The Motley Fool

Forget buy-to-let! I’d invest £20k in the FTSE 250 to make a million

Buy-to-let investments have been a popular means of generating high returns in the past. They’ve offered a mix of rental income growth and improving capital returns, while falling interest rates have increased the net returns of many landlords.

However, the investment appeal of FTSE 250 shares could be higher than buy-to-let properties. The index may gain from reduced political uncertainty in the UK, while its valuation may be more attractive than for properties. And with it being tax-efficient to invest in shares compared to property, now could be the right time to buy a range of mid-cap shares. It could increase your chances of making a million.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Valuation

House price growth over the last decade means buying a property has become increasingly unaffordable in many parts of the UK. House prices compared to average incomes have increased significantly, and may mean there’s limited scope for capital growth in the coming years.

By contrast, the FTSE 250 appears to offer good value for money. Since the index generates around half of its revenue from within the UK, many of its members have been negatively impacted by political risks. Following the general election, these risks may fade to some degree in 2020 and beyond. This may enable many stocks to trade on valuations that are more in keeping with their historic averages.

The end result of this process could be rising share prices. With the FTSE 250 having delivered an annualised total return of around 9% in the past 20 years, a similar rate of return could be ahead in the long run. It may prove to be higher than the property sector following its surge in the past decade.

Tax efficiency

Investing in the stock market provides a significant amount of tax efficiency for investors. Products such as a SIPP or a Stocks and Shares ISA are appealing because no tax is paid on the dividends and capital gains from money invested within them.

This contrasts with buy-to-let investments. They have been subject to significant tax changes in recent years, with mortgage interest payments now not deductible from rent for many landlords and additional stamp duty payable on second homes. These changes may cause a reduction in net returns for landlords, while FTSE 250 investors continue to enjoy high after-tax returns.

Outlook

Clearly, there’s scope for changes to be made to the taxation of both buy-to-let properties and shares. However, the latter’s lower valuation and its track record of growth suggest it could be a better means of generating high returns in the long run.

Therefore, now could be the right time to invest £20k, or any other amount, in a diverse range of mid-cap shares. They could offer high returns that increase your chances of making a million.

There’s a ‘double agent’ hiding in the FTSE…

We recommend you buy it!

You can now read our new stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

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.