With so many different options nowadays in the land of investment, it can be confusing to know where to put your money in order to get the best returns at the lowest risk.
Two of these options that we will be comparing are buy-to-let property investments and the bank option of the simple ISA.
Buy-to let Investments
There are many benefits to buy-to-let investments, with one of the most significant being the relative ease in which you are able to boost your returns by borrowing.
The vast majority of banks and mortgage lenders are generally quite content to offer landlords a mortgage equivalent to around 60% of the value of the property, meaning that as an investor, you only need to provide the remaining 40% out of your own capital.
If we work this out metaphorically then, an investor looking to purchase a UK property with a value of £300,000 with a potential rental income of £15,000 per annum would be able (in the majority of situations) to obtain a mortgage covering £180,000, leaving a remainder of £120,000 to invest out of their own pocket. Based on the potential rental income, this £120,000 would generate an annual yield of 12.5%, excluding fees, taxes and any other costs.
However, before you throw your laptop down and head for the nearest mortgage lender, whilst this 12.5% return might look attractive, there are the issues of instability within the property market to think about. If property prices suddenly plummet, or if the property is left empty and the investor then struggles to meet the repayment obligation, this leaves the bank with ultimate control, not a situation that anyone wants to be found in.
Additionally, a recent change which has put a dampener on investors profit margins with buy-to-let investments is the changes to tax relief which has not been reduced on mortgage interest, making it less attractive to borrow money and consequently pinching in on those all–important margins.
In our opinion, ISAs have two main advantages over buy-to-let opportunities.
Firstly, tax. With ISAs, any income received, and capital gains generated on the sale of held assets within an ISA do not attract any tax, none! There is no need to even report the numbers when submitting your tax return.
Secondly, if you are an investor looking to diversity your investment portfolio, an ISA is a much better way to do this as opposed to buy-to-let property. Depending on the ISA you choose, some providers let you invest directly in international stocks including giants such as Apple and Amazon. In addition to this, with an ISA you are able to own international funds, bonds and small-cap stocks.
Of course, as with everything, there are always going to be a couple of drawbacks. Obviously, one of the biggest drawbacks with ISAs as opposed to buy-to-let is the inability to borrow money in order to improve returns, however this can be easily offset by the fact that what you do make back has the tax benefits.
Ultimately, it is up to you whether you opt for ISA or buy-to-let, but in the current market with recent regulations making it difficult for buy-to-let landlords to make a healthy profit like they once could, we would be looking into the ISA.