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Forget buy-to-let! I think a Stocks and Shares ISA is a lower-risk way to make a million

While it is possible to make a million through buy-to-let investing, doing so can be a very risky proposition. In many cases, it involves funding the purchase of a property with a large amount of debt. This can put an individual under severe financial strain at a time when interest rates are expected to rise and the UK economy’s prospects are uncertain.

Although investing in the stock market through an ISA can also be risky, unlike a buy-to-let it is not possible to lose more than the initial investment. As such, it could offer a more attractive risk/reward ratio and may be a better means of making a million.

Risky business

Since most buy-to-let investors fund their purchase at least partly through debt, it is possible for them to lose more than their initial investment. For example, they may fund a property purchase through a mortgage amounting to 75% of the property’s value. Should their property fall by more than 25%, they would be in negative equity and its sale would lead to them losing more than their initial 25% deposit.

Although a 25% fall in property prices may be unlikely, house price growth has stalled in the last couple of years and sharp falls have happened in living memory. Brexit is causing significant political and economic uncertainty for investors, and should there be continued challenges for the economy, there may be house price falls. That’s especially the case since house prices are at the upper end of their historic range when compared to average earnings.

An uncertain economic outlook means that a buy-to-let investor may experience longer void periods than expected. Or a tenant may be unable to pay rent due to difficult financial circumstances. Either situation could cause cash flow issues for a buy-to-let investor that may ultimately lead to them being required to sell their property at a loss. With interest rates expected to rise, cash flow pressures could become an increasing risk facing property investors.

Risk/reward opportunity

While investing in FTSE 100 shares through a Stocks and Shares ISA is clearly not without risk, as I said, it is not possible to lose more than an initial investment. Furthermore, shares generally provide positive cash flow for investors, and there will not be a funding requirement on the part of the investor as there may be during void periods for a buy-to-let investor.

With the FTSE 100 offering a dividend yield of over 4%, its yield may be higher than for some buy-to-let investments – especially once costs such as management fees and service charges have been factored in. It is also possible to liquidate shares within a matter of days, while it can take weeks or even months to sell a buy-to-let investment.

Therefore, while buy-to-let has proved popular in the past and may still offer the opportunity to make a million, buying shares could be a lower risk means of doing so over the long run. As such, now could be the right time to buy a variety of FTSE 100 shares through a Stocks and Shares ISA.

Stock-Market Millionaire

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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.