Buying a National Lottery ticket might seem like an easy way to make a million pounds, but the chances of winning are so slim you are more likely to lose your money than anything else.
Instead of gambling on the National Lottery, many investors choose more traditional methods to grow their wealth, such as buy-to-let investing. Indeed, buy-to-let has created a considerable amount of wealth over the past few decades and minted many millionaires who have benefited from both property income and capital gains.
However, during the past two years or so, the buy-to-let market has changed dramatically. It’s no longer easy to make money with this asset class as it once was.
No sure thing
I wouldn’t go so far as to say that buy-to-let investing is gambling, but newly-introduced regulation and tax changes have dramatically increased the chances that investors will lose money buying property and attempting to rent it out.
For example, changes to stamp duty and the tax reliefs landlords can claim have reduced the after-tax returns investors can look forward to. Meanwhile, recent changes to regulation that force landlords to update their properties will only increase costs.
Under a new law introduced just a few days ago — the new Homes (Fitness for Human Habitation) Act — tenants can now sue and claim compensation from landlords if they don’t fix issues such as damp and mould in their properties. This means even the slightest defect could result in a lengthy and costly legal battle or costly repairs for landlords, and you can’t put the rent up to compensate for the extra cost.
Is the risk worth the reward?
Warren Buffett’s first rule of investing is “don’t lose money,” and considering the recent tax and policy changes for landlords, I think both the National Lottery and buy-to-let investing breach this rule. I’m not saying every buy-to-let investor will lose money but, as stated above, I think the risks are growing for investors in this space.
With that being the case, I reckon investing in the stock market is a better way to try and make one million pounds. Equities might seem riskier than buy-to-let property at first, but they have many advantages.
For a start, you can buy and sell stocks with ease, unlike property, which may take weeks or months to find a buyer. What’s more, equities have limited liability. If one of the companies you own shares in goes bankrupt, then you only lose your investment unlike buy-to-let investing where, unless the investment is structured in a limited company, you are entirely responsible for everything that goes wrong.
Then there’s the income from stocks to consider. The FTSE 100 currently supports a dividend yield of 4.6%, which is virtually guaranteed as it’s an aggregation of all the dividends in the index. With buy-to-let property, income is always dependent on finding a tenant.
So that’s why I plan to use equities to make a million rather than the National Lottery and buy-to-let investing. Not only are the risks lower with equity investing, but returns are more consistent as well.