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Why buy-to-let could be a major mistake in 2019

The government has in recent years made changes to the tax situation for buy-to-let investors and this has affected many small landlords who are now often keen to sell. Their reaction is understandable. For many years, property seemed like a smart investment, but a combination of the tax reforms, Brexit concerns and a struggling London property market have all put a real dent in the returns investors can achieve from buying properties to let out to tenants. With the housing crisis keeping political pressure on the government, landlords can’t expect preferential treatment any time soon, meaning demand from buy-to-let investors – which would push prices up – is likely to remain subdued throughout 2019 and possibly beyond. 

With seemingly lower returns on offer from property investment, I’d encourage those looking to grow their wealth to consider shares in 2019 and for the long term. Investing in shares has a long track record of producing returns greater than that which can be achieved from property, cash or investing in gold. Furthermore, shares are affordable – unlike buying property; tax efficient – unlike property; and are far easier/more enjoyable than investing in property – there’s no dealing with tenants, no repairs to undertake or late rents to chase. And shares are easier to sell too.

One slick share to look at

So what would I buy instead? Investing in oil may not be everyone’s cup of tea. It’s a volatile commodity and it’s environmentally unfriendly, but investing in the big oil companies can be financially rewarding. In the last 12 months, BP (LSE: BP) shares are up over 13%, whereas house prices in the UK fell 2.9% in January from December. BP also outperformed its FTSE 100 peer, Shell (LSE: RDSA), which rose by less than half BP’s rise, the company’s shares being up nearly 6% over the last 12 months.

Recent results show just why BP now looks to be a potentially profitable investment. Last week, its fourth-quarter and full-year results showed the business is improving, with underlying replacement cost profit for the full year of $12.7bn, more than double that reported for 2017. In the last quarter, the same metric was $3.5bn, which was up from $2.1bn a year earlier. Another good sign for investors was the increase in the return on average capital employed (ROCE), which rose by 11.2% – it was 5.8% in 2017. I feel these results really do point to a company which is recovering well from the Gulf of Mexico oil spill that hit it hard and that is also benefitting from a higher oil price. The fact the share price is doing better than Shell’s is another reason to be optimistic as the positive sentiment is likely to continue if BP can keep producing strong results.

Buying at a good price

On top of this, the shares are still reasonably cheap, despite the share price momentum. The yield has fallen to a little under 6% which is still very high and the P/E is 15, indicating good value for an oil major. Investing in BP now gets an investor a company that is rapidly improving financially but still offers good value, a potentially very profitable combination. I think it is a far better prospect than investing in UK property right now as politicians continue to scramble to reach a deal for leaving the EU.

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Andy Ross has no position in any of the shares 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.