Applying Warren Buffett’s Key Investing Concepts To Real Estate

Warren Buffett is America’s most successful stock investor. He’s never really been a big real estate player, as that’s not his area of expertise, but the same strategies he uses on stocks also works well on income properties. So what are these maxims and what do they mean?

The necessity of a “moat”

One of Warren Buffett’s key axioms is the concept of a “moat” which basically means a barrier to competition. In Buffett’s mind, a “moat” protects your investment from competition. And there are many different real estate sectors that offer powerful “moats”. For example, cities have not allowed new mobile home parks to be built for over 50 years. And boat marinas require difficult to obtain permits and there’s only so much water frontage to be had.

Keeping costs low

Buffett is also a stickler on low overhead, still living in the same house he bought in Omaha in the 1950s. He believes that excessive costs are a sign of weakness and bad management. And there are real estate sectors that also have low overhead and costs, such as self-storage. Remember that all that matters is the net income on the property, not just the gross revenue, and an expensive high-rise office building is of little value as an investment if it comes with expenses that wipe out all profit.

Buy-and-hold

This Buffett theory is all about holding an asset and allowing it to mature over time (basically inflate in rents). Many real estate sectors conform to this principle, but their success or failure in this arena is all about the ability to push rents. Mobile home parks, for example, have this magic component since their rents go up around 5% to 10% per year in most cases. By contrast, office rents are declining.

Importance of diversification

Warren Buffett is a huge believer in diversification – the ability to hedge your risk through having a number of assets in a bundle instead of just one. That’s the theory behind mutual funds. In real estate, this basically relates to owning multiple assets spread out over some divergent geography. In that manner, it tends to favor real estate sectors that have lower entry prices and the ability to manage from afar. Some great niches for that include mobile home parks and billboards.

Seize opportunities

Warren Buffett once said about a recession: “dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.” The point is that you need to be ready to make big bets when the opportunity presents itself. While you don’t want to be foolhardy, you also don’t want to be too cautious. You have to back up your hunches with a belief in yourself.

Be contrarian

“Be fearful when others are greedy. Be greedy when others are fearful”. That’s one of Buffett’s most famous quotes, and it describes his thoughts on being “contrarian” which simply means to do the opposite of what others are doing and not following the herd. In real estate that simply means investing in what is currently not in vogue and waiting for it to come back (and avoiding sectors that are over-heated). Currently the most contrarian bets would be on retail and lodging, but that may be too risky post-Covid. Mobile home parks have also always ranked high as a contrarian strategy since most Americans are turned off to them due to their stigma which is gradually eroding.

Conclusion

Warren Buffett is not known for his expertise in real estate, but the same concepts that made him America’s #1 stock investor definitely apply. We can all learn from his time-proven strategies and become better investors accordingly.

Frank Rolfe has been a commercial real estate investor for almost three decades, and currently holds nearly $1 billion of properties in 25 states. His books and courses on commercial property acquisitions and management are among the top-selling in the industry.