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Forget buy-to-let! Here’s how I’d invest £20k today to make a million

Buy-to-let investing has often been seen as an easy route to an improving financial future. While this may or may not have been the case in the past, today the opportunity to generate high returns on buy-to-let investments is relatively slim.

A key reason for this is tax changes that have stifled the returns available, while an unpredictable outlook for house prices may mean that the cyclicality of the property industry becomes increasingly relevant.

As such, investing £20k or any other amount in the stock market could be a better idea. Not only does it potentially offer higher returns than buy-to-let, it may be a simpler and less risky means to generate £1m over the long run. And you do not need to take out a mortgage to do it.

Return potential

The return prospects of buy-to-let investments have been significantly reduced by tax changes in recent years. For example, an additional 3% stamp duty is charged on second-home purchases, while mortgage interest payments can no longer be offset against rental income for some landlords. In addition, the fall in house prices in some parts of the UK, notably London, has meant that many property investors have generated relatively low returns in recent years.

By contrast, the FTSE 100 and FTSE 250 appear to offer favourable prospects. When purchased through a tax-efficient account, such as a SIPP or a Stocks and Shares ISA, shares could offer higher net returns that a buy-to-let investment. Moreover, with both indexes yielding in excess of their historic averages, there appear to be significant opportunities to buy a wide range of high-quality companies while they trade on low valuations. This may lead to high returns over the long run.

Simplicity

As well as offering higher potential returns, investing in the stock market is far simpler than undertaking a buy-to-let. Online share-dealing means that an account can usually be opened in a matter of minutes, while it is possible to diversify geographically through buying stocks that have exposure to different regions.

Share-dealing has become cheaper in recent years, with features such as regular investing making it even more cost effective. By contrast, costs such as surveyor fees, legal costs and management expenses can mean that the net return on a property investment is lower than many investors realise.

Risks

The outlook for the UK economy continues to be highly uncertain. This could mean that confidence in the property market remains low, which could translate into a period of slower growth. This would not be a major surprise, since the property market is by its very nature highly cyclical. And since property prices are close to a record high when compared to average incomes, a period of reduced growth could be ahead.

As such, the risk/reward opportunity presented by the stock market could be more appealing than that of a buy-to-let investment. This may mean that now is the right time to invest in shares in order to boost your financial future and generate a seven-figure portfolio.

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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.