Why I’d chose an ISA over buy-to-let any day

Rupert Hargreaves explains why recent developments mean he’s avoiding buy-to-let at all costs.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One of the most significant benefits of buy-to-let investing is the fact that it is relatively easy to boost your returns by borrowing. Mortgage lenders are generally quite happy to give landlords a mortgage equivalent to around 60% of a property’s value, meaning that you only have to invest 40% of your own money.

On this basis, an investor acquiring a property worth £300,000 with a potential rental income of £15,000 per annum would only need to invest £120,000 of their own money to generate an annual yield of 12.5%, excluding mortgage fees, taxes and other costs.

However, while this 12.5% return might look attractive, the problem with leverage is that it can be just as much of a problem as a benefit. If property prices suddenly lurch lower or if the property is left empty and the investor cannot meet repayment obligations, then the bank is in control — not something anyone wants.

The government’s recent tax changes have also made it harder to make money in buy-to-let by reducing the amount of tax relief available on mortgage interest. These changes now mean that it is less attractive to borrow money and they have weighed on landlords’ profit margins.

The changes are just one of the reasons why I would rather invest my money in an ISA rather than buy-to-let property.

Two key advantages

ISAs have two main advantages over buy-to-let in my opinion.

First of all, there are the tax advantages of using an ISA. Any income received and capital gains generated on the sale of assets held within an ISA do not attract tax. You don’t even need to report the numbers on your tax return.

Second, it is easier to build a well-diversified global portfolio in an ISA than it is with buy-to-let property. Not only can you own international funds, bonds and small-cap stocks in an ISA wrapper, but some providers also let you invest directly in international stocks such as Apple and Amazon. The returns from these investments have left buy-to-let trailing in the dust over the past two decades, and remember, there’s no capital gains tax to pay when you sell either.

That being said, the one drawback of investing via an ISA rather than buy-to-let is that you can’t borrow to improve your returns, which might put some investors off.

However, I do not think the trade-off is worth it. I’d rather sacrifice my ability to borrow for the tax benefits and international investment exposure offered by an ISA. What’s more, buy-to-let property also requires a great deal of work to keep up to standard, find tenants and chase up rent payments. By comparison, equity investing is relatively effortless.

The bottom line

So, that’s why I’d choose an ISA over buy-to-let any day. ISA are much more flexible, offer tax benefits and don’t need babysitting. The same can’t be said for buy-to-let property.

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.

Rupert Hargreaves owns no share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »