Forget buy-to-let, I’d aim to make a million using this simple strategy

Buy-to-let has helped investors all over the UK make fortunes. But, as Rupert Hargreaves explains, the risks of owning a rental property are starting to outweigh the rewards.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past few decades, buy-to-let investors have earned fantastic returns through a combination of rental growth and rising property values. One of the reasons why investors have been able to achieve such impressive profits with buy-to-let property is the ability to borrow money. 

According to my research, most buy-to-let mortgages allow investors to borrow up to 60% of the property’s value.  According to the Land Registry, the average house price in the UK is £234,853, implying investors can get into the buy-to-let market with an average deposit of just £93,941.

However, as well as boosting purchasing power and profits, leverage also has a dark side. It can magnify your losses as well. And now that the government has decided to remove the mortgage tax relief tax break that buy-to-let investors used to be able to claim, the appeal of borrowing to buy a rental home has decreased dramatically.

This is just one of the issues buy-to-let investors now have to deal with. In recent years the government has been clamping down on the sector in an attempt to force rogue landlords to improve the quality of their properties. These new laws have had a knock-on effect across the rest of the industry and have, in my opinion, drastically reduced the attractiveness of buy-to-let property as an investment. 

The better investment

Instead, I think the stock market is a much better home for your money. Granted, borrowing money to increase your returns in the stock market should be avoided, but investing in the market has many other benefits.

These include the fact you can own stocks in an ISA, so you don’t have to worry about any additional tax obligations, the liquid nature of the stock market, which means you can get in and out whenever you want, and the ability to diversify your portfolio to click of a button.

On top of these benefits, stocks and funds come with their own managers so you don’t have to worry about managing anything yourself. Meanwhile, the stock market also offers much higher returns than the buy-to-let market. 

Over the past 10 years, the FTSE 100 has produced an average annual return for investors in the region of 7%. The FTSE 250 has produced an average annual return of 9%. You can still get yields of 10% in some buy-to-let markets, but the UK average is closer to 5%, although that excludes capital growth, maintenance charges, and interest costs. 

The road to a million

At an average annual return of 9%, I calculate it would take 27 years to make £1m in the stock market, with an initial deposit of £93,941. If this money were invested in an ISA over several years, there would be no taxes to pay on income or capital gains. 

Further, by using a low-cost tracker fund, you could get the annual management fee down to below 0.8%. By comparison, most letting agents charge 10%, and many landlords spend as much as 40% of their rental income on property maintenance.

That’s why I would ignore the buy-to-let market and invest my money in the stock market instead to make a million. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »