As house prices continue to fall, I find myself tempted to look at how a buy-to-let could offer me a second income. But after some basic research, I think investing in UK shares is a much better source of passive income. Here are four reasons why.
1. Interest rates
The first issue is interest rates. The Bank of England just bumped these up to 5%, which makes borrowing — including via a mortgage — expensive. Rates might even go up again in August. Put simply, I’d say this makes now a terrible time to fund a house purchase with borrowed money.
It’s true that high-interest rates hurt companies too. They have to pay more to borrow, which means less money for investment. But shares can be inflation-resistant. As companies will raise prices to meet inflation, the value of the business as an asset could rise at a similar level.
2. Tax
A second reason is that the income received on a buy-to-let is taxable. As it’s classed as income, it can go as high as 45% in the UK, taking a huge chunk off the amount I’d earn.
While UK shares are taxed too, I can avoid this using an ISA. The Stocks and Shares ISA allows UK residents to invest in shares without paying any tax on their returns. It has a maximum deposit of £20,000 a year, or £1,700 a month, which is more than enough for most earners.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
3. Work
A third issue with a buy-to-let is the work involved. I’d need to research a neighbourhood, scout for properties, get the surveyors in and all the rest of it. And as if that wasn’t enough, once I own my buy-to-let, now I have a second job as a landlord. Maybe it’s not always hard work, but the wrong tenants or a boiler breakdown could be a nightmare in the making.
By contrast, buying shares is easier than ever. These days, it takes only a few minutes to open an account with a broker., and once that’s set up, each trade takes me at most 30 seconds to execute. The hardest part is researching which shares to buy, but even that can be done in my spare time with a coffee in hand.
4. Upfront cost
A buy-to-let requires a sizeable upfront cost. The average house deposit is up to £60,000 now, hardly an amount I have lying around.
The minimum outlay to buy UK shares, on the other hand, is very low. I mean, I could theoretically buy a share in Lloyds bank right now for a 50p coin. There are trading costs to consider though, which make tiny investments like that a bad move. I aim for a minimum of £300 for each stock to minimise the effect of these costs.
What I’m doing
Having said that, buy-to-let isn’t all bad. The second income may be more stable than the ups and downs of the stock market. And if house prices start to soar again, I may end up sitting on a very valuable asset at the end of it.
On balance though, I think investing works best for me. I’ll continue hunting for quality UK shares to work towards a second income that way.
The post Forget buy-to-let! I’m buying UK shares to target a second income appeared first on The Motley Fool UK.
Our best passive income stock ideas
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
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More reading
1 rising penny stock I’d buy today at 64p
How I’d use £80,000 to target a £7,000 second income for life
3 ‘no-brainer’ FTSE 100 dividend shares I’d buy in July
A stock market rally is coming! I’m buying FTSE 100 stocks while they’re still cheap
A once-in-a-decade opportunity to buy cheap British shares for passive income!
John Fieldsend has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
As house prices continue to fall, I find myself tempted to look at how a buy-to-let could offer me a second income. But after some basic research, I think investing in UK shares is a much better source of passive income. Here are four reasons why.
1. Interest rates
The first issue is interest rates. The Bank of England just bumped these up to 5%, which makes borrowing — including via a mortgage — expensive. Rates might even go up again in August. Put simply, I’d say this makes now a terrible time to fund a house purchase with borrowed money.
It’s true that high-interest rates hurt companies too. They have to pay more to borrow, which means less money for investment. But shares can be inflation-resistant. As companies will raise prices to meet inflation, the value of the business as an asset could rise at a similar level.
2. Tax
A second reason is that the income received on a buy-to-let is taxable. As it’s classed as income, it can go as high as 45% in the UK, taking a huge chunk off the amount I’d earn.
While UK shares are taxed too, I can avoid this using an ISA. The Stocks and Shares ISA allows UK residents to invest in shares without paying any tax on their returns. It has a maximum deposit of £20,000 a year, or £1,700 a month, which is more than enough for most earners.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
3. Work
A third issue with a buy-to-let is the work involved. I’d need to research a neighbourhood, scout for properties, get the surveyors in and all the rest of it. And as if that wasn’t enough, once I own my buy-to-let, now I have a second job as a landlord. Maybe it’s not always hard work, but the wrong tenants or a boiler breakdown could be a nightmare in the making.
By contrast, buying shares is easier than ever. These days, it takes only a few minutes to open an account with a broker., and once that’s set up, each trade takes me at most 30 seconds to execute. The hardest part is researching which shares to buy, but even that can be done in my spare time with a coffee in hand.
4. Upfront cost
A buy-to-let requires a sizeable upfront cost. The average house deposit is up to £60,000 now, hardly an amount I have lying around.
The minimum outlay to buy UK shares, on the other hand, is very low. I mean, I could theoretically buy a share in Lloyds bank right now for a 50p coin. There are trading costs to consider though, which make tiny investments like that a bad move. I aim for a minimum of £300 for each stock to minimise the effect of these costs.
What I’m doing
Having said that, buy-to-let isn’t all bad. The second income may be more stable than the ups and downs of the stock market. And if house prices start to soar again, I may end up sitting on a very valuable asset at the end of it.
On balance though, I think investing works best for me. I’ll continue hunting for quality UK shares to work towards a second income that way.
The post Forget buy-to-let! I’m buying UK shares to target a second income appeared first on The Motley Fool UK.
Our best passive income stock ideas
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
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setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
1 rising penny stock I’d buy today at 64p
How I’d use £80,000 to target a £7,000 second income for life
3 ‘no-brainer’ FTSE 100 dividend shares I’d buy in July
A stock market rally is coming! I’m buying FTSE 100 stocks while they’re still cheap
A once-in-a-decade opportunity to buy cheap British shares for passive income!
John Fieldsend has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
