Making money from buy-to-let has become a lot harder in recent years as the government has removed lucrative tax breaks for investors. On top of this, additional regulations, designed to stop rogue landlords taking advantage of tenants, has had the impact of pushing up costs across the board.
With that being the case, I think property stocks are now a much better investment than buy-to-let property and today I’m going to highlight two property stocks that I believe can help you make a million.
The first company is Inland Homes (LSE: INL). This immediately looks to me as if it is a deep value investment. It is trading at only 85% of book value, a forward P/E ratio of 7.2 and it supports a dividend yield of 4.3%.
It’s not immediately clear why the market is giving this business such a wide berth. Over the past six years, net profit has risen by more than 300% as the property development, and regeneration specialist has benefited from the UK’s booming property market. Over the same time frame, Inland’s dividend to shareholders has increased tenfold, and it looks as if management can improve the payout further. It is covered three times by earnings per share.
The figures above tell me Inland could be a much better investment then buy-to-let. For a start, the stock is undervalued by around 50% compared to the rest of the UK real estate sector, which trades at a forward earnings multiple of approximately 16. On top of this, earnings per share increased at around 30% per annum for the past five years, while this rate of growth is clearly unsustainable over the long term, analysts have pencilled in high single-digit earnings growth for the next two years.
This growth, coupled with the group’s 4.3% dividend yield, implies the stock could return around 10% per annum for the foreseeable future, that’s without including an increase in valuation to the sector average.
An investment of £100,000, roughly the same amount as a deposit required on a buy-to-let property, would grow into £1m after 25 years with a return of 10% per annum.
Another property company that I think and help you make a million is Helical Bar (LSE: HLCL).
Helical is focused on the ownership and development of property mainly in and around London, and its track record of creating value for shareholders is impressive. For example, since 2013 book value per share has increased by 16% per annum.
Unfortunately, the stock is currently trading at a discount to book value of around 27%, so this value creation is not entirely reflected in the stock today. Still, if the company continues to do what it has done in the past, I think it is highly likely that over the long term, the shares will trend towards the current book value of 463p and possibly higher as the firm continues to create value for shareholders.
And as the company’s property portfolio is located in and around London, I think there’s a high chance an opportunistic buyout offer could be tabled for the group.
On top of the deeply discounted valuation, the stock also supports a dividend yield of 3.1%, which implies shareholders could see an average annual return of 19% on their money through a combination of book value growth and dividends.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Inland Homes. 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.