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Why a stocks and shares ISA beats buy-to-let every time

I always felt that buy-to-let was over-hyped. Although many investors have done well, generating attractive rental yields and capital growth from rising house prices, it is such an effort.

Buy-to-let bother

And today it demands more effort than ever, while the rewards have declined dramatically. Investors have to secure the right property, slap down thousands in stamp duty and spend money doing it up. They then have to find tenants, sign contracts, collect deposits and rent, check tenants aren’t trashing the place, replace them when they leave, and sort out any problems with the property. There there’s maintenance and wear and tear.

Oh, I forgot. If you take out a buy-to-let mortgage you also have to allow for a valuation, survey, legals, arrangement fees, mortgage interest charges and future remortgage costs.

At the same time, the tax burden has got heavier, including a 3% stamp duty surcharge, reduced wear and tear allowances, and the loss of higher rate tax relief on mortgage interest. Landlords also have to jump through many more regulatory hoops.

So much easier

If you invest in a stocks and shares ISA instead, you simply set up an online trading account, transfer in money from a debit card, choose your funds and click the ‘buy’ button. Stocks are liquid, you can sell at any time. You can invest small amounts such as £1,000 or less

Rot, subsidence, bad neighbours, burst pipes, winter storms and the thousand natural shocks that property is heir to don’t apply to stocks and shares. OK, you might inadvertently invest in the next Carillion, for example, which is the kind of nightmare that keeps investors awake at night. But property prices can fall too.

Double your money 

Property and stocks offer both income and growth. The FTSE 100, for example, currently yields a healthy 4.01%. If you had invested £20,000 in the FTSE All Share 10 years ago you would have more than doubled your money to £41,100, according to Fidelity International.

Property has also done well too, just not well enough to make it worth the extra effort. The national average rental yield is just 4.4%, which falls to 3.16% in London, Your Move calculates. Rental growth has stalled, up just 0.97% in the last year, according to Landbay.

House price slump

Prices in Cambridge and London are more than 65% higher than 10 years ago, Hometrack says, but elsewhere, growth has been patchy, with Belfast, Liverpool and Aberdeen still below 2008 levels, while Newcastle and Edinburgh have experienced weak singledigit growth. 

Rental income and house price growth are both taxed, whereas all your income and capital growth is tax-free inside an ISA. The Lifetime Isa even gives younger investors a 25% government bonus. The Government may be cracking down on landlords, but it is lavishing savers with largesse.

Only one winner

Stock markets also give you global diversification, while most buy-to-let investors are doubling down on the UK residential property market. The big advantage of buy-to-let is that you can borrow money to invest via a mortgage but otherwise shares are the clear winner. For me, there’s no contest.

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harveyj 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.