I used to own a buy-to-let business. And make no mistake about it, if you buy a property with a mortgage and let it out you’ll end up running a business with all the demands on your time and finances that it entails.
Why I reckon property is unattractive
Indeed, hands-on, buy-to-let property is no passive investment. You could aim to outsource the entire management of the property and its tenants to an agent, but the costs and fees will be high and will eat into your returns – it’s no secret that agents in all walks of life do very well financially when the economy is swinging along.
Luckily for me, my involvement in the buy-to-let sector began towards the end of the 1990s when I felt compelled to take the plunge because property prices looked like they were at bargain levels. As things played out, property became much more fully valued compared to the average wage while I held mine and the capital gains were large. But I don’t see much value in the real estate market today.
The government has been bearing down on the sector by essentially raising taxes in an apparent effort to make the option of buying to let a property less attractive. And it’s working, at least for me. I wouldn’t touch property with a bargepole except for when it comes to buying somewhere to live.
One of the problems is that the capital outlay can be so large when buying a property that it’s hard to achieve diversification. In many cases, people will end up with an investment 100% concentrated in maybe just one or two buildings. If anything goes wrong in a case like that, your entire investment could lose value rather than just part of it. I see that kind of situation as risky.
How I’d aim to build wealth with stocks
And if I did want exposure to real estate, I’d choose to invest in several of the many property-focused companies listed on the London stock market. Such shares immediately have the advantage of spreading your money over several underlying properties in their portfolios. And shares like that can provide financial outcomes similar to those of owning property directly – your capital can rise and fall in value with the potential to go up a lot, and they pay regular dividends as income, which compares with the rental yield from direct property ownership.
But to target seven-figure wealth I’d look beyond the property sector at other shares in other industries. The stock market has companies involved in many different sectors and I’d aim to diversify across several.
However, I reckon the most important place to start when it comes to investing in the stock market is by guarding against irretrievable losses of capital. So, for me, that means that profitless, speculative, jam-tomorrow stocks with an enticing story are off the agenda.
Instead, I’d look for well-capitalised firms with a good financial and trading record, decent quality metrics, and a good reason for believing that business will improve further in the years ahead. Having found stocks like that, I’d buy them at opportune moments when the valuation shows a level that makes sense of an investment.
