Over the past couple of decades, a lot of investors have made a lot of money with buy-to-let property. I think the sector does have appeal for some investors, but I would rather follow the advice of Warren Buffett.
Even though he is one of the wealthiest people in the world, Buffett, or the ‘Oracle of Omaha’ as he is often known, does not have extensive property holdings. Unlike other billionaires, the investor tends to avoid real estate, preferring stocks and shares instead.
He is not avoiding real estate because he believes it is a bad investment. He has said that he avoids property because he does not understand the sector. By comparison, Buffett has been buying stocks and shares since he was a teenager. That is around eight decades of experience.
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The Warren Buffett approach
I am in a similar position as I have never owned buy-to-let property, but I have significant experience as an investor.
Further, I am aware that rental properties can be difficult to manage. They can also be costly to repair if something goes wrong. Further, in recent years, the government has introduced a series of tax and regulatory changes, increasing costs for landlords.
These challenges may be straightforward to navigate for investors with a large buy-to-let portfolio. Unfortunately, I do not have the money, time, or experience to build an extensive, diversified portfolio of rental properties. Nevertheless, I do have the time to build a large, diversified portfolio of stocks and shares.
This is the primary reason why I am following Buffett’s advice and sticking to what I know.
Buy-to-let alternative
That is not to say I am avoiding the property sector entirely. I do have some exposure to the sector through real estate investment trusts (REITs). One of my most significant holdings is Great Portland Estates, which owns a portfolio of commercial properties in London’s West End. It would be virtually impossible for me to personally build exposure to this market, but I can buy shares in the trust for less than £10.
By using stocks and shares to invest, I can also spread my risk across different sectors. As well as Great Portland, I also own the insurance group Admiral. This gives me exposure to the insurance sector, and the company also offers an attractive dividend yield of 5%.
The one drawback of using this Buffett approach rather than acquiring buy-to-let property is the fact I have to trust other managers to look after my money. Investing in a company means that I am investing in the skills of that management team. Not all managers have shareholders’ best interests at heart.
On the other hand, owning and managing my own rental properties means I am looking after my interests. Equity investments are also far more volatile than rental assets.
Despite these drawbacks, I believe that following Buffett’s advice and sticking to what I know is the best way to build wealth in the long term.
