Investing in buy-to-let properties has been a popular choice for anyone with a spare £100k. After all, house prices in the UK have risen significantly and relatively consistently over the past few decades.
However, the stock market has also produced strong growth rates. And, from a valuation, growth and tax perspective, it may offer superior appeal compared to buy-to-let properties at the present time.
As such, anyone seeking to make a million with £100k, or any other amount, may be better of building a portfolio of stocks rather than seeking to buy property.
House price prospects
House prices have benefitted from low interest rates since the financial crisis. A low cost of borrowing has supported high demand for homes in the UK, but is unlikely to last in perpetuity.
Certainly, a sharp rise in interest rates over the coming months seems unlikely. But over the long run, history shows that low and high interest rate environments have never lasted. Therefore, investors in property may wish to assume interest rates will move higher during their investment horizon, and could limit the potential for their property to rise in value.
Therefore, property prices may have experienced strong growth in the past, but changing fundamentals could mean their future prospects are relatively unattractive.
Stock market potential
The FTSE 100 and FTSE 250 appear to have strong long-term growth potential. They rely on international economies for the majority of their revenue, which could enable their members to post high levels of earnings growth over the coming years.
Furthermore, in many cases their constituents appear to offer good value for money. Like house prices, the FTSE 350 has risen over the past decade. But there are a number of high-quality stocks which have improving financial prospects that currently trade on valuations below their historic averages. This could suggest they offer greater capital growth potential than property, and may provide a better chance of turning £100k into £1m.
With the FTSE 250 having recorded an annualised total return of around 9% in the past 20 years, a similar rate of growth could be a realistic outlook in the coming years. Assuming such a rate of growth would mean it takes around 27 years to turn a £100k investment into a £1m portfolio.
However, through buying undervalued shares which have improving financial prospects, you could generate a higher return than the wider index and arrive at a seven-figure portfolio sooner.
As such, now may be the right time to be selective about the companies you purchase within your portfolio, in terms of focusing on their balance sheet strength, improving cash flow and other factors such as their track record of growth and strategy. Through buying the most attractive stocks within the FTSE 350, you may be able to boost your chances of making a million and, in doing so, significantly outperform the return of buy-to-let investments.
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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.