August 6, 2014 Lydia Gable

The ‘Buffett’ Approach to Real Estate Investing

Warren Buffett recently penned a letter for the benefit of those who are interested in real estate investing. Of course I think anyone—not only real estate investors—could find value after reading it just by virtue of his expansive knowledge. Interestingly enough he refers to the experts, the pundits as offering nothing but impediments to success, mere chatter. He implies that you don’t need to be a real estate expert to invest well. The irony is, at least in my humble opinion, that he sounds every bit the expert—which obviously he is—in his attempt to make it accessible for every wo/man. As a realtor, I thought of course that I should share some of what Buffett believes are contributing factors to his own success. It’s an interesting read – I’m neither endorsing it nor refuting it. My aim: simply to share the information.

‘Expectations Proved Out’

As reported by Fortune Magazine, they state that in an “exclusive excerpt from his upcoming shareholder letter, Warren Buffett looks back at a pair of real estate purchases and the lessons they offer for equity investors.” In the letter, Buffett’s annual letter: What you can learn from my real estate investments, Buffett cites two of his early investments—a farm and an NYU property— which he describes as good lifetime investments and both of which he says in terms of the gains, “won’t be dramatic [but] will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.”

Of the 400 acre farm investment which was made in 1986, he says that he had no unusual intelligence to conclude if it was a good or poor investment. He knew nothing about the industry. But he had a son who loved farming, and so he calculated some costs v. ROI numbers. He figured “both how many bushels of corn and soybeans the farm would produce and what the operating costs. Then he held these numbers up against a calculation of the normalized return from the farm which he figured at about 10%. He also thought productivity would improve over time. He says, ‘Both expectations proved out.”

‘Recognize Your Limitations’

Mainly Buffett cites these examples to show that he needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had a substantial upside. Almost 30 years later the farm has tripled its earnings and is worth five times more than the original price. He stresses however it was based on his own analysis and business sense not so called fear chatter from experts which seems to be the big takeaway from the letter. Finally he offers these takeaways which I believe are very valuable for any real estate purchase:

  • You don’t need to be an expert. But if you aren’t, recognize your limitations and follow a course certain to work reasonably well. When promised quick profits, respond with a quick “no.”
  • Focus on the future productivity of the asset. If you don’t feel comfortable making a rough estimate of future earnings, forget it and move on.

Know Your Gut and Your Realtor!

Essentially it boils down to this: Do your homework, know what you like, trust your gut and don’t bail on an investment because you listened to other people’s fear. Before you bail, give it time, there will always be less than favorable markets, but trust your own sense and that the market will return.

Many real estate investors could have used his letter a couple years back. Of course it’s easy to have confidence in your investing decisions when your name is Warren Buffett. But none the less, we all have to start somewhere. But I would add one last small note to his infinite wisdom…find a Realtor that can help you figure out your gut!

For information on any information covered in this blog or list a home or view listings in the Conejo Valley, contact Lydia Gable today for an appointment.

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