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4 reasons why investing in the FTSE 100 could beat a buy-to-let property

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.

Source: Yahoo Finance UK

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Forget buy-to-let! These property investments yield up to 5.1%

Buy-to-let investing has taken a bit of a bashing over the past few years. With the introduction of an extra 3% surcharge in Stamp Duty, the phased reduction of tax relief on mortgage interest and stricter lending criteria brought in by the Prudential Regulation Authority, it comes as no surprise that many landlords are pessimistic over the future of sector.

However, that’s not to say that prospective new investors should simply avoid the property sector. There are other ways to get invested in property without becoming a landlord yourself. Via property-focused investment trusts and REITs, investors can still earn attractive returns without having to worry about finding a decent tenant or day-to-day management.

With this in mind, here are two property investment vehicles which may be worth a closer look.

Student property

Empiric Student Property (LSE: ESP) is a real estate investment trust which focuses on investing in the purpose-built student accommodation sector. Student property is a good substitute to investing in residential property, because due to the substitutability between student and residential properties, investors in the student property sector maintain a high level of exposure to UK house price movements.

Student property does however offer two key advantages over traditional residential buy-to-lets. First, student property is intrinsically more defensive, given the non-cyclical nature of demand for higher education, which means cycles of boom and bust have little impact on student numbers. As such, student property will likely fare better than most other property sectors in a downturn, in terms of the stability of vacancy rates and rental income.

Rental premium

Second, purpose-built accommodation typically commands a rental premium to similarly-located residential properties, due to the chronic shortage of modern, purpose-built student properties and the general preference of students towards living in such places.

Empiric Student Property has proposed a full-year dividend of 5p per share for 2018, giving prospective investors a forward yield of 5.1%. Dividend cover, which is currently at 60%, is expected to rise to at least 100% in 2019.

Diversification

For investors looking for greater diversification, the TR Property Investment Trust (LSE: TRY) may be a better pick.

Unlike the vast majority of property investment vehicles, TR Property’s portfolio consists of both European-listed real estate investment trusts and direct property. The company’s direct property investments consist of a mix of retail, office and industrial properties — they are all located in the UK and currently represent just 7.4% of its total assets.

Focus on growth

In the REIT space, the company picks out well managed companies of all sizes, focusing primarily on future growth prospects and capital appreciation potential. There is a sizeable exposure to German residential property, with Germany’s largest REIT Vonovia being its single biggest asset (representing 11% of the total). Overall, the UK is still its largest geographical exposure, representing 40.9% of its assets, and this is followed by Germany (29.1%) and France (18.2%).

The fund is a top performer in the property sector — over the past five years, shares in the trust have returned 132%, nearly double the performance of its FTSE EPRA/NAREIT Developed Europe benchmark, which gained only 75%.

At the time of writing, shares in TR Property yield 2.9%.

Source: Yahoo Finance UK