When Warren Buffett speaks, investors will pay careful attention based on his success over the years as an investor in stocks. The following excerpts from an article in Daily Finance is worth reading as he shifts gears to real estate investing.
In an annual letter to shareholders of the conglomerate holding company Berkshire Hathaway, Chairman and CEO Warren Buffet provided some useful tips on real estate investing.
Here are a few of the tips he provided in the letter, which centered on Buffet’s purchases of a 400-acre farm in Nebraska and a retail property in New York in the mid-1980s and early 1990s, respectively:
See the long-term potential instead of trends. As Buffet put it, he invested in the Nebraska farm because he knew that corn would continue to grow in the area no matter what the stock market did. Similarly, he chose the retail property located near New York University because he knew that the area would remain populated with students.
If you’re not an expert, partner with someone who is. Buffet said he didn’t know anything about farming, but his son did and was able to help him understand what was needed to make the 400-acre farm profitable. In the case of the retail property, Buffet admitted that he’s never even step foot in the property as he relies on other professionals to manage it for him.
Look for underutilized properties. Buffet said that with the farm and the retail space, he was able to see the properties for what they could be instead of what they were. In other words, don’t settle for the current productivity if mismanagement and low expectations were involved.
Investing in undervalued real estate can pay off. Buffet discussed purchasing the Nebraska farm and the New York retail property at majorly discounted prices after real estate bubbles had popped. That made these relatively small investments — but small investments with big potential.
Focus on income instead of appreciation. Buffet said that with both properties, the Nebraska farm and the New York retail property, he did not focus on the value of the properties but instead the profit that the properties could produce.