Forget buy-to-let: I’d rather buy FTSE 250 shares in a Stocks and Shares ISA

The problems for buy-to-let investors have continued to mount over recent years. Not only have property prices failed to rise across the UK, due in part to high valuations, tax changes and mortgage availability have also meant the profitability of the segment has come under pressure.

Of course, the FTSE 250 has also endured a challenging period. Since half of its income is generated in the UK, it has faced increasing levels of investor uncertainty. However, offering better value for money, having greater diversity, and being significantly more tax efficient than a buy-to-let investment, now could be the right time to buy FTSE 250 shares for the long run.

Tax efficiency While tax may not be the most important factor for many investors when determining how to apportion their capital, it can make a significant impact on their long-term wealth.

Buy-to-let returns have come under pressure for many landlords in recent years, with government changes to tax a key reason. As well as a 3% stamp duty surcharge on second homes, there’s less scope to offset mortgage interest payments against rental income than in the past. The impact is that a landlord’s cash flow, after all costs have been paid, may be down on where it has been in the past. Should interest rates rise, this could put their future return prospects under even greater pressure.

By contrast, an investor can avoid tax on investments held within a Stocks and Shares ISA. This could mean that, over the long run, their net returns are even more attractive compared to those from a buy-to-let investment.

FTSE 250 growth prospects While property prices may be high at the present time, the FTSE 250 appears to offer a wide margin of safety. A number of its members trade on valuations that are below their historic averages, while their dividend yields are significantly ahead of inflation in some cases.

Furthermore, with the FTSE 250 generating around 50% of its revenue from outside of the UK, its growth potential may be higher than a buy-to-let investment. Countries such as China and India are growing at a pace that’s as much as five or six times the UK’s growth rate. This could catalyse the index’s performance, due to many of its members having exposure to the emerging world.

In addition, the FTSE 250 offers a greater opportunity to diversify compared to a buy-to-let investment. Not only is it possible for an investor to buy multiple shares with limited capital compared to having a small number of properties in a portfolio, the FTSE 250 provides the chance to buy companies that also operate in different sectors and regions. This could reduce the overall risk and lead to a more appealing risk/reward ratio over the long run.

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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.

Motley Fool UK 2019

First published on The Motley Fool