Buy-to-let was once the first place investors would look for long-term passive income. But the £239bn bubble has burst and the door has shut for most.
Instead, I think investors serious about plans to make their first million should invest every month in a Stocks and Shares ISA.
I remember getting a taxi a few years back and the driver gleefully running me through his £1m Manchester buy-to-let property empire. All, of course, supported by generous tax breaks from the UK government.
His dream started to fall apart in April 2017. Until that point, private landlords could deduct any interest they paid on their mortgage payments from their buy-to-let rental income before they paid tax on it.
Say my taxi driver made £10,000 in rent from his properties, and his yearly mortgage interest payments were £9,000. Back then, he would only pay tax on the £1,000 difference. At the 20% lower income tax bracket it would mean a bill of just £200.
Tax hike kills buy-to-let
The 2017 rule change altered all that. And while the changes were gradually phased in, the tax relief has completely disappeared as of April 2020.
Harsher buy-to-let changes, including alterations to capital gains tax rules, came in effect in the 2020 tax year. It would take more than the length of this entire article to explain them.
But suffice it to say it thoroughly complicates buy-to-let investing.
£1m Stocks and Shares ISA
I think a 7% return per year for a Stocks and Shares ISA is entirely achievable. In fact, I’d say that number is pretty conservative.
The average yearly return from the FTSE 100 alone over the last five years has been nearly exactly that: 7.07%. Look back even further and the numbers increase. From 1984 to last year, the annualised return of the FTSE 100 hit 7.8%.
That’s without picking outperforming shares or making any attempt to beat the market.
And I’m also taking into account an average 2.9% annual inflation rate to make it more realistic.
With this in mind, and a starting balance of £0 at age 35, how long do you think it would take to make a million?
Certainly faster than with a buy-to-let portfolio. An investor putting £750 a month into a Stocks and Shares ISA at a 7% return will turn £0 into £1,029,187 in 32 years. So by the age of 67 our investor will have reached the magic million pound mark.
Compound gains
The genius of compound interest growth is that the larger our pot grows over time, the more we gain every year. It might seem like nothing much is happening to grow your wealth in a Stocks and Shares ISA in the early years.
But when you add the benefit of time to consistent investing, that’s where the numbers start really stacking up. Like buy-to-let used to be, it’s all good passive income.
All you have to do is choose quality FTSE 100 shares making good profits with low debt and a hefty market share.
With a long-enough lead time and consistency of focus, making £1m in a Stocks and Shares ISA is simpler than you might think.
