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Forget buy-to-let, I’d aim to make a million using this simple strategy

Over the past few decades, buy-to-let investors have earned fantastic returns through a combination of rental growth and rising property values. One of the reasons why investors have been able to achieve such impressive profits with buy-to-let property is the ability to borrow money. 

According to my research, most buy-to-let mortgages allow investors to borrow up to 60% of the property’s value.  According to the Land Registry, the average house price in the UK is £234,853, implying investors can get into the buy-to-let market with an average deposit of just £93,941.

However, as well as boosting purchasing power and profits, leverage also has a dark side. It can magnify your losses as well. And now that the government has decided to remove the mortgage tax relief tax break that buy-to-let investors used to be able to claim, the appeal of borrowing to buy a rental home has decreased dramatically.

This is just one of the issues buy-to-let investors now have to deal with. In recent years the government has been clamping down on the sector in an attempt to force rogue landlords to improve the quality of their properties. These new laws have had a knock-on effect across the rest of the industry and have, in my opinion, drastically reduced the attractiveness of buy-to-let property as an investment. 

The better investment

Instead, I think the stock market is a much better home for your money. Granted, borrowing money to increase your returns in the stock market should be avoided, but investing in the market has many other benefits.

These include the fact you can own stocks in an ISA, so you don’t have to worry about any additional tax obligations, the liquid nature of the stock market, which means you can get in and out whenever you want, and the ability to diversify your portfolio to click of a button.

On top of these benefits, stocks and funds come with their own managers so you don’t have to worry about managing anything yourself. Meanwhile, the stock market also offers much higher returns than the buy-to-let market. 

Over the past 10 years, the FTSE 100 has produced an average annual return for investors in the region of 7%. The FTSE 250 has produced an average annual return of 9%. You can still get yields of 10% in some buy-to-let markets, but the UK average is closer to 5%, although that excludes capital growth, maintenance charges, and interest costs. 

The road to a million

At an average annual return of 9%, I calculate it would take 27 years to make £1m in the stock market, with an initial deposit of £93,941. If this money were invested in an ISA over several years, there would be no taxes to pay on income or capital gains. 

Further, by using a low-cost tracker fund, you could get the annual management fee down to below 0.8%. By comparison, most letting agents charge 10%, and many landlords spend as much as 40% of their rental income on property maintenance.

That’s why I would ignore the buy-to-let market and invest my money in the stock market instead to make a million. 

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Rupert Hargreaves owns no share 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.