The Quotable Oracle … on Real Estate

Warren Buffett

By Beth Jo Zeitzer

Legendary investor and CEO of Berkshire Hathaway, Warren Buffett, is best known for his ability to pick stocks and scoop up companies at a bargain. The truth is, though, that his sage investing advice – which earned him the moniker “The Oracle of Omaha” – applies aptly to the business of investing in real estate.

In fact, Buffett dedicated a section of his 2013 Berkshire Hathaway letter to shareholders to the lessons he learned from two real estate investments he made decades ago. The first was a 400-acre farm outside of Omaha, purchased for $280,000 from the FDIC in the wake of a Midwest price-bubble burst. While not a farmer himself, he consulted with his more knowledgeable son and calculated that they could improve productivity and capitalize on increasing crop prices. “I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside,” Buffett wrote. “Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.”

The second investment was a retail property in New York sold by the Resolution Trust Corp. in 1993, after the commercial real estate bubble popped. With a prime location near New York University, several vacant stores and a large tenant that was dramatically underpaying, Buffett knew he could increase the earnings and yield. He partnered with a group, including experienced real estate investors to purchase and manage the property. Annual distributions now exceed 35 percent of their initial equity investment.

Applying Buffett’s Wisdom
In addition to his investing prowess, Buffett is lauded for his folksy wisdom about how others can navigate the markets. Here are a few of his notable quotes and how they apply to investing in real estate:

“Be fearful when others are greedy. Be greedy when others are fearful.”
The residential and commercial real estate markets are wildly diverse, and rarely do they rise or fall in concert. Some environments are obviously more challenging than others, but patience and a steady hand will be rewarded. Buffett has made a fortune from capitalizing on market fluctuations and finding value that the crowd has overlooked.

“Our favorite holding period is forever.”
Sure, you can make money in fix-and-flips, although that’s an increasingly hard road in today’s market. The most successful real estate investors I know are focused on the key metrics, such as the current and projected yield, and the long-term return on investment. Ask yourself: Will you be happy owning that property a year, three years or 10 years from now if market conditions force you to hold it?

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Switch out the word company for real estate, and this statement is equally valid. Getting into a money pit is psychologically and financially damaging, and the effects compound over time. Again, this is why due diligence is absolutely essential to any transaction – and there is no shame in walking away from a deal that doesn’t pencil out for you.

“You don’t need to be an expert in order to achieve satisfactory investment returns.”
At first glance, this may appear to be in conflict with another Buffett aphorism: “Never invest in a business you can’t understand.” But really, it comes down to knowing your limitations, doing appropriate due diligence and acting according to a plan. As Buffett himself illustrated with his own investments, enlisting the help of outside experts is a prudent move when you don’t believe your knowledge is sufficient.

One final thought: In his 2013 shareholder letter, Buffett underscored the fact that he was not concerned with the day-to-day valuations of his two forays into real estate. He was focused on the long haul, not on the vagaries of the economy or fluctuations in interest rates. “I can’t remember what the headlines or pundits were saying at the time,” he wrote. “Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.” It’s not among his famous quotes, but it is exactly the type of philosophy you need to bring to the search for profitable real estate opportunities – and to the negotiating table.


 

Beth Jo Zeitzer, Esq. is the owner and designated broker of R.O.I. Properties. She can be reached at (602) 319-1326 or bjz@roiproperties.com.