Investing your hard-earned money is one of the most challenging decisions you’ll face as a new investor. Should you invest in the housing market or FTSE? Both are good starting points for a novice and even provide similar returns. However, FTSE comes with a wealth of benefits that put off the housing market. Here’s what you should weigh in on.
While it is true that all investments come with associated risks, some investments are simply riskier than others. FTSE means you could lose your entire investment, but you can lose nothing beyond that.
Things are different in the housing market. Buying a house usually means you can lose more than your investment if you finance your purchase through debt. House prices may also drop due to political instability, according to market specialists. In the worst-case scenario, you could find yourself in negative equity should you have to sell the property.
At this point, the odds are 1-0 in favour of FTSE, simply because its risk of loss is lower than that of a buy-to-let property.
Another category in which the housing market doesn’t excel is diversification. Buying a property won’t expose you to other companies, at least not at first unless you have millions of pounds to invest. The FTSE, on the other hand, gives you instant exposure to one hundred of the largest companies in the world without any real effort from your side.
Costs and Unexpected Charges
Your initial capital also plays a big role in deciding how to invest. The FTSE doesn’t require you a minimum initial investment. You can invest in shares as much or as little as you want without strings attached. Dividends might not be guaranteed, but investors have shown that buying assets in a wide variety of companies usually leads to a steady income.
Investing in the housing market usually requires you to pay a big lump of money upfront. Property prices may have dropped in the last few years, but they are still high. The property also comes with additional costs. As an owner, you’ll have to pay for building repairs and are responsible for maintaining the property in good condition.
Many new investors believe that owning brick-and-mortar is a guarantee for liquidity. However, the contrary is true. Investing in FTSE means you can have access to cash whenever you want by simply selling your shares. If you invested your entire capital and your situation worsens, you’ll be able to get money back into your pocket with just a few clicks.
Things are quite different if you invested in the housing market. Selling a property is daunting to say at least, as well as time-consuming. You have no guarantee you’ll secure a good deal or that you’ll get your investment back.
It is also foolish to assume that by renting your property you’re guaranteed a steady income. In most cases this is true, but if the tenant’s situation changes and payments are delayed, you might have difficulties in getting your money.
With the new regulations protecting the tenants, it could also be hard to end the agreement and rent your property to someone who can afford timely payments.
It is no mystery that in one way or another all markets are at risk. That’s why you should truly consider the catalysts before making an investment.
The housing market has a strong positive catalyst, namely the shortage of supply versus demand. However, recent government schemes are encouraging people to invest in their own homes rather than rent. Think of Help to Buy or Rent to Buy schemes popular all over the UK. This means your returns could fall significantly should these schemes have a positive response.
The FTSE is closely linked to the global economy. Political events may trigger a fall in this sector, yet specialists still forecast an annual growth rate of 5% in the world economy by 2022. As such, the prospect of investing in indexes seems brighter than investing in the housing market.
Getting a profit is why you invest in the first place, so it makes sense to analyse your possible returns before making a decision.
To start with, you should consider the yield of each type of investment. A quick look at the financial markets will reveal the dividend yield is higher than the average yield offered by the possible income produced by a property.
Even if renting a home could seem like it gives you more money, you should also consider taxation.
Tax on dividends and tax on property income are very different, with the latter often costing you over 20% and up to around 45% of what you’ve earned. Account for additional expenses such as property maintenance and repairs, and you might not have such a great deal as you would have thought.
Depending on the amount you earn, tax on dividends can cost you less than 10%, and in any case, it does not exceed 40%.
Of course, the value of your actual tax bill will depend on many other factors, but overall, taxation on dividends is more efficient than taxation on property income, allowing you to retain a higher portion of your revenue.
And the Winner Is…
Undoubtedly, FTSE. While both markets can bring similar returns, investing your money in indexes takes all the burdens off of you. FTSE comes with lower risks, higher diversification, clearer costs, and no unexpected charges.
You will be able to get access to cash whenever you need it without waiting for months – or sometimes years – to sell your property.
Outperforming the housing market in all the points above, FTSE is perhaps your best bet. Ultimately, the choice is yours, and in the end, both markets offer great investment opportunities as long as you’re ready to deal with their challenges.
DISCLAIMER: These articles are for information only and should not be construed as advice. You should always seek advice prior to taking any action.