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.
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 to invest in.
Tax/stamp duty
This is a big difference. UK stocks have stamp duty charged at 0.5% of the purchase value (or 1% 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 5.5% of the value or £27.5k in stamp duty (3% on the first £250k, and 8% on the remaining £250k).
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 £53,350 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.
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 (all explained here), 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
💡 Learn more about investing: How to invest in stocks - guide
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 4-5%. 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 UK's FTSE 100 gained 3.8% in 2023 and the S&P 500 gained 25%.
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 full-time 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!
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
In conclusion
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 and REITs.
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.
See what our community of retail investors thinks about this topic on our community forum.
Freetrade is on a mission to get everyone investing. Whether you’re just starting out or an experienced investor, you can buy and sell hundreds of REITs and SPACs commission-free through our investment app. You’ll also be able to invest in freshly launched IPOs.
Important information
ISA and SIPP eligibility rules apply. Tax treatment depends on your personal circumstances and current rules may change.
A SIPP is a pension designed for you to save until your retirement and is for people who want to make their own investment decisions. You can normally only draw your pension from age 55 (57 from 2028), except in special circumstances.
At present, Freetrade only supports Uncrystallised Fund Pension Lump Sums (UFPLS) for customers who wish to withdraw funds from their SIPP after their 55th birthday. We strongly encourage you to seek financial advice before making any withdrawals from your SIPP.
