Warren Buffett is the richest investor on earth – with a net wealth of around $80 billion.
Now, we know him as a ‘share market guy’ – but what can we learn from him as real estate investors?
Well, Buffet has made two real estate investments that he talks about his in his annual letter to shareholders.
- He bought a 400 acre farm in Nebraska in 1986 for $280,000.
How did he work out whether this was a good deal?
He simply calculated how much crops the farm could produce, and the estimated value of them.
Through this he worked out the annual return on his investment to be about 10% per year.
(Why did he make such a small investment when he’s a billionaire? His son is crazy about farming, so Warren bought the farm for him to lease).
- In 1993 he bought a commercial building in New York, near New York University.
The yield on this property was about 10%. However some of the rents were not at ‘market rates’ – so he knew he could increase the yield.
In both cases, he was buying at ‘fire sale’ prices – after a bubble had burst.
Now, here’s some excerpts from his annual letter, summarising his lessons from these 2 investments.
- “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 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”
- 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.”)
- “My two purchases were made in 1986 and 1993. What the economy, interest rates, the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in determining the success of those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.’
Real Estate Investing ‘The Buffett Way’ in the Australian Market
One Local investor who follows Warren Buffett’s strategy of focussing on the ‘future earnings’ of an investment to calculate it’s value, is Helen Tarrant.
She looks for deals that will net her anywhere from 8%-11%….and this allows her to calculate the exact amount she will pay for the asset.
Because of this ‘cashflow first’ approach, she’s been able to build a portfolio that pays her an average of over $871 per day net passive income.
That’s money in her pocket after loan repayments and expenses (pre-tax).
If you want to discover more about how you can apply ‘Warrens rules’ to Real estate in Australia come along to her free webinar tonight.