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Forget buy-to-let: here are 3 reasons why I’d rather buy FTSE 100 shares in an ISA

While investing in buy-to-let properties has provided high returns for a wide range of investors in the past, the prospects for the sector appear to be highly challenging.

Indeed, tax changes could reduce the cash flow of a variety of landlords. Meanwhile, a lack of diversity may mean that economic risks facing the UK continue to weigh on house prices over the medium term.

Moreover, the FTSE 100 appears to offer a range of stocks with improving outlooks. They may be able to provide a higher income return, as well as superior risk/reward opportunities, than the buy-to-let sector over the long run.

Tax changes

With second home purchases now being subject to an additional stamp duty charge of 3%, the returns available on buy-to-let investments may be lower than they have been in the past. Alongside this, many landlords are now unable to offset mortgage interest payments with rental income. This could lead to higher tax being paid at a time when rent rises may be limited due to the uncertain economic outlook for the UK.

FTSE 100 shares, meanwhile, are not subject to tax when purchased through a Stocks and Shares ISA. Since up to £20,000 can be invested in a Stocks and Shares ISA per tax year, many investors may be able to avoid tax on their investments in the stock market. This could enhance their returns in the long run.

Diversity

Diversifying within the property sector is challenging. Even an investor who owns multiple properties may hold them within a small geographical area that could be negatively impacted by an economic slowdown.

Although the chances of a global economic slowdown may be elevated at the present time, buying stocks that operate in a variety of geographical regions could lead to lower risk. As such, the FTSE 100 could have greater appeal than direct property investment. That’s especially the case since there are multiple listed property companies that provide access to the industry, while also offering a diverse asset base that reduces risk.

As such, buying REITs, housebuilders and other listed property-related businesses could be a better idea than undertaking buy-to-let investments.

Income returns

With house prices having moved significantly higher over the last decade, the yields available to investors are relatively low in some regions of the UK. This could mean that after costs such as management fees, void periods and taxes are deducted, the net return available to an investor is relatively low from an income perspective.

By contrast, a number of FTSE 100 stocks offer income returns that are in excess of 5%. This means that an investor could realistically obtain a net income return from a portfolio of stocks that is higher than from property. As such, for income investors, FTSE 100 dividend stocks could offer a superior return, as well as lower risk, than a buy-to-let investment.

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Peter Stephens 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.