Most real estate investors follow the latest fads when determining what they will buy. They usually focus on short term gains rather than the overall big picture, and tend to buy in environments of economic euphoria rather than environments of economic doom and gloom. They go with the herd mentality.
Warren Buffet’s credentials as an investor need no explaining. And recently he shared the basis of his success with the shareholders of Berkshire Hathaway in his annual update letter. His strategies for investing are simple and easily followed for those that have the patience and persistence to carry them out.
In his letter to shareholders, he used the example of a farm he had purchased, even though he knew nothing about farming. But, by relying on the knowledge of experts in the field, he was able to make an informed purchase decision.
Here are four simple tenets to follow when making a real estate purchase decision:
- Look for undervalued real estate. Wait until the real estate bubble has burst rather than speculating with everyone else during a period of rapid expansion.
From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders.
In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier.
- 2. Find homes for sale that produce a solid income “as is.” Any property you purchase should be able to show value in the income it earns vs the price you paid for it. Future appreciation is for speculators. (And we all know how that can go in the long run.)
With my investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.
- Look for properties that are not earning what they could be earning if managed properly. Many real estate investments are poorly managed and operations could be streamlined to increase productivity by several percentage points.
I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.
- 4. Look at the Macro (overall) picture rather than the micro (small) picture. If a property is producing solid returns, it doesn’t matter if the general real estate market goes up or down. Of course, if it does, that’s a nice added bonus. Look for property that will earn its keep no matter what is happening in the rest of the economy.
My purchase was made in 1986. What the economy, interest rates, or the stock market might do in the years immediately following was of no importance to me in making those investments. I can't remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska.
What does this mean for Las Vegas real estate investing? In the simplest of terms, whether you are buying commercial or residential real estate, make sure to look for property in areas where rents are likely to remain stable and in demand, no matter what else happens in the rest of the world. According the strategies of Warren Buffet, the “Flipping Las Vegas” mentality has no attraction for the serious real estate investor. The only people that make consistent money with that investing philosophy are the sharks promoting it to the innocents who buy their program.
Can I say once again how excited we are to become Berkshire Hathaway HomeServices in Las Vegas at the end of April? We couldn’t ask for a better example to follow. (And obviously Warren thinks real estate companies themselves are an undervalued, underutilized investment since he bought 67% of Prudential’s real estate division!)
Team Leader, The Tonnesen Team
Berkshire Hathaway HomeServices, Nevada
3185 St Rose Pkwy #100 Henderson, NV 89052
With over 30 years of experience helping families call Las Vegas "home!"