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Is this the best way to make £1m from buy-to-let?

Rupert Hargreaves
Cupcake styled as a unicorn

According to a recent study from estate agent Hamptons International, landlords across England and Wales made an average gross gain of £79,770 when selling their properties in 2018, with an average holding period of 9.6 years, excluding rental income. 

Buy-to-let landlords with a London focus achieved even better returns. The same study shows that London buy-to-let landlords who sold up in 2018 made an average profit of £248,000, excluding rental income. 

Putting a number on growth 

While these numbers might look impressive, they’re a bit misleading because they don’t tell us how much money investors used to generate this return. For example, a profit of nearly £80,000 might seem attractive at first, but if you’ve invested £1m, that’s a return of just 8% over 10 years. You’d get a better return on your money from a cash savings account. 

We do know that over the past decade, the average home price in England and Wales increased by 30%. This implies the average landlord has seen capital appreciation of around the same level, although I think it’s reasonable to assume most buy-to-let investors have seen higher returns, thanks to the benefits of leverage. 

Still, even after factoring in leverage, the returns from buy-to-let over the past decade pale in comparison to equity returns. 

A better investment 

According to my research, over the past 10 years, the FTSE 100 has produced a total annual return (including dividends) of 8.76% for investors. At this rate of return, every £10,000 invested back in 2009 would be worth £23,569 today, a total return of 136%.

The FTSE 250 has produced even more impressive gains. This index has returned 12.4% per annum on average for the past decade, turning ever £10,000 invested into £33,303 — a total return of 233%. 

I think it’s fair to say that most buy-to-let investors have come nowhere near this return over the past decade. Granted, the numbers above don’t include the property’s income stream and other costs. But even if we try to include these, it’s unlikely the average landlord will be booking a return of more than 5% per annum from rent. 

These numbers tell me that equities have been by far the better investment over the past decade, and that’s without taking into account all of the extra admin costs associated with buy-to-let properties. 

On the road to a million

The other benefit of using equities to make a million rather than buy-to-let is that you can invest through a tax efficient wrapper such as a Stocks and Shares ISA. Unlike buy-to-let, which is facing ever-growing tax demands, any money earned within an ISA is tax-free. 

According to my calculations, if you make the most of your annual ISA allowance (£20,000) every year, and invest these funds in a low-cost FTSE 250 tracker, it will only take 16 years to make a million.  

So overall, while buy-to-let might seem like an excellent way to make a million, the numbers tell a different story. It might be better to avoid property and buy stocks instead. 

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Rupert Hargreaves owns no share 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.

Motley Fool UK 2019