For many years, buying a second property has been the obvious choice for anyone who has spare capital. House prices have risen significantly over the last few decades, while a shortage of properties has also caused rental growth to be strong.
However, changes to the buy-to-let industry mean that there are greater challenges than ever for landlords to overcome.
As such, following investors such as Warren Buffett and buying a range of shares could prove to be a better idea. Not only could it offer higher returns, there may also be less risk and reduced effort for an investor.
Buy-to-let difficulties
Tax changes are a key part of the difficulties facing property investors at the present time. They include an additional 3% stamp duty payable on second homes, while many landlords may find it more difficult to offset mortgage interest payments against rental income.
The impact of these changes could be lower net returns. Meanwhile, obtaining a mortgage may also prove to be more challenging, with increasingly onerous regulatory requirements being put in place over recent years. At a time when interest rates are likely to rise over the long run, the returns on offer from buy-to-let investments may be relatively disappointing.
Furthermore, with the UK economy facing a period of uncertainty, the property market may experience slower growth over the next few years. This would not be hugely surprising as house price growth since the financial crisis has been strong. As a cyclical industry, a period of consolidation may be ahead.
Warren Buffett’s strategy
Perhaps surprisingly, Warren Buffett has never been a major property investor. He has always focused on the stock market, with his value investing strategy being simple and easy to implement. He has been successful through buying high-quality businesses that posses a competitive advantage over their peers at fair prices.
Often, he buys during periods of uncertainty for the wider economy. Since there are fears surrounding the trade dispute between China and the US, as well as economic challenges in Europe, now could be such a time. And, with a wide range of FTSE 350 shares currently offering wide margins of safety, it could be a favourable time to build a portfolio of attractive companies with positive long-term growth outlooks.
Risk/reward
Of course, it is far easier to reduce risk through investing in shares versus taking on buy-to-lets. An investor with even a modest amount of capital can buy a range of companies at minimal cost due to share-dealing features such as regular investing services that reduce commission costs to as little as £1.50 per trade.
By contrast, accumulating a variety of properties requires a large amount of capital which may not be available to most people.
As such, with value investing requiring less capital and it appearing to offer a superior outlook than the buy-to-let industry, it could boost your financial prospects over the long run.
