A raft of changes to the buy-to-let market could reduce potential returns and increase risks for landlords. These include tax changes, more challenging borrowing requirements, as well as the prospect of higher fees being passed on to landlords.
By contrast, a Stocks and Shares ISA continues to have significant appeal when it comes to investing for the long term. It offers tax efficiency as well as low fees and the opportunity to invest in a variety of shares across the world. As such, it could offer a better chance to make a million than buy-to-let.
Tax changes
The introduction of a 3% stamp duty surcharge to second homes means that the cost of undertaking a buy-to-let has risen significantly. This could wipe out a number of months’ worth of rent for many landlords before a tenant has even been found for their new property.
Alongside this, the interest paid on buy-to-let mortgages can no longer be offset against rental income for many landlords. This may reduce their cash flow each month, and lead to lower returns in the long run.
By contrast, a Stocks and Shares ISA continues to offer tax efficiency. It’s not subject to capital gains tax or dividend tax, which could leave investors with a larger nest egg for retirement.
Regulatory changes
It’s becoming increasingly difficult to obtain a buy-to-let mortgages. The rental cover requirement in terms of how many times it covers interest payments has become stricter in recent years, with regulators seemingly concerned about the prospect of higher interest rates in the medium term.
The end of tenancy fees may also mean costs for landlords continue to increase. Estate agents that previously charged hundreds of pounds to tenants for simple administrative tasks such as reference checks and credit checks may look to recoup some of their lost income from landlords in the form of higher management fees.
Stocks and Shares ISAs, meanwhile, have exceptionally low charges that are showing no sign of moving higher. This makes them accessible to a wide range of investors, no matter what their portfolio size.
Return potential
With house price growth stalling in recent years and the multiple of average incomes at the upper end of its historical range, capital growth from buy-to-let investing may be somewhat disappointing. This could mean total returns are low, with rental incomes also potentially rising at a slow pace due to the economy’s uncertain outlook.
The FTSE 100 and FTSE 250, though, seem to offer good value for money. Both indexes have dividend yields that are relatively high, while a number of their members have ratings that are low. This suggests they could offer impressive levels of capital growth and income returns in the long run.
As such, buying a variety of stocks through a Stocks and Shares ISA could be a much better means of making a million than engaging in the buy-to-let industry at the present time.