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Here’s why I’d rather invest in the FTSE 250 than bothersome buy-to-let

Everybody feels the lure of buy-to-let at some point in their lives – even I did, once. The British have a hankering to own bricks and mortar, and the residential property market has been one of the best performing investments of the last 20 or 30 years.

Property pain

A few years ago, I would have suggested investing in buy-to-let alongside a balanced portfolio of stocks and shares, but I wouldn’t suggest that today. The Treasury’s tax crackdown has taken the joy out of buy-to-let, and replaced it with endless pain.

First, investors are marked out by paying a 3% stamp duty surcharge, adding thousands to the purchase price. They have also seen their wear-and-tear allowances diminished. Worst of all, they can no longer claim higher rate tax relief on their mortgage interest payments, even if they are higher rate taxpayers themselves.

On the attack

Add to that a raft of ever-tighter regulations, including new rules covering houses in multiple occupation (HMO) and evictions, changes to energy efficiency measures and more potential horrors on the way, including three-year tenancies, and I can’t see why people would bother. The Government is wilfully destroying the buy-to-let market, and a Labour government would be even more aggressive.

We are even seeing the rise of the buy-to-let landlord prisoner, trapped in overpriced mortgages because they cannot meet lenders’ tough new affordability testing.

Looking for trouble

Then you have all the bother of finding the right property, doing it up, advertising for tenants, chasing deposits, signing contracts, doing inventories and dealing with any emergencies, and finding new tenants when they leave.

Do you really need all this when you can trade shares in an online dealing account for around a tenner, while avoiding thousands of pounds in stamp duty, estate agency, conveyancing and mortgage arrangement fees?

You can also trade shares in seconds, whereas buying and selling property can take months. In a downturn, you might not sell it at all.

Joy of tax

If you invest via your stocks and shares ISA allowance, you escape all income tax and capital gains tax on your returns. Buy-to-let landlords can only dream of a benefit like that. In fact the only advantage property retains is gearing, because when you take out a buy-to-let mortgage you are borrowing money to invest, leveraging up your returns.

Most newbie investors focus on the FTSE 100 and understandably so, as the index tracks the country’s 100 largest companies. However, spare a thought for the FTSE 250, which covers the next 250 companies size-wise, and gives you exposure to faster-growing medium-sized stocks.

Over the last five years, the FTSE 250 has outperformed, with the low-cost unit trust tracker HSBC FTSE 250 Index returning 37% against 27% from the HSBC FTSE 100 Index. Both funds have no upfront costs and ongoing fees of just 0.28% and 0.17% respectively.

I don’t know why anybody would bother with buy-to-let when they can buy funds like those two quickly and easily, or top investment trusts like these two.

I wouldn’t put money in a cash ISA either, but that’s a different story.

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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.