The Motley Fool

Buy-to-let returns are plunging. Here’s where I’d invest my money instead

Over the past few decades, buy-to-let investing has been a sure-fire way to generate a steady return on your money. However, in recent years, it has become harder to make money from buy-to-let. Rising taxes, increasing government regulation, and high home prices have all contributed to the sector’s woes.

Indeed, even though rents are rising — a recent study shows that rents in London have increased by 6% on average over the past 12 months to a fresh record of £1,924 — potential landlords are no longer flocking to buy properties.

As my Foolish colleague Royston Wild recently pointed out, the number of buy-to-let landlords in the UK is falling rapidly. Data shows the number of landlords registering to buy property over the past year has plunged 37.4% on a nationwide basis.

Plunging returns

The main reason why investors appear to be shunning the buy-to-let market is falling returns. Landlords’ rising tax burden is undoubtedly first and foremost in the minds of many potential investors.

According to recently released research from the National Landlords Association (NLA), income tax paid by buy-to-let landlords now exceeds £3.8bn annually, more than double Tesco’s entire annual tax bill.

In total, the NLA estimates landlords in England have a combined taxable income £19.1bn. The £3.8bn excludes other liabilities such as stamp duty, capital gains tax, VAT and other costs and charges associated.

And the tax burden is only going to increase in the years ahead, according to the study. It estimates that landlords’ income tax total will hit £5.7bn as the changes to sector taxation, introduced in 2015, start to bite.

The substantial increase in the amount of tax landlords are now required to pay “have led many to conclude that it is no longer possible to achieve a reasonable return on investment,” according to the NLA.

With this being the case, I think a better alternative for investors who are looking for an attractive return on their funds, but don’t want to have to hand over thousands of pounds in tax every year to HMRC, is a Stocks and Shares ISA.

ISA tax benefit

Funds held inside a tax-efficient ISA wrapper aren’t subject to income or capital gains tax, which means investors can quickly achieve a much higher after-tax return on capital invested by putting their money to work inside one of these wrappers. And today, there are dividend yields of 6% or more on offer from some of the UK’s most attractive blue-chip stocks.

What’s more, unlike with buy-to-let, investing in the stock market means you don’t have to worry about many of the other factors that can impact buy-to-let returns, such as increasing interest rates, further regulation and maintenance costs.

It’s also relatively easy to manage a portfolio of stocks and shares yourself, unlike buy-to-let investing where many investors hand over 10% or more of their monthly rental income to managing agents.

So, with the returns from buy-to-let plunging, I think it could be wise to exit the sector and invest in a Stocks and Shares ISA instead.

Want To Boost Your Savings?

Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.

The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

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.