Warren Buffett is widely regarded as the most successful investor of all time. He doesn’t often speak about real estate investing, but when he does, it is wise to listen closely.
Buffett’s 2012 Bombshell Comment that Turned Heads on Wall Street
In 2012, to the surprise of his interviewer who was asking him about equities, Warren Buffett famously said on CNBC that single-family homes in the U.S. are "as attractive an investment as you can make". Buffett said: "If I had a way of buying a couple hundred thousand single family homes and had a way of managing them...I would load up on them."
And sure enough, some of the most well capitalized private equity funds and other institutional investors started buying thousands of single-family rental properties for the first time, largely because, as Buffett indicated, the value proposition was so comparatively superior.
Buffett’s Validation of Residential Investment Property as an Asset Class
Buffett’s comments were very significant and made major waves at the time primarily because they validated residential investment property as an asset class. Previously, the asset class had been widely disparaged by Wall Street (as well as by large commercial real estate investors), in some cases for self-motivated competitive reasons and in other cases for a lack of understanding of the asset class.
Beyond that important validation though, Buffett’s 2012 comments did not provide much specific advice to individual investors looking to get into the real estate game. However, in his 2014 annual letter to the Berkshire Hathaway Shareholders, Buffett discussed his own personal real estate investments, including how he bought and managed them, how they have performed, and what lessons should be taken from the experience.
Buffett’s Personal Real Estate Investing Experience and Lessons
While most everyone in the residential real estate investment space was excited about Buffett’s very general 2012 comments, you will notice far fewer people quoting his 2014 advice. That is because Buffett’s advice abruptly contradicts most of the advice being hawked by real estate investment “gurus” (Surprise!). That also means it is particularly important to pay attention to Buffett’s advice to understand exactly how it diverges.
Let’s dive in.
Buffett’s Real Estate Advice in the 2014 Annual Letter to Berkshire Hathaway Shareholders
In his 2014 annual letter, Buffett talks about how he personally bought out-of-state rental property in 1993, how he uses professional property management to collect his rental income every month, and how, over 20 years later, he has still never seen the property and yet it has performed exceptionally well.
Buffett then goes deeper to explain how real estate investing is not a space where you can get rich quick or make quick profits. In the letter he says:
"Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick ‘no’."
You are probably starting to see why the real estate infomercial "gurus" are not quoting Buffett’s real estate investing advice.
In the letter, he goes on to talk about the dangers of speculating on home price appreciation. He says:
"If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it."
He then further emphasizes the importance of buying performing properties based on real estate fundamentals, instead of buying based on hopes of future price appreciation. He says of his own real estate investing experience:
"I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field -- not by those whose eyes are glued to the scoreboard."
I will now summarize this wisdom into 7 lessons that I think we should take away from Warren Buffett’s advice and experience in real estate investing:
7 Real Estate Investing Lessons We Can Take from Warren Buffett:
- Buy and Hold the Rental Property Over Time. Do Not Flip.
- Use Professional Property Management. Do Not Be a Landlord.
- Buy Great Deals in the Best Markets, Regardless of Where You Live.
- There is No Need to See the Property as Long as You Conduct Proper Due Diligence.
- Do Not Speculate. Never Buy Based Primarily on Expected Market Appreciation.
- Buy Cash Flowing Properties that Perform While You Hold Them and Don’t Focus on Home Prices Going Up Or Down in the Short Term.
- Real Estate is Not a Vehicle to Get Rich Quick or Make Quick Profits. Rather, it is a Vehicle for Getting Wealthy Over Time. If Anyone Tells You Otherwise (Alert: Most Real Estate Gurus!), Walk Away.
The final piece of advice from Buffet’s letter that I will quote here is when he says this:
"You don't need to be an expert in order to achieve satisfactory investment returns.But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well.”
Don’t allow your lack of expertise to prevent you from buying rental properties, but educate yourself as much as possible, establish some investing criteria that are a good fit for your personal comfort level, and then execute a meticulous due diligence regiment each time before you buy a property. Getting a good team of experienced advisors around you is a good idea too, especially if you are new.
Leave us a comment and let us know what you think about Warren Buffett’s real estate investing advice!