Forget buy-to-let! I’d invest in a Stocks and Shares ISA today to make a million

I think that the stock market could offer a superior risk/reward ratio compared to buy-to-let.

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With UK house prices having surged higher over the last decade, buy-to-let investments have offered significant returns. Now though, the prospects for the industry are under pressure. Affordability is an ongoing concern, while regulatory changes could make the returns available to landlords less attractive.

Over the same time period, investing in a Stocks and Shares ISA has become more appealing. The annual ISA limit is now £20,000, while its tax advantages remain enticing. With the FTSE 350 currently offering low valuations across a variety of sectors, making a million from the stock market could be more likely than generating a seven-figure property portfolio.

Buy-to-let challenges

House price growth over the last decade means that affordability is a major concern for property investors in many parts of the country. The average house price stands close to a record high when compared to the average wage. This means that many first-time buyers would be unable to get onto the property ladder without government policies such as Help to Buy. Since they are unlikely to remain in place in perpetuity, house price growth could eventually stall – especially if interest rates rise at a faster pace than expected.

In addition, house price growth in recent years means that the income return on property is limited in many parts of the UK. Previously, obtaining a 5%+ yield on a property was achievable in many areas. Today, though, yields are often 4% or less. When rising taxes and other costs such as management fees and repair bills are deducted from that figure, the net returns for property investors could be somewhat limited over the coming years.

Stocks and Shares ISA appeal

By contrast, investing in a variety of companies through a Stocks and Shares ISA remains highly appealing. The FTSE 350 has an above-average yield, which suggests that it offers good value for money. This may translate into strong growth over the coming years, with low price-to-earnings ratios in sectors such as banking, retail and even property suggesting there are significant opportunities for long-term investors to benefit.

In addition, reducing risk is easier when investing in shares versus property. The stock market offers a wide range of companies from a variety of sectors that operate in multiple regions around the world. Buying a number of companies can therefore diversify an investor’s portfolio so that risk is reduced. Due in part to the cost of buying property, as well as the large amount of capital that is required for a deposit, diversifying is much more difficult. This can lead to higher risks, as well as lower returns, over the long run.

Takeaway

House prices may continue to move higher over the coming years. However, it could prove to be at a slower pace than over the last decade. The stock market appears to offer better value for money than property, as well as lower risks. As such, now could be the right time to avoid buy-to-let and buy a range of companies through a Stocks and Shares ISA.

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.

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.

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