Although buy-to-let investing has generated high returns for many investors in previous years, now may not be an opportune time to buy property. Affordability is a major concern across many parts of the country, with political risks and regulatory changes potentially leading to reduced returns for landlords.
As such, now may be the right time to focus on the value investing principles of Warren Buffett. Through focusing on the best value opportunities within the FTSE 350, it may be possible to improve your chances of building an improved financial future with lower risks than a buy-to-let investment would entail.
Risky buy-to-let Although the UK property market may have risen significantly in the last few decades, its affordability suggests that lower growth may now be ahead. The ratio of house prices to average incomes is at the upper end of its historic range, which indicates that capital growth may be somewhat lacking. Furthermore, high property prices mean that the yields available across the sector may be suppressed – especially in areas such as London, where previous price rises have left yields towards the lower end of their historic range.
In addition, buy-to-let properties are subject to significant risks. Borrowing vast sums of capital in order to fund a property purchase is always a risky move, but doing so at a time when the UK faces an uncertain economic future could mean that investors experience a difficult period. Void periods and rising interest rates could, for example, lead to reduced net cash flow at a time when tax changes are already making life for landlords less profitable.
Buffett’s value investing strategy While the stock market also faces an uncertain future, the valuations of a wide range of stocks suggest that investors may have a long-term buying opportunity. In the FTSE 100, for example, there are a wide range of companies that have historically low price-to-earnings (P/E) ratios, and yet offer robust earnings growth and a wide geographic spread in terms of where their sales happen.
Moreover, a strategy of buying shares while they are experiencing a period of uncertainty has historically been highly successful for investors such as Warren Buffett. He has simply purchased stocks while other investors have generally been averse to doing likewise. This has enabled him to obtain large discounts to the intrinsic values of the companies he holds, with him then allowing them the time they require in order to produce capital returns.
In addition, a lack of leverage and the ability to spread the risk across a wide range of companies, sectors and geographies means that the risk/reward prospects for a value-investing strategy seems to be more appealing than undertaking a buy-to-let. As such, now may be the right time to pivot towards the stock market, and away from the buy-to-let sector.
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