Here’s why I think it’s easier to make £1 million in the FTSE 250 than through buy-to-lets

I think the FTSE 250 (INDEXFTSE: MCX) could offer stronger investment potential than the diminishing returns from buy-to-lets.

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The appeal of rising house prices in recent decades has led many investors to take the plunge and invest in a buy-to-let. Generally, it has proved to be a profitable move, with house prices moving higher and rents doing likewise in many areas. And with interest rates being at a historic low for the last decade, the appeal of the UK housing market from an investment perspective has been high.

Now though, tax changes and the potential for rising interest rates are making buy-to-lets less appealing. At the same time, the FTSE 250 appears to offer good value for money following its recent correction. As such, investing in the mid-cap index could be an easier way of making a million in my opinion.

Tax changes

There seems to be a political consensus regarding second-home ownership. The government has put into effect various policies which are essentially designed to make it less appealing from an investment perspective. For example, there is additional stamp duty to pay, while mortgage interest payments will no longer be tax deductible for a range of investors. And with the rules on obtaining a buy-to-let mortgage becoming more stringent, the process of buying and owning an investment property seems to be losing its appeal.

At the same time, the tax advantages of buying shares have continued to improve. The annual ISA allowance now stands at £20,000, which could allow investors to enjoy tax-free gains on their entire portfolio. Similarly, pensions are more appealing than ever, with changing rules on withdrawals making them increasingly flexible. And with new products such as a Lifetime ISA offering a bonus simply for investing in shares, there are a number of incentives on offer for individuals who focus their capital on the stock market, rather than on property.

Growth potential

Of course, the housing market could experience further growth in the long run. There is a fundamental lack of supply of homes in the UK which is unlikely to be solved even over an extended time period. As such, buy-to-lets could offer capital growth potential, although this may be limited to some degree by the prospect of a higher interest rate. Having been low for a decade, the interest rate is forecast to increase over the next few years, and this could squeeze landlords’ cash flow and also make property less affordable.

In contrast, the FTSE 250 appears to offer investment appeal at the present time. As mentioned, it has declined in recent months by over 10%, and now has a dividend yield of over 3%. This is relatively high compared to historic levels, and could indicate that it offers good value for money. When the tax breaks and ease of buying and selling shares versus property are factored in, it could prove to be an easier way to generate high returns over the long term.

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.

Peter Stephens has no position in any of the shares 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.

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