Real Estate Investing – Warren Buffett Style

Stock investing has some fundamental principles that are similar to real estate investing. Research is critical. Bad management can ruin a business just like it can ruin a property. And, the best money is made in the long term 99% of the time.

And when you think of successful stock investing I don’t think there’s a person in North America that wouldn’t immediately think of Warren Buffett. So it shouldn’t surprise you that Buffett strategy and Buffett investing fundamentals are just as applicable to real estate as they are to stock investing. Take my favourite seven quotes as examples and lessons for you:

1. “No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month just by getting nine women pregnant.”It’s the same thing with wealth creation. You can make money fairly quickly in real estate, but cash is not the same thing as wealth.Real wealth creation in real estate does take some time. It doesn’t take a lifetime but it’s not overnight. And when you’re just starting out it takes time to even make cash.I know there are so many programs that promise quick cash, but it just doesn’t happen that way. Take our recent direct mail campaign. We sent out 4,000 letters and we’ve yet to close on one deal from them. We’re working on a few deals now … but it’s taken time.

   Somebody sending 500 letters would likely face the same time frame. In other words, a massive effort today doesn’t make it happen that much faster… just like getting 9 women pregnant doesn’t produce a baby in a month. But a massive effort today could produce 9 babies in 9 months.

   It will probably be 6 months before our time, effort and money invested in the process so far pays us anything. And we really won’t feel the benefits for up to a year, but that is ok because we know it takes time. But when you’re starting out you have to be prepared for that. Yes you can make $50,000 in one month but it just won’t be your first month.

2. “The smartest side to take in a bidding war is the losing side.”

When the price is going higher and higher you are losing your return. That is why you don’t want to win in a bidding war. Usually when bidding wars end the winner has overpaid. The winner is the last fool standing. Nobody gets rich paying too much for an asset.

You’re much better off, as a real estate investor, to find the assets that aren’t as desirable today and find a way to create value and make them desirable. This makes more sense than buying the hot products at hot prices and hoping they continue to be the hottest ones.

• “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”You don’t need an MBA to invest in real estate. I have an MBA in real estate and finance … and if anything it made real estate investing more difficult for me for awhile. MBA school teaches you to assess risk in every possible way. It also teaches you how to analyze all the variables in every single situation.You absolutely must consider the risks in a deal. And in fact, I shot a little video a few months ago showing you a simple tool to use to assess risk quickly. And you do need to analyze your options, but there comes a point where too much risk analysis paralyzes you and you really can become afraid of your own shadow ruining your deal. The best thing you can do is focus on each deal …focus on making sure the economic fundamentals of an area are strong and the property is in demand. And then factor in the biggest risks you can’t control to make sure you’re compensated for any real risks you’re taking… and then roll with what comes your way.

  Keep it simple. And then you’ll keep moving forward!
  

• “A public opinion poll is no substitute for thought.”In fact, I would go so far as to suggest that if you do use public opinion for anything at all you use it to judge where the herd is going so you can go the opposite direction.Typically the best real estate deals are found when nobody is buying and the media can’t stop talking about the housing crisis and the poor economic situation of the housing market. And typically when there is talk of everybody and their dog buying real estate for investments that is the time to sell your property or take a vacation while the rest of the world shops for property.No matter what – do your own market research. The confidence and clarity that comes with doing your own research is invaluable even if you do end up heading the same direction as the herd at least you will understand why you did, and be able to recognize and make adjustments if the climate changes.

• “I don’t try to jump over seven-foot bars; I look around for one-foot bars that I can step over.”

Many new real estate investors think they have to find properties for 60% of their market value to be successful. Deals like that do come around, but they aren’t that common (at least they certainly aren’t that common in the areas in Canada where we invest!).

Quite frankly, if you wait for deals like that you could be sitting around trying to be a real estate investor for years. Instead, focus on finding a good area to invest in and then find a good solid property that will be easy to attract tenants to. Over time you will find that you make a lot of money from cash flow, mortgage pay down and property appreciation from that one simple deal. And if you keep doing that… finding one foot bars to step over instead of waiting until you find a seven foot bar you can leap over, you’ll build your wealth steadily and successfully over time.

• “It’s easier to stay out of trouble than it is to get out of trouble.”Oh Warren I wish I didn’t know how true it was. It only takes a dozen or so hours to buy a property where the property manager you hire turns it into a crackhouse and gets you fined for fire code violations amongst other hassles but it can take you years to sell or fix that problem.Sound like a lesson we wish we didn’t learn the hard way?You’re right.

  Spend a day or two doing solid due diligence on every single property BEFORE you buy. Those hours could save you years of stress, thousands and thousands of dollars and even making the news as a the absentee landlord being fined in local crackhouse!

• “I made my first investment at age eleven. I was wasting my life up until then.”
  Time is passing by – whether you’re investing or not. And given that it takes time to build your wealth there is only one thing you should be doing right now… focusing on how you’re going to make yourself wealthier tomorrow by doing something today.

Warren Buffett may not be a real estate investor but he is one of the smartest investors in the world. And his message to me is quite simple … focus, be consistent, follow simple rules, find one good deal at a time and take small steps every day. These are some of the simple things that have brought him enormous success in the stock market and I believe if you follow them they will also bring you enormous success in the real estate market too.

Published on January 20th, 2010