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Forget buy-to-let. I’d aim for a multi-million pound retirement portfolio this way

In the past, buying an investment property in the UK and renting it out (buy-to-let) was a really easy way to make a lot of money.

With property prices continually moving higher (between 2000 and 2016 the average selling price of a detached property in London rose from under £500k to around £1.5m), you could buy a place, rent it out, pay the mortgage with the rent, and profit from the house price appreciation.

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If you were looking to boost your retirement wealth, buy-to-let was a no-brainer.

Buy-to-let’s appeal has diminished

Today, however, the outlook for buy-to-let is far more opaque.

For a start, house price growth has stalled due to Brexit. With so much economic uncertainty, we may not see much growth in the years ahead.

Secondly, in an effort to make property more affordable for everyone, the government has cracked down on buy-to-let in a big way. For example, you now have to pay a substantial amount of stamp duty if you want to purchase a buy-to-let property, as well as much higher mortgage rates.

On top of this, mortgage interest tax relief is being phased out. By April next year, you won’t be able to deduct any of your mortgage expenses from rental income to reduce your tax, which potentially means you’ll face a higher tax bill than before.

And finally, there are now so many regulations that landlords have to deal with. For example, any large flat or house share rented out to five or more people now requires a House in Multiple Occupation (HMO) licence, which could cost you over a grand. Then, there are things like minimum space requirements and minimum energy efficiency standards that you need to deal with. What a hassle!

All things considered, buying property to rent out just doesn’t have the same appeal that it used to.

A better way to build wealth

If your goal is to retire wealthy, investing in the stock market through a tax-efficient account is a better idea than buy-to-let, in my view.

Of course, after a strong run over the last decade, there’s no guarantee that stocks will deliver a profit in the next year or two. Yet history suggests that with a 10 or 20-year investment horizon, a diversified portfolio (that includes both UK and international stocks) is likely to generate a very healthy return.

Will companies such as Apple, Google, Diageo, and Asos be bigger than they are today in 10 or 20 years? Almost certainly, in my opinion. As such, they should deliver great returns for investors.

Government boost

I’ll also point out that the UK government is currently providing many incentives to invest in stocks.

For example, invest within a Stocks and Shares ISA, and all your capital gains and dividends will be tax-free. Invest within a Lifetime ISA (open to those aged between 18 and 40), and the government will even give you £250 for every £1,000 you put in. And don’t forget the Self-Invested Personal Pension (SIPP). Here, £800 is topped up to £1,000 if you’re a basic-rate taxpayer.

Combine the wealth-creation power of the stock market with the incentives offered by the government, and you have a pretty compelling investment proposition. Invest regularly, and there’s no reason you can’t build up a multi-million-pound portfolio by the time you reach retirement age.

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Edward Sheldon owns shares in Apple, Alphabet, Diageo and Asos. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Apple, and ASOS. The Motley Fool UK has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool UK has recommended Diageo and recommends 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.