In a recent blog I also advised setting the equivalent of three months income aside but also a portion of rent for running costs of smaller maintenance tasks which help to prevent bigger problems down the line. 

Medium-term goals 

Stuart’s take on this: “Funds to be invested that you have no need to access for at least the medium term e.g. 5 years. The most tax efficient investment is a stocks & shares ISA. You are currently able to invest £20,000 annually. There is no income tax or capital gains tax on this investment, therefore, the capital can grow initially with a tax-free income paid out in the future, if required.    

Clearly, this is one where stocks and shares have a definite advantage over buy-to-let. However, if you find that you need funds in the interim there is always the option of leveraging/refinancing your property.  

Long-term goals

Over to Stuart again: “Funds to be invested for Retirement Planning. When would you like to retire? If insufficient planning is put in place, then it is likely that you will retire when the state pension is paid out. It is likely that legislation will continue to be implemented to push the state pension age towards age 70 years.

“When do you ‘want’ to retire? If you would like to retire at 55 or 60 years, then Retirement Planning needs to be funded at a worthwhile and affordable amount from the earliest age possible.”

Excellent advice, Stuart! Many of our buy-to-let landlords consider the income from their buy-to-let property to be their pension or a supplement to it. They also enjoy the fact that by retirement age there is a considerable capital appreciation on the property.  

ROUND FOUR: Your risk appetite

I mentioned earlier that some stocks and shares can yield as much as 5.3pc per year, which is all well and good, but if your risk appetite is low, then you might want to consider alternatives.

Obviously the ‘safest’ options involve leaving your money in a bank account or a cash ISA, but as Stuart McAdam points out:

“Leaving money accessible in bank accounts and cash ISAs will not generate any capital growth, nor will they provide a regular income if required. Therefore, doing nothing is not beneficial to a long-term financial planning strategy” 

It is therefore a good idea to seek financial advice from a qualified wealth manager who can advise on the best steps to take. 

Buy-to-let property is seen as lower risk because of the concrete asset factor. You have a tangible quantity which can be leveraged if necessary and also provides a steady income.

A medium risk appetite could also see you diversifying – no-one is saying that you can’t invest in buy-to-let AND stocks and shares, it’s just important to understand the pros and cons of each. 

Of course, if you have a high risk appetite, then you can afford to be less cautious and take more chances, which is where stocks and shares come into their own. 

Advice from the property professionals

Far from throwing in the towel, I’m feeling pretty invigorated after that battle. If you’ve got capital to invest and are looking for a solution that works for you, It’s great to know that there’s so much excellent advice out there.

It’s really important that you take the time to understand what your chosen or desired investment option involves because what works for someone else may not work for you. 

So don’t hesitate to round up some online reviews, check out social media, and take advantage of word-of-mouth recommendations. It makes sense to get your money working for you rather than just sitting in the bank, after all.

Lastly, make sure you have your power team around you. Depending on your chosen investment you’ll really benefit from a good solicitor, mortgage advisor and accountant. If this seems like a lot, consider all the skills they can bring to the table.  

Remember that if you’re considering stocks and shares vs buy-to-let, each will involve their own costs depending on what you choose. 

A tenanted property, for example, can offer a considerable saving compared to vacant possession, and a stocks and shares investment will have, in addition to setup costs, different fees depending on how you wish the funds to be managed. 

In summary…

So there you have it, I hope this blog has been helpful for you if you’re trying to decide between stocks and shares vs buy-to-let. Both definitely have their pros and cons as investment options but I hope I’ve given a flavour of what might work for you. 

It’s always advisable to do your research and consider carefully what your goals are and how you want your money to work for you. 

If you’d like to take advantage of all my years at the property coalface, I’m more than happy to have a chat about the merits of tenanted property.

Remember, I’m only a phone call away, or you’ll welcome to book a no-strings consultation with Chris and myself.

Written by Ross MacDonald, Director of Sales & Cofounder of Portolio

Get in touch on 07388 361 564 or email to [email protected]