Forget buy-to-let: I’d much rather invest in cheap shares today

In the past month I have opened cheap stocks, to generate capital and income for retirement.

During that time, the FTSE 100 has risen a lot, and the purchases I made last October have been worth more today. The best decision is to buy an airplane engine Rolls-Royce on November 1.

Property or shares: who buys?

I thought it was cheap at the time, but didn’t expect the stock price rally to be so quick. It’s up 70.91% since clicking the buy button.

Although the FTSE 100 recently hit a high of 8,000, there are still bargains to be had in the index. The beauty is buying individual stocks instead of buying tracker funds. They don’t all move at the same speed. Last I saw, Anglo American, Barclays, Kingfisher and Unilever still seems cheap to me.

In contrast to the FTSE 100, UK property prices have fallen. I have considered investing in buy-to-let property before, when I was never quite knuckling down to it. Is now the end of time?

I was struck by this paradox. The FTSE 100 has risen but still looks cheap, while house prices have fallen but still looks expensive to me. So much for the price, how are the results? A buy-to-let is on the market in the same block as mine, asking £375,000. The current tenant pays £1,350 a month in rent, which works out to £16,200 a year. This yielded 4.3%.

It is slightly higher than the FTSE 100 yield, which is currently around 4%, but in practice it seems much less attractive. This is why.

Investing in buy-to-let can be profitable and work for many people, but it also has a lot of costs. The biggest one is stamp duty, mainly because landlords pay an extra 3%. That will cost me a refund of £17,500, a tax rate of 4.67%. In contrast, the stamp duty for buying shares is only 0.5%

Too much trouble?

Since I had to borrow to buy the property, I also had to pay the mortgage. Then there is the cost and hassle of setting up a flat, finding tenants, checking out, doing maintenance work, etc.

It’s an uncertain time to buy, as the government considers new rules to protect good tenants against rogue landlords. I worry this will make it harder for good landlords to evict bad tenants.

When I buy shares, I do not have such a conflict to worry about. They just sit on my online platform, go up and down, and pay dividends regularly. Minimal workload, low stress factor. Sure, the stock market can crash, but I’ve seen so many crashes in my life, they tend to destroy me.

Stock dividends can be cut, so my income stream is weak. I got this round by investing in a balanced portfolio of stocks for the long term, which I’ve held for decades, giving me plenty of time to find my feet again.

Best of all, my portfolio will never ring in the middle of the night to complain about a dripping tap. That’s why I bought cheap stocks today.