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Why I’d ditch buy-to-let property and follow Warren Buffett’s investment tips

Buy-to-let investing has been a popular means for many people to generate a mix of income and capital growth from their hard-earned cash. Property prices in the UK, though, are now relatively high. Combined with changing tax rules, this could mean the net returns available to landlords are lower than they have been in the past.

As such, following Warren Buffett’s value investing strategy could be a good idea. The FTSE 350 currently offers a range of companies that have wide margins of safety, competitive advantages and long-term growth potential. Therefore, they could improve your financial prospects to a greater extent than a buy-to-let property.

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Property risks

Becoming a buy-to-let investor is much more difficult today than it has been. For starters, obtaining a buy-to-let mortgage is certainly more challenging than in previous years, with the headroom required when making interest payments now stricter to ensure than property investors are prepared for potential interest rate rises.

In addition, a 3% stamp duty surcharge on second homes means that the returns available could be limited. Similarly, changes to mortgage interest relief could mean that the net returns available to some landlords are less favourable than they have been.

Since house price growth has been high over the last decade, the cyclicality of the property industry suggests that a period of more limited returns may be ahead. Affordability is a major concern for many prospective buyers, since house prices have increased at a faster pace than wages in many parts of the country. This could mean demand for homes moderates to some degree, which could be exacerbated by the prospect of rising interest rates.

Value investing

By contrast, value investing seems to be as appealing as ever. Investors such as Buffett have sought to buy companies that have a clear competitive advantage versus their sector peers at a time when they trade on low valuations.

There appear to be a number of FTSE 350 shares in such a situation at the present time. The risks facing the UK and world economies could mean that the stock market is undervalued. The FTSE 100, for example, currently has a dividend yield of around 4.5%. This is ahead of its historic average and may mean there are a wide range of undervalued shares on offer.

Of course, Buffett has built his wealth over a long time period. The stock market will inevitably experience periods of decline in the long run, which means it isn’t an avenue to generate a large amount of wealth in a short space of time. But through buying high-quality businesses on low valuations, it may well be possible to outperform the returns that are available on buy-to-let properties and, in doing so, transform your financial future.

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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.