I really admire Warren Buffett. Not just because of his success but because he is truly ethical and has a wonderful philosophy. He is also quite quotable. Below are five of my favorites. Mr Buffett said these regarding the stock market yet we can apply these same lessons to real estate.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
I am amazed how many crooks there are in real estate. There is plenty of money to be made by being honest and ethical. I regularly see how treating people right has come back to benefit me in ways I didn’t expect. I also see crooks and charlatans that have no idea how many people avoid them and speak badly of them. They have no idea of how many deals they miss because of their bad reputations.
“Risk comes from not knowing what you’re doing.”
Forget what the late night TV gurus say, real estate is incredibly risky. The great thing about real estate is you can control that risk through knowledge. Unlike stocks, you have much more control in real estate. You have control over how you finance it. You have control over which tenants you choose & how you manage it. You can upgrade the property. How much control do you have if you own 100 shares of Microsoft? But knowledge is the key. You must know what the risks are and how to assess and limit them.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
With all of the turmoil in the markets many investors are are scared, but now is a terrific time to be buying real estate. I recently formed Arkad Group, LLC with some partners. We are getting ready to buy some apartment complexes. Our timing couldn’t be better. We feel now is an ideal time to by multi families. Money is moving out of the stock market and some investors are afraid of any type paper assets. This should help us raise funds as investors look to the steady cash flow and solid asset base of apartment buildings. Volatile markets mean opportunity.
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years” and “Our favorite holding period is forever.”
This is not a universal rule for real estate. Buying to rehab and flip is a legitimate strategy. However many investors got caught with their pants down because they overpaid hoping to do condo conversions. When the market changed and the condo market died they had no plan B. They couldn’t hold the buildings as rentals because they had overpaid based on condo conversions. Markets change, you should consider what happens if you get stuck holding a property because of that change.
“The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”
Warren often speaks of “intrinsic” value. Real estate investors are taught to value properties by “comps” but is what others are willing to pay an indication of the true value of the property? If demand drives prices artificially high like in the last boom, does that make the properties intrinsically more valuable?
In the recent run up of prices I often saw landlords buying properties based on comps. But they were paying prices that would never cash flow. Frankly I couldn’t see why anyone even bought the properties they were using as comps. A few naive investors overpaid and then everyone thinks it’s OK to pay that much. A good investor should be looking at the true value, not just the prices. Affordability indexes, cash flow analysis, and rental rates vs cost to own are all tools that can be used to asses the intrinsic value of properties.
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