Warren Buffett's five tips for investing in real estate

By Katherine Jimenez

Wednesday, 05 March 2014

He is known as the Wizard of Omaha and considered to be one of the world's most successful investors.

And for thousands of investors around the world, Warren Buffett has become their investment guru.
Every year, through his letter to Berkshire-Hathaway shareholders, the legendary investor offers his wisdom on anything from his rules for investing in stocks to the US and global economies or even Bitcoin.

This week, Buffett he again released his highly anticipated annual shareholder newsletter and this time, front and centre of his letter was real estate investment.
Specifically, he reflected on two small properties that he purchased long ago and offered some insights on real estate investment.

One purchase involved a 400 hectare farm in Nebraska, which cost him $280,000 in 1986.
The other purchase, which he made with a small group of investors a few years later, was a retail property in New York.

The common theme in these tales was that he purchased both assets after property collapses.
In his letter, Buffett says he cites the tales to "illustrate certain fundamentals of investing".
He then goes on to highlight his five tips for real estate investing.
They are:

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. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

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 sceptical 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.

With my two small investments, 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. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”

news@propertyobserver.com.au