When investing your own cash, it’s tempting to stick to what you understand. If you’re already a homeowner, buy-to-let may seem obvious.
I’m not convinced. I think it’s getting harder to make money from buy to let. At the same time, I can see attractive stock market opportunities that provide exposure to the property market.
Why not buy-to-let? Owning a home to live in is very different to running a house as a profitable rental business. With prices near record highs in many areas of the UK, homes aren’t cheap. Mortgage rates are at record lows too, so borrowing costs only seem likely to rise in the future. On top of that, maintenance and repair costs can eat into your profits.
Buy-to-let investors often lose sight of the need to turn a profit each year. If you can’t do this, then you’re paying to rent your house out, in the hope that one day you might sell it for more than you paid. That sounds a bit risky to me.
Profit from repair work My first stock pick is builders’ merchant group Travis Perkins (LSE: LON:TPK). This company is taking advantage of the ‘do it for me’ trend to focus on businesses which sell to tradesmen and building firms, rather than retail customers.
The Travis Perkins share price is up by 10% as I write, after the company said its sales rose by 4.8% to £6,741m last year. Pre-tax profit was also higher, climbing by 1.2% to £347m, excluding certain one-off costs.
As part of a plan to simplify the business, chief executive John Carter hopes to sell the group’s plumbing and heating business this year. This includes brands such as City Plumbing and PTS.
My view: The uncertain outlook for the UK economy is a risk. But Travis Perkins appears to be trading well and profits are expected to remain stable. The shares are priced at 12 times forecast earnings and offer a 3.6% yield. I’d be happy to buy.
Time to buy London? My second stock might be of particular interest to buy-to-let landlords. Housebuilder Berkeley Group Holdings (LSE: BKG) specialises in building homes in London and the South East.
The group is known for its high profit margins and for the good market judgement of founder and chairman Tony Pidgley.
London property prices have fallen in some areas over the last year, with some local falls of more than 10%. But I suspect the market would stabilise quickly if a Brexit deal is secured over the next couple of months.
In any case, Berkeley’s trading appears to have remained strong and the company has been open about its profit expectations.
During the six months to 31 October, the company reported a pre-tax profit of £401m, down from £540m last year. However, controlled spending on new projects helped to lift the group’s net cash balance from £687m to £860m during the half year. And the company’s order book remained healthy, at £1.9bn.
Berkeley expects to return £280m per year to shareholders until 2025. Some of this cash may be used for share buybacks as well as dividends, but analysts are forecasting a dividend yield of 4% for this year and 4.9% next year.
My view: Based on the group’s strong track record, I’d be happy to tuck a few of these away at this level.
Roland Head 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.
Motley Fool UK 2019