Property vs stocks 🏡 📈

In the UK, property investing has historically been very popular. A soaring property market turned a lot of middle-class boomers into millionaires. There are wealthy private investors in the UK who’ve never touched the stock market.

The most successful investors didn’t just bootstrap the value in their own home, but also built sometimes vast portfolios of rental properties.

There are some firm reasons for this. The UK has relatively fewer desirable cities vs. its population and the size of the economy. In particular, most of the economic activity and wealth is concentrated in London, Europe’s pre-eminent global city. Lots of people want to live in the UK, the capital especially, and housing stock is limited.

In addition, years of housing policy have been torn apart by an inherently contradictory goal: how to make housing more attainable and accessible while keeping the property asset boom going to keep owners and lenders happy. For a long time, owners and landlords were definitively winning.

Now though, some people and many landlords reckon that rental investing or buy-to-let is dying. Some of the causes include:

  • Sheer magnitude of price rises vs income
  • Policy changes disincentivising landlords and wannabe landlords (e.g. stamp duty rises, phasing out income tax relief on mortgage payments)
  • Drops in confidence and demand after June 2016’s Brexit vote.

At Freetrade, we’re all about investing in the public markets. With market investments, you get a huge degree of diversity and flexibility. You can invest in the world’s most dynamic companies, you can spread your risk and invest in almost every public company in a single security via ETFs and you can buy into different asset classes with ease.

But buy-to-let still holds a lot of sway in the UK mainstream as a desirable way to invest. There’s just something about owning a lot of houses that appeals to the monopoly player in all of us.

Monopoly 2019: you go round and round the board never earning enough to buy a single London property. Then the Iron moves to Reading.

So we wanted to compare the two across a number of factors to give you some context on what each investment can offer. We’re not taking a view on how each investment might perform - just what you can expect from them.

Note 1: For extra usefulness, we’re declaring one or the other a ‘winner’ in each category, but bear in mind that only means the asset class generally has a particular advantage in that factor, not that it’s an inherently superior investment.

Note 2: When we say stocks, we mean exchange traded securities, including ETFs, trusts and equities.

Tax/stamp duty

This is a big difference. UK stocks have stamp duty charged at 0.5% of the purchase value (or 1.5% for an Irish company). On overseas stocks and ETFs, there’s no stamp duty at all.

Meanwhile stamp duty on property (AKA Stamp Duty Land Tax) is more complicated and usually much higher. It works on a laddered system with different rates for first homes, second homes and rental properties, graduating rates (i.e. you pay a different rate on different tranches of the total value), as well as exceptions and get-outs.

That complexity is the result of successive governments trying to ease and regulate the impact of the property market with nothing but tax policy tweaks.

We’re not going to summarise the whole system, because a) it’s way too complicated and b) you can use this calculator anyway.

If you want to buy a rental property worth £500k as a buy-to-let investment in England or Northern Ireland, you’ll currently pay 6% of the value or £30k in stamp duty.

Scotland has a different tax called Land and Buildings Transaction Tax, which works slightly differently and is a bit more complex; there you’d pay £43,350 on a £500k rental property.

In Wales, they also run property taxes slightly differently.

In any case, the lower the value of the property, the lower the stamp duty rate and vice versa.

If you’re planning to rent the property, you don’t get first-time buyer relief even if it’s your first property,

This is a big deal for property investment. Depending on the value and the rent deal you can make, you could end up spending a year or more of the expected rent in stamp duty.

Imagine buying a stock and taking an instant 6% hit. :neutral_face:

When you sell an investment property, you’ll also crystallise a capital gain and you may have to pay capital gains tax. Because of the large value involved and the fact that you usually have to sell a whole property at once, it’s difficult to manage how much capital gain you realise and spread it over time.

You also can’t hold residential property directly in an ISA or SIPP - although you can hold property trusts and funds.

Stocks are the clear winner here. The tax system for market investments is much more simple, not too expensive and a lot of tax can be avoided relatively easily with an ISA or SIPP. If you hold stock outside an ISA, you could also still sell it off in chunks to manage your annual capital gains allowance.

Winner: Stocks

Diversification

Unless you’re very wealthy, the sheer expense of direct property purchases means that investing often means you’ll concentrate a lot of your money in one asset. Not just one asset class, one asset.

If anything goes seriously wrong with that property or the market it sits in, you could lose a lot of money.

Even after building a multiple property portfolio, you’re not particularly diversified since you’re still holding a lot of money in one asset class. That’s not to say property investing can’t be very effective - but diversification is not a natural strength.

Note that you could potentially use a property crowdfunding platform to own small shares in multiple properties.

Meanwhile, stocks can be bought in much smaller amounts, allowing you to pool your risk across many different holdings. You can also buy index trackers and own a diversified investment with a single transaction.

Winner: Stocks

Yield

A yield is how much income an investment brings in each year vs. its price. For a stock that usually means annual dividend/share price. For a property that means yearly rent/property value.

For instance, a property worth £250k that rents for £12.5k/year or £1041/month has a 5% yield.

In London, the original hotbed of UK property investing, rental yields now average 3-4%. This is down to a couple of factors:

  • Massive price growth outstripping slightly less massive rental growth
  • Demand dropping off after the Brexit vote

In lower-priced, growing UK property markets in the North East or Scotland, yields can be higher - around 6 to 8%. You might even hit 10% in a best case scenario.

Bear in mind that if you buy with a mortgage, some of your rental yield might go to paying the interest. With a buy-to-let mortgage, the interest is usually higher too. You also might lose income during empty periods.

Stock yields are more inconsistent. UK yields are a bit higher than US ones, as UK companies tend to pay out more dividends for an array of reasons. Looking at whole indexes, the FTSE 100 has a projected yield of 5% for 2019. The S&P 500 is much lower - around 2%.

With property, you get more control. You might fail to rent out the property, but you can set the rent yourself. You have very little control over whether a company decides to pay a dividend each year.

For consistent and more controllable income, property probably edges it when it comes to yields.

Winner: Property, just

Hassle

Owning an investment property can be almost like a fulltime job. There’s a reason ‘landlord’ is often people’s only occupation.

As well as finding and replacing tenants. You’ll usually need to pay estate agents too.

Depending on where you choose to buy, your property could be hundreds of miles away from your home. You might need to hire a manager and you’re also financially responsible for repairs, maintenance and costs like ground rent and service charge. It’s a much more hands-on investment and you don’t necessarily get rewarded that much more for the extra effort.

Stock investing (rather than trading) is much lower effort.

With Freetrade, for instance, you can start building a portfolio for a lifetime in just minutes. Buying a property is… not that fast, as anyone who’s ever dealt with conveyancing and mortgagees will know.

Stock ownership can also be very hands-off. Apple Inc. will probably run OK without your personal input!

But a phone call would be nice

Of course, lots of extra research and standing up for your rights as a shareholder are great too. But if you want to just put your money to work and then get on with the rest of your life, then stocks are an unrivalled investment for that.

Winner: Stocks

Liquidity

Liquidity is how quickly and easily you can buy and sell an investment, also factoring in how much of a hit on the price you take for that speed.

Property is one of the least liquid investments. In most cases, a property has to be sold to an individual buyer. Finding that buyer, making the deal and finalising the purchase can take months or even years. An urgent sale is usually a worse sale.

Buying a property investment is also a major endeavour. First you need to save a deposit, go hunting and wrestle over the offer price. Then there’s conveyancing and agreeing the mortgage to actually complete the purchase.

With stocks, you can buy, sell and reallocate assets within a single day. If you own non-exotic stocks with market makers you can expect instant liquidity. There’s no contest.

This isn’t exactly liquidity but you can also start stock investing very early on without saving a lot of capital, because of the low buy-in costs. That means you have more potential time to invest and grow your funds.

Winner: Stocks

Leverage

Generally banks and financial institutions let you borrow more cheaply to buy property than most other assets (although that is in the context of historically low UK interest rates). That’s partly cultural, partly practical. As assets go, a house is pretty good loan security. It’s hard to conceal or move a property and it can be reclaimed fairly easily.

Banks also expect properties to hold value better than other assets.

An investor might say, “Hey, an all-world ETF has about the same risk as a property in a potentially overblown market - why won’t a bank give me a low interest loan to triple my investment capital?” We’re not saying that’s actually the case, but an investor might take that view.

However, even if it were true, it would be much harder for the bank to make sure you only use the money to buy a hugely diversified ETF, rather than random stocks. Or to reclaim the capital, if you stop paying the interest.

This means that if you want to leverage your stock investments, you’ll usually have to get a loan from your broker. That’s often called ‘buying on margin’. The loan will usually charge more interest than the average mortgage. Most brokers also require that you maintain enough value in your account as collateral for the loan. Because stock market valuations fluctuate daily, that means you could end up tying up a lot of money trying to service the loan.

All things being equal, it’s a more high stress and risky debt than most mortgages.

For these reasons and more, we don’t offer leverage on Freetrade.

Banks’ willingness to lend on relatively generous terms and magnify your purchasing power is one of the main reasons why property has an edge as an investment. A long-term, manageable mortgage lets you buy a much bigger asset than you could by yourself. By the time the loan is due, the asset could have grown much larger, while the loan’s real size has been shrunk by inflation.

Winner: Property

It’s worth noting you don’t actually have to choose between stocks and property. You can actually invest in property on the stock market with ETFs (or REITs, which aren’t currently on Freetrade).

However, if you want a straight choice between direct property ownership and the market?

Stocks are the clear winner when it comes to:

  • Liquidity

  • Easy diversification

  • Low barriers to entry

  • Lack of hassle

  • Easier tax management and lower tax cost

Direct property investment gives you more controllable income and more accessible, cheaper borrowing to increase your investment.

The choice, as always, is yours.


Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.

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31 Likes

A solid write up as usual & overall I agree with the sentiment of this.

The section on yield is perhaps a little disingenuous though (not on purpose). Yield should really be calculated against your capital outlay & not the overall value of the asset - because BTL property is typically leveraged via a mortgage, your ‘true’ yield is substantially higher. Using the example above:

A property worth £250k that rents for £12.5k/year or £1041/month. The deposit on this would be £37.5k (assuming 15% deposit) & so your yield is actually closer to 33%.

3 Likes

But wouldn’t it make more sense to knock the Mortgage payments off that yield for a NET figure? Your mortgage is going to be best part of a grand a month on that assuming 2% for 25 years

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Yes. Not really sure how my dumbass forgot how to do that.

Good article. What about holiday lets or short-term lets like AirBNB?

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There are different ways to think about yield for sure - measure by buy-in cost or current value. I kept it simple, but most common way is to measure it against current value of the asset, since the thinking is you could cash out and get a better yield elsewhere.

Of course with leverage it’s not that simple!

2 Likes

Don’t have a huge amount of info on AirBNB restrictions and practices across the UK (in London, you can only let out for 90 days I believe), but generally it seems like you would basically be trading the security of a long-term yield for more money per day/week/month from your tenant.

Generally, you can only get buy-to-let mortgages if you’re planning to rent out for 6 months or more so you might have to borrow differently to offer short lets over the long-term (i.e. with a holiday let mortgage).

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I actually had this choice to make last year, I Inherited a share of a house. We decided to sell rather than rent it out mainly because it’s less hassle and I’ve put most of my share in stocks

Some of it went in Freetrade R4 :slight_smile:

6 Likes

I keep hearing good things about having a residential REIT within a portfolio. From what I’ve been told, people look to use REIT(S) for their regular income, and run them alongside their other value/growth stocks that might take a much longer period to pay out. I can see the sense in it.

Nice article and thanks for putting this together for us all. :slight_smile:

Matt

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Yep I’d like to have some REITs in my Freetrade portfolio. Like WP Carey. What’s the plan on seeing REITs in the app?

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It’s a great article, love it!
Question: why is this article (and other insightful ones about investing) not published in Freetrade blog or social media?
I feel this will benefit to a larger audience.
Also, is the Discourse platform optimized for SEO?
Curious to better understand your approach to content marketing

4 Likes

We’ve shared this on social media, on twitter and we’ll share it on LinkedIn soon too :mega:

The community works well for SEO because we’ve seen that a lot of user’s posts here end up being popular search results, as well as the content that we share :speech_balloon:

So we tend to use the blog for news and the community to share everything else now.

When it comes to this aspect of our content strategy, Viktor’s summed up our approach nicely here -

4 Likes

Very good write-up!

A couple of things:

  • You mention this in a reply, but yield isn’t the same as ROI if you are buying property with a loan (whereas for unleveraged stock acquisitions yield and ROI are more or less synonymous). Could be worth pointing out.
  • Some commentary on the transaction taxes which apply to residential property transactions in the UK:
    • The tax which applies in England is called stamp duty land tax (SDLT), not simply stamp duty.
    • SDLT also applies in Northern Ireland - ie, NI does not have a different tax.
    • With all due respect, you write about the transaction tax which applies in Scotland (and Wales) as if these places were slightly curious foreign countries - eg, capitalising the name of the Scottish tax, and referring to both places with “they” (which you don’t do for England). I think it would be possible to write this summary in a way which doesn’t treat any part of the UK as the ‘default’.
    • That said, well done for mentioning LBTT (and alluding to LTT) at all. Many companies based in London/England just wouldn’t bother!
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If you want to see some property hassle, I was on Channel 5’s Nightmare Tenants a few weeks ago.

https://www.my5.tv/nightmare-tenants-slum-landlords/season-5/episode-3-2-2-3-2-2-2

I let out a flat to a Zeyad Alsaffar, a convicted fraudster. My segment’s a bit of an anti-climax, because the guy fled the country.

4 Likes

Is it me or has no-one realised property is insanely expensive, especially London. You wouldn’t buy a massively overvalued stock, at the peak… would you?

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I think most people are aware, but what can you do? The situation gets worse by the year. You either pay rent, pay mortgage or be homeless. The first two options further inflate the housing market.

And the longer you wait to buy, the more out of pocket you will be when you finally do thanks to this infinite housing boom.

It’s an unpopular opinion, but if all private properties had a right to buy clause for tenants, this issue would be over.

There is nothing wrong with renting as long as you invest your money elsewhere. Especially for London I can be more profitable in the long run.

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I do agree. But your investment growth needs to be greater than the growth of your rent

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I’m not sure if London property really is overvalued? Is it not very simple supply and demand? The number of houses in the capital is fairly limited (either build up or further out) and at present the capital has a large concentration of jobs and wealth, ergo lots of people want to live there and value doing so highly enough to pay the prices in order to do so.

I do believe that the bubble is artificially inflated. As we have many Houses in London or flats that are unoccupied in order to push the price up.