Buy-to-let vs stocks: Which one should I invest in?

Key takeaways

• Buy-to-let properties can provide regular rental income and potential capital growth, but require a deposit of at least 25% and come with ongoing costs like maintenance, repairs and tax
• Stocks offer high liquidity and low initial costs (you can start with as little as £1), making them accessible for new investors who want to invest little and often
• Buy to let gives you more control over your investment but requires active management, while stocks offer a more hands-off approach once your portfolio is set up
• Both investment types carry risks - property values can fall and make remortgaging difficult, while stock market volatility means your portfolio value can fluctuate significantly
• The right choice depends on your financial situation, how much time you can commit, and whether you prefer regular income (buy to let) or long-term wealth building (stocks)

Advantages of buy-to-let

1. Regular income

Something that sets buy-to-let apart from other types of investment is that it can provide you with a regular income. At a minimum, you’ll want your tenants’ rent to cover your expenses such as mortgage payments, letting agent fees, and repair and maintenance costs. But to make buy-to-let really worthwhile, you’ll need to make a regular income that you can put towards your own expenses, living costs, and personal goals too.

If you are struggling to cover your buy-to-let mortgage with rental income alone, you may be able to find ways to make your buy-to-let more affordable. 

2. Capital growth

Property values can rise and fall from one year to the next, but over the long term, they tend to increase. Data released in 2022 showed, on average, UK property prices are 65 times higher today than they were in 1970. By holding onto your property for the long term, you may be able to sell it for a significant profit, though past performance doesn't guarantee future results.

Read more: Are house prices still rising?

3. Control

When investing in buy-to-let, you’ll have a lot of control over how your investment is managed. You can decide which property to buy, whether to make any changes to it, who to rent it out to, and how it is managed once a tenant moves in.

You might like: Where should I buy a house?

Disadvantages of buy-to-let

1. High upfront costs

You’ll usually need a deposit of at least 25% to buy a buy-to-let property. So for a house worth £400,000, for example, you’ll need a deposit of around £100,000. The upfront cost of buy-to-let can be an obstacle for many potential landlords. 

2. Mortgage affordability checks

Finding a deposit for your investment property is only half the battle. To get a mortgage, you’ll also have to pass lenders’ affordability checks.

Mortgage affordability checks can vary from one lender to the next, but most will want to see that you can afford the mortgage payments on your investment property on top of your existing expenses.

Most buy-to-let mortgage lenders will take into account how much rent you’d be able to charge your tenants. They’ll do this by assessing average rents in your area and the demand for that type of property.

3. Repairs and maintenance

You may have seen property investors discussing 'passive income' on social media. While the concept of 'making money while you sleep' sounds appealing, it's important to understand that being a property investor typically requires more active involvement than these posts might suggest.

As a landlord, you’ll be responsible for maintaining and repairing your investment property. This can be costly and time-consuming. And the more properties you have, the larger your workload will be. It can be hard to switch off, particularly if you manage everything yourself.

You may be able to reduce your workload by outsourcing some of the day-to-day responsibilities of being a landlord. Some people outsource it all, but this can eat into your profits and make your investment less worthwhile.

4. The costs of being a landlord

Being a landlord often comes with ‘hidden’ costs that new investors may overlook. You’ll usually have to budget for the following:

• Mortgage costs
• Legal fees
• Letting agent fees
• Admin costs
• Repair and maintenance fees
• Tax

A letting agent can take full control of managing your property, if you want them to. Their responsibilities can involve advertising the property, arranging viewings, vetting tenants, protecting deposits, responding to tenants' questions, and hiring tradespeople such as plumbers and electricians. They’ll also help ensure you comply with all relevant government legislation and legal requirements. This can be particularly helpful if you’re new to buy-to-let investing and you’re still figuring out how everything works.

However, these services come at a cost. Letting agent fees can range from 10%-20% of the rent, making your investment less profitable than if you were to manage it yourself. You’ll need to weigh up the benefits of being less involved and having more time for yourself versus the impact on your profits.

5. Property market risks

While property investment can appear relatively secure, particularly given historical house price growth, it's important to understand that buy-to-let isn't risk-free and there are no guarantees. The market can be unpredictable, and property values can decrease. A significant fall in your property’s value could make it hard to remortgage. And if interest rates rise, your payments could become less affordable.

6. Regulatory changes and tax squeezes

Landlords have faced increasing regulatory requirements and tax changes in recent years, which have made buy-to-let less profitable for many investors.

Changes to mortgage interest tax relief mean landlords can no longer deduct all their mortgage interest from their rental income before calculating tax. Instead, they receive a 20% tax credit, which can result in higher tax bills, particularly for higher-rate taxpayers.

Additional costs include higher stamp duty rates on second properties, stricter energy efficiency requirements, and evolving tenant protection legislation. These regulatory changes and tax squeezes could further eat into profits and make buy-to-let a less attractive investment option than it once was. It's important to factor in these ongoing costs and potential future changes when deciding whether buy-to-let is right for you.

Advantages of stocks and shares

1. Liquidity

Stocks are highly liquid, meaning you can buy and sell them easily. For fast access to funds, you can sell your stocks and see the money in your bank account within a matter of days. 

However, since the value of your stocks can go down as well as up, they might be worth less than the original purchase price. If you need their money urgently, they may need to sell at a loss. Whereas if you can hold tight for a few months (though sometimes it may be years), your stocks will usually recover, and no money will be lost, but this isn’t guaranteed.

2. Low initial cost

Investing has a lower barrier to entry than you might think. In fact, some investing platforms will let you get started with as little as £1. If you've been considering investing but waiting for the right moment, this low initial cost could provide you with an incentive to just get started.

3. Diversification

It’s easier and cheaper to build a diverse stock portfolio than it is to build a diverse property portfolio. By building a diverse portfolio covering multiple properties, industries and stock markets around the globe, you can reduce risk.

Disadvantages of stocks and shares

1. Volatility

As we touched on earlier, the stock market can be extremely volatile. This means the value of your investments can fluctuate. Your portfolio might be up 10% one month and down 10% the next. This can make the stock market risky, particularly if you’re only investing for the short term or you don’t have much money in savings. If there’s a chance you might need the money in the next 5 years, it’s a good idea to keep it in cash.

2. No control

The stock market gives ordinary people an opportunity to invest in large corporations such as Apple, Microsoft, Facebook and Tesla. But this doesn’t mean you’ll have control over each company’s decisions and management.

You might invest in one of your favourite companies only for a new CEO to shake things up in a way you disagree with. This is one of many reasons why it’s a good idea to avoid investing in individual companies as a new investor. Investing in index funds like the FTSE 100 might not sound as exciting, but it can be much safer.

3. No guaranteed returns

Investing in stocks can be one of the best ways to build wealth over time, but this doesn’t mean a return is guaranteed. If the value of your stocks falls or there’s a stock market crash, you may lose money. However, by maintaining your investments over the long term, you can often weather these fluctuations and see your portfolio recover.

How to choose between buy-to-let and stocks

If you’re struggling to decide between buy-to-let vs stocks, here are a few questions to ask yourself:

Can you afford to buy a buy-to-let property?

If you have a lot of money in savings, you’ve received an inheritance, or you’ve sold a business or other type of investment, you may be in a good position to buy a buy-to-let property.

If you’re a homeowner, you may be able to use the value from your home to put down a deposit on an investment property. There are a few ways to do this, but one of the most popular involves remortgaging.

Learn more: What is remortgaging and how does it work?

Do you want to invest a little and often?

If you want to invest a little and often, the stock market might be best for you. If you were to invest £300 a month for 10 years with a 7% average annual return, you’d end up with £49,739, even though you’d only invested £36,000 of your own money. With buy-to-let, however, you’d need a much larger upfront investment rather than regular contributions.

Do you want to make a regular income?

It’s possible to make a regular income from the stock market by prioritising stocks that pay dividends, which are financial rewards that companies pay to their shareholders as an incentive to keep investing with them. However, it can take a long time to build a dividend portfolio big enough to generate an income.

So, unless you have a large sum of money to invest in the stock market from the get-go, buy-to-let can be a better way to make a regular income.

Do you want passive income?

Although buy-to-let can offer a regular income, it’s not necessarily a ‘passive income’. Unless you can afford to outsource repairs, maintenance and property management, you'll need to be actively involved in managing your buy-to-let property.

A dividend-paying stock portfolio, however, can be a passive income. You aren’t responsible for the companies you invest in. Once you've set up your investment account and chosen your investments, you can take a more hands-off approach and allow your portfolio to grow over time.

Is buy-to-let better than stocks?

For some people, buy-to-lets can be a better investment than stocks. If you have a deposit set aside or you’re a homeowner with a significant amount of equity in your property, buying an investment property could be a sensible decision. Another option is to rent out your current home and purchase a new property to live in through a Let to Buy mortgage, allowing you to build a property portfolio while moving to a new home. You’ll be able to make a regular income and benefit from rising property prices over time.

However, being a landlord requires ongoing commitment. Unlike traditional employment, you may need to respond to tenant issues outside of regular hours, such as emergency repairs that can't wait until morning.

If you prefer a more hands-off investment approach, the stock market allows you to build wealth gradually without the day-to-day responsibilities of property management. It can take a long time to build a portfolio that generates a reliable income, but by automating your investments and sticking with it for the long term, you may be able to make a lot of money without having to play an active role in the companies you invest in.