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

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.

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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.