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Forget buy to let and soaring rental demand! I’d buy the FTSE 100 for my ISA

The road to hell is paved with good intentions.”

Forgive the melodrama, but to this Fool, it’s a phrase that perfectly sums up recent government action on buy to let.

Attempts to help the country’s legions of young people get onto the property ladder may be a good thing but this has come at the expense of the landlord and tenant. Landlords’ costs have increased on a blend of bigger tax liabilities and greater regulation, adding to the financial pressure created by larger day-to-day running costs. And this has had the desired effect of encouraging would-be investors to put their cash elsewhere, and to force buy-to-let owners to throw in the towel and sell up.

At the same time, those aspiring first-time buyers still stuck in the rental trap are having to pay larger and larger rents as the scant supply of available properties gets even smaller. In fact, evidence suggests that rental demand is booming in the UK, data which may encourage many to still consider taking the plunge or persisting with buy to let.

Soaring demand

Recent data from lettings platform Bunk shows tenant demand across major UK cities exploded 6% between quarters two and three, led by Nottingham where rental demand leapt 18.7%. Blocking out the top three are Bristol and Cambridge, where demand leapt 17.5% and 16.4% respectively, overshadowing the 8.2% quarter-on-quarter rise that London landlords are witnessing.

Major UK cities ranked by quarterly demand change
City
Q2
Q3
Change
Nottingham
35.6%
54.3%
18.7%
Bristol
50.1%
67.6%
17.5%
Cambridge
33.5%
50.0%
16.4%
Bournemouth
30.3%
42.9%
12.6%
Portsmouth
31.6%
42.8%
11.2%
Glasgow
25.4%
35.1%
9.7%
Leeds
15.5%
24.1%
8.6%
London
21.4%
29.6%
8.2%
Manchester
26.4%
32.7%
6.3%
Birmingham
23.1%
28.9%
5.9%
Southampton
24.0%
29.6%
5.6%
Liverpool
18.3%
22.9%
4.6%
Leicester
24.7%
29.1%
4.4%
Newcastle
13.9%
16.5%
2.6%
Plymouth
34.5%
36.4%
1.9%
Swansea
16.3%
17.9%
1.6%
Sheffield
22.0%
23.5%
1.5%
Newport
38.7%
40.1%
1.5%
Aberdeen
8.0%
8.9%
0.9%
Edinburgh
14.3%
14.8%
0.5%
Oxford
29.0%
28.8%
-0.3%
Belfast
21.2%
20.9%
-0.3%
Cardiff
21.1%
19.7%
-1.3%

And naturally this booming demand is helping to drag rents higher as well. Freshest figures from landlord services provider HomeLet showed average rents in the UK soared to a record £970 per month in August, with costs rising in each and every part of the country.

Spiraling costs

So rents are rising but then, as I said, so are landlord costs. The $64,000 question then is whether or not the pros outweigh the cons and in my opinion the answer is an unqualified ‘NO!’

It’s still possible for buy-to-let owners to grind out a profit but so meagre are returns nowadays (currently around £2,000 a year according to recent studies) that you’d be much better off putting your money to work elsewhere. Besides, so intense is the desire by all the major political parties to curry favour with the non-property-owning class, that even those landlords still managing to walk the cliff edge are in danger of plunging off the side.

In my opinion you’d be much better off using your extra cash to build a brilliant Stocks and Shares ISA. As we all know, long-term share investors can expect to create bulging returns of up to 10%. And while the outlook for buy to let is getting cloudier and cloudier, the FTSE 100 is looking pretty attractive right now in my opinion.

The UK’s premier share index is marching steadily back toward 2019’s highs of around 7,687 points and is within range of taking out mid-2018’s record peak of 7,877. And there’s a multitude of reasons to expect investor demand for the Footsie to keep hotting up, like falling sterling, booming dividends, and reduced exposure to the Brexit-battered UK economy.

For these reasons I think buying a FTSE 100 tracker fund, an instrument that tracks broader movements in the blue-chip index, is a great idea for ISA investors today. And certainly a better bet than investing in buy to let.

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Royston Wild 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.