The Lion Real Estate Blog is focused on issues that may affect investments in the Houston area especially focused for investors looking to build a rental portfolio.
There was a article about Warren Buffett’s investing tips that he outlined in his yearly letter to investors. However, the rules that he outlined are just as applicable to real estate investing as a industry. I will outline his rules for investing, and I will explain how I believe that they relate to real estate.
Rule #1: Never Lose Money Rule #2: Remember Rule #1.
Warren Buffett’s rule was not meant to be a glib comment. In fact the article on Yahoo, explained how even Mr. Buffett lost $23 billion. However, his point is that you cannot gamble on gains. To often investor’s enter real estate investing, betting on huge gains without doing their own due diligence. I have met many investors who buy property based on glitzy presentation made by builder groups or they buy property sight unseen. This seems to define the concept of “gambling”.
Another corollary formula is that a if a business does well, a stock will eventually follow” . In real estate, this rule could be applied as well. If you choose properties that do not have a solid investment rationale, then it will likely fail. Real estate investors should evaluate the reasons that they believe that the property is a good investment. Is it in a good location? Is it the crime rate rising? Are there many foreclosures? Are property values falling?
Another corollary is “It is far better to invest in a wonderful property at a fair price than a fair company at a wonderful price.” I have seen many investors not evaluate the price of a property and why it was priced in such a manner. If a property is priced below market prices, then there is a definite reason. In today’s market with the ease of internet access, pricing arbitrage opportunities are less prevalent. Therefore, the price should reflect some reality of the property. Does it have major repairs to be done? Are there unpaid lien risks?
The final corollary is “Our favorite holding is forever.” This rule is very applicable to real estate investing. It is extremely risky to invest in a property without a long term view. Too many investors believe that the should take a immediate “flip this house” view point, but without the right due diligence and team in place; these goals may often devolve into “rent this house”. If you are flush with cash, then you can hold a property and wait for the property to sell. However, many investors do not have this reserve of cash. This forces them to prematurely abort their “flip this house” plans, and try to scramble to obtain cash flow. If you cannot support your investment decision by holding the property for a extended period of time, then you may want to reconsider your investment strategy.
Warren Buffett’s rules for investing work for both real estate and stocks. It is not shock that he is the richest man in the world with these kinds of sound investment rules.
(Jay Raman is a real estate investor, and he is the owner of a full service real estate property management firm, Ashoka Lion- www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)