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Warren Buffett didn’t make billions from buy-to-let! Here’s why I wouldn’t try to either

Warren Buffett is one of the world’s most successful investors of all time. He has turned a relatively modest sum of money into $billions during the course of his lifetime, making him one of the richest people on earth.

He has done so through investing in shares that offer good value for money, and holding them over the long run. In many cases, he hasn’t sold them even after they’ve generated vast amounts of profit over a period of decades.

However, one area where Buffett has not invested on a large scale is… property. Here’s why, and why investors may also wish to avoid buy-to-let investments.

Buy-to-let risks

Buffett is known to have an aversion to debt. Whether that’s in the companies he buys, or the way in which he does business, he seeks to minimise leverage. Investing in property is usually undertaken with a considerable amount of debt, which means it’s unlikely to be of interest to him.

Although the use of debt when investing in property can increase returns should asset prices move higher, it can lead to significant losses if prices move lower. At present, there’s a real risk that property prices in the UK will come under pressure. Already in some parts of the country there have been declines in house prices, with affordability issues and weak consumer confidence contributing to a fall.

Looking ahead, a rise in interest rates seems to be likely. Although there’s a lack of inflationary pressure at present, the Bank of England recently reminded investors interest rates could rise at a faster pace than may be currently anticipated. This could increase the cost of having a buy-to-let at a time when rents may fail to rise rapidly due to an uncertain outlook for the UK economy.

Stock market opportunities

By contrast, investing in the stock market doesn’t require debt. It also provides investors such as Buffett with the opportunity to invest in a wide variety of businesses, with a wealth of information that can be used to assess whether they offer favourable risk/reward ratios.

For Buffett, the focus is on whether a stock offers good value for money. At present, the FTSE 100 appears to have a wide margin of safety, with its dividend yield standing at over 4%. This is towards the upper end of its historical range. Alongside this, the growth potential of the world economy appears to be bright. This could mean that a number of FTSE 100 stocks offer impressive growth outlooks given the prices at which they are trading.

As such, while buy-to-let investing appears to have high risks and relatively subdued return prospects, the FTSE 100 and wider stock market could deliver high returns. While making £billions may not be achievable for all investors in the stock market, following in Buffett’s footsteps could generate a far higher return, and with less risk, than undertaking a buy-to-let.

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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.