Is buy-to-let or the stock market the better path to wealth in 2024?

Imagine you have just received a windfall of £100,000. Rather than spend the money, you decide to invest it with the aim of generating the highest possible return over a 10-year period. But will property or the stock market be the better bet?

Many Britons swear by property – house prices are our national obsession, after all – but while the Government penalises buy-to-let heavily, it actively encourages us to own shares in our Isas.

We summarise the merits of investing in property versus the stock market to help you to decide which is right for you.

How much money can I make from property?

Getting a good return on an investment in property is not as easy as it once was. 

In 2020 the average basic-rate taxpayer who borrowed 60pc of the value of their buy-to-let needed a ‘gross’ yield – the rent as a percentage of the purchase price, before costs such as mortgage payments, maintenance and tax – of just 2pc to make a profit, according to estate agents Hamptons. That figure has since risen to 4pc.

Higher-rate taxpayers, meanwhile, now require a yield of 5pc before they break even. Based on these figures, buy-to-let investing increasingly makes sense only if you can afford to put down a hefty deposit.

In the era of higher mortgage rates, investing in buy-to-let if you rely heavily on mortgage finance generally stacks up only in high-yielding regions such as Scotland and the North East, where average yields are 6.8pc and 6.4pc respectively, compared with less than 5pc in London, according to property data firm Outra.

Let’s look at an example. In Sheffield, where the average house is worth £238,000, according to Rightmove, and the average yield is 5.4pc, an investor could put down £85,000 as a deposit, reserving the other £15,000 from their notional £100,000 for costs such as legal fees and stamp duty. 

Assuming a mortgage interest rate of 5.25pc over 25 years, maintenance costs of 10pc of rent and a management fee of 12pc of rent, the landlord could make an annual return of around 2pc after costs, according to Private Finance, a mortgage broker, generating £20,000 pre-tax over 10 years. 

If the landlord dispensed with the agent and managed the letting him or herself, the yield would rise to about 3.5pc, resulting in £35,000 in pre-tax profits.

This excludes the profit the landlord could make from eventually selling the property.

However, a property investor could stand to double their money over 10 years if they bought in a higher-yielding area such as Glasgow, where the average yield is 7.4pc.

These calculations assume no unexpected costs, such as the replacement of a boiler, which could make a substantial dent in returns.

For all of the costs involved, the advantage of investing in property is that you are likely – over time – to sell for more than you paid. Although price growth has slowed in the short term, over the past decade the average house price in England has shot up from £190,000 to £310,000.

Another reason why you could still make gains is upward pressure on rents. A shortage of housing and affordability struggles for first-time buyers have fuelled record rent rises over the past year. 

The estate agents Savills has said it expects rents to increase by 6pc in 2024. After that the pace of growth may slow – but rents are not predicted to come down.

David Fell of Hamptons said landlords had tended to benefit from remaining invested in their properties for a long time, an average of around 11 years.

“For most landlords, a long period in the market has been a blessing,” he said. “Price and rental growth have for the most part been a one-way bet since 2008, with over 90pc of buy-to-let investors selling their property for more than they paid.

“The time and cost associated with selling tend to mean landlords don’t buy and sell often. So buy-to-let tends to attract those who take a longer-term view and don’t want to be thinking about their investment strategy every day.”

How much money can I make from the stock market?

Research has shown that shares will consistently outperform other assets over long periods. According to research by Barclays, American stocks have returned an average of 5.8pc a year over the past 50 years, compared with 0.4pc for cash and 3pc for government bonds.

Their performance has been even stronger in the past decade, thanks in part to the tech boom. Between 2012 and 2022 American stocks made a total real return of 8pc a year. 

The return you can expect from your portfolio will depend on how much risk you take. Those who put most of their money in the stock market – a high-risk approach – can expect typical returns of 8pc, while medium-risk portfolios will generally produce 5pc a year and low-risk portfolios 2pc, according to the wealth manager Quilter. 

This means that over 10 years a high-risk investor could double their money, with a £100,000 initial investment growing to £200,200. By comparison, a medium-risk portfolio would turn £100,000 into £151,100, or £113,060 for low risk.

Take tax into account

Another thing to consider when deciding between property and stocks is tax.

An investment portfolio can be held in a tax-free ‘wrapper’, such as a pension or Isa, but buy-to-let property cannot. Rental income is subject to income tax and any eventual gain is subject to capital gains tax. 

So although a high-yielding property could generate more profit than a portfolio of stocks, the landlord will also face a bigger tax hit.

Another advantage of investing in the stock market as opposed to investing in property is that the former will almost certainly be less time-consuming, particularly if properties are self-managed.

How to invest in buy-to-let

Investors who enter the sector now should consider where rental demand and yields are highest, and which areas are predicted to experience strongest price growth. Generally, properties in the north of the country will produce a higher yield.

Landlords are increasingly purchasing property via limited companies in order to save on tax. This is because owning a buy-to-let via a limited company allows you to offset your mortgage interest against rental income. Under changes introduced in 2015, landlords can no longer claim mortgage interest as a tax-deductible expense.

Setting up a limited company makes more sense if you are a higher-rate taxpayer. However, you must expect a higher administrative burden.

Clearly, renting out the property without the help of an agency is a simple way to boost returns. However, you will have to decide whether the higher yield is worth the added hassle of managing the property yourself.

How to invest in the stock market

You can invest in the stock market either by choosing companies yourself or by investing in a fund, or several funds, managed by professionals.

Rosie Hooper of Quilter said: “Investing in the stock market and buy-to-let properties present distinct opportunities and challenges. The stock market offers ‘liquidity’ – you can get your money out quickly – and the potential for significant returns, with the ability to diversify across various sectors. 

However, it’s subject to market volatility and requires a strategic understanding of market trends.”

If you want to keep things simple, you can invest in a low-cost ‘tracker’ fund designed to mirror the performance of a particular index such as America’s S&P 500 or the FTSE 100. 

An actively managed fund, run by a human stock-picker, may give you a chance of bigger returns. However, the fees will be higher and there is the chance that the fund could underperform or even close for business.

The most important thing is not to put all your eggs in one basket. For this reason it may be wise to invest in a handful of passive and active funds.