Peter's Perspective
6th March 2014 by Peter Churchouse

Buffet on Real Estate

The world’s most famous investor, Warren Buffet has never really been known for real estate. However, in his latest annual letter to Berkshire Hathaway shareholders, he writes about his experiences with a couple of small real estate investments he made in the US – specifically, a farm in Nebraska and a New York retail property. You can read an excerpt of the Oracle’s real estate dealings here.

His experience and conclusions echo much of what we have been writing about to our readers for years, especially to our subscribers who’ve read through my Guide to Real Estate Investing: Lessons from the Trenches.

You don’t have to be an expert farmer or property guru to do well but there are some really important lessons that he imparts as we have done on numerous occasions.

Don’t invest on dreams and fantasies of mega gains in capital values. Instead try to figure out the income potential from the asset in relation to its cost. This could be in terms of output (farms), product prices, rentals, the ability to add value through renovations or re-positioning the tenant base, or increasing occupancy levels.

It is worth noting that Buffet’s real estate purchases were distressed assets, following years of excessive lending to the sector. Again the same reasoning has been behind our recommendations on US real estate investment in the past couple of years (specifically our May 2013 AHA Report “If You are Young, This May Be the Best Opportunity You Will See in Your Lifetime”), and something that has guided our own investments over many years (such as Asia after 1997 financial crisis).

Buffet refers to the long term earnings uplifts and value uplifts that his real estate investments have experienced. Without boasting or even attempting to match the Oracle, his returns in this case are very modest compared to what some of our own real estate investments have achieved over similar long term periods – and you can do it too.

You can read the Oracles latest annual letter in full here.

Good investing,

Peter

P.S. If you would like more specific investment recommendations, try a 50 day risk-free trial of The Churchouse Letter.

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