The Motley Fool

Forget buy-to-let. I’d buy cheap FTSE 100 shares in an ISA now to get rich and retire early

The FTSE 100’s recent market crash means there are many cheap UK shares. Certainly, their near-term outlooks are challenging, in some cases. However, solid balance sheets and a likely recovery for the world economy suggest they could offer improving return prospects over the coming years.

By contrast, valuations within the buy-to-let sector continue to be unattractive. They may also experience a decline in the short run, due to a weak economic outlook.

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FTSE 100 valuations

The FTSE 100 continues to trade significantly below its price level from just a few months ago, despite a recent rebound for many of its members. This suggests many blue-chip shares continue to offer margins of safety. And that could lead to impressive capital returns as the world economy recovers.

A strategy of buying undervalued businesses and holding them for the long run has been successful in the past. It enables an investor to capitalise on the boom/bust cycles experienced by the stock market. Neither bull or bear markets having ever lasted in perpetuity.

As such, building a portfolio of FTSE 100 shares today, and holding them for the long run, could lead to above-average returns that catalyse your portfolio’s prospects.

Buy-to-let valuations

FTSE 100 company valuations may now reflect an uncertain economic outlook. But a lack of transactions in the property market over recent months means that buy-to-let investors may continue to pay high prices compared to average incomes.

Although property prices may decline as transaction volumes gradually increase following lockdown, they could continue to trade at high levels relative to average incomes. This may be offset to some degree by lower interest rates that help to make property more affordable.

But the scope for house price growth at a time when unemployment is rising and consumer confidence is weak seems to be limited versus the FTSE 100’s international growth opportunities.

ISA tax efficiency

Another reason why FTSE 100 shares could offer superior long-term return prospects than buy-to-let is their tax efficiency when purchased in an ISA. No tax is levied on any amounts invested through a Stocks and Shares ISA. Meanwhile, withdrawals are also tax-free and can be made at any time.

This is in contrast to buy-to-let investments. Many landlords have seen their net returns come under pressure. This is due to tax rises over the last few years. Indeed, mortgage interest payments are no longer allowed to be offset against rental income for tax purposes for many investors.

Therefore, over the long run the net returns from buying cheap FTSE 100 shares could be significantly greater than those of buy-to-let. The index’s recovery potential could help you to retire early.

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Peter Stephens has no position in any of the shares 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.