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Forget buy to let! I’d buy FTSE 100 growth stocks in an ISA right now

The outlook for buy-to-let investors continues to be highly uncertain. House price growth has slowed in London and the South East, while it is dependent on government policies such as Help to Buy across other parts of the country.

Since political risks are high at the present time, and tax changes have reduced net returns for many landlords, the prospects of generating high returns from buy-to-let investments seem to be limited.

By contrast, the FTSE 100’s growth outlook seems to be high. Its international focus and lower valuation following its recent period of volatility may mean that now is the right time to buy a range of large-cap shares in an ISA.

Buy-to-let uncertainty

House prices in the UK have been boosted by government policies such as Help to Buy over recent years. While there are plans for such policies to continue over the next few years, the uncertain political outlook for the UK could mean that there are changes ahead for housing policy. This may lead to a period of slower growth for house prices – especially with the cost of a home compared to average wages being close to a record high.

In tandem with the prospect of a difficult period for house prices, tax changes mean that the net returns for property investors could be lower than in the past. A stamp duty surcharge of 3% for second homes, as well as an inability for some landlords to offset mortgage interest payments against rental income, could mean that the investment performance of buy-to-let properties declines compared to its previous results.

FTSE 100 growth potential

While property prices may struggle to offer capital gains for buy-to-let investors, the FTSE 100 could deliver an impressive rate of return over the long run. The index’s focus on international economies may mean that it is catalysed by a strong economic outlook over the coming years – especially since emerging economies are expected to contribute a large proportion of the global economy’s growth rate.

The recent pullback in the FTSE 100’s price level could mean there are buying opportunities on offer for long-term investors. Certainly, further volatility may be ahead in the near term. But the track record of the FTSE 100 shows that buying following short-term declines can be a profitable strategy over the long run.

Low valuation

Furthermore, with the FTSE 100 having a 4%+ dividend yield, it may offer a higher net return than a buy-to-let investment when purchased through an ISA. Since the index appears to be undervalued when compared to its historic levels, as opposed to being overvalued in the case of property prices, a diverse portfolio of large-cap shares could hold greater appeal than a buy-to-let investment from a risk/reward perspective.

As such, now could be the right time to focus your capital on FTSE 100 growth shares while they trade on lower valuations.

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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.