The brick has always been one of the most popular options from an investment perspective. Buying a property and letting it pay off: you buy a property with bank money and then let the tenant pay the mortgage, while the property continues to gain value.
Brick never betrays, some say. But how come legendary investors like Warren Buffett don’t invest in real estate?
Over the years, the Oracle of Ohama has provided some clues in his letters to Berkshire Hathaway shareholders and in television interviews. From these we can identify the 3 main reasons why Warren Buffett does not buy real estate.
Three reasons why Buffett doesn’t invest in the brick
The first reason is that rents are generally perceived as passive investments. It is thought that it is enough to buy a property, rent it and let passive income accumulate while doing other things. But the reality is very different and Buffett knows it well. In a 2012 interview, the investor explains that if there was an efficient way to invest in rents, he probably would, but management makes it impossible.
Studying the different markets and sub-markets, knowing the value of the property, looking for it, negotiating, obtaining a loan, deciding whether or not to carry out renovations, monitor them, find a good tenant, carry out repairs … in short, there is no shortage of work and in some sense renting out a property becomes more of a part-time job than a passive investment.
People like Buffett are very aware that time and work have value and that, once accounted for, rental returns are pretty disappointing in most cases.
The second reason is to understand your own circle of skills. Buffett is very good at understanding his circle of skills and respecting it. He made his fortune by investing in consumer goods, retail and insurance. He knows these sectors very well and has a competitive advantage over other investors.
But he also knows that this is not true for the real estate sector. While he certainly has skills and probably knows more than most of us, he is still at a disadvantage compared to funds that invest in real estate. At a previous annual meeting, Charlie Munger, Buffett’s right-hand man said: “We have no competitive advantage over experienced real estate investors… We have no specific industry expertise and that means we spend almost no time thinking about it. And then, as regards the properties that we actually owned, I would say that we have achieved poor results “.
Reason number three, difficulty finding opportunities. Buffett is a valuable investor. Look for opportunities for exceptional returns, but sadly, there aren’t many such opportunities in the real estate sector. In a previous interview, he explains that: “In most conditions it is difficult. It is a very competitive world. In most cases, property prices are more accurate ”. This makes sense when you think about it. The property is not a commodity, but it is closer to being one than a normal commercial activity. You have four walls and a roof, and then you earn a rental income by renting it. It is quite simple to understand. Cash flow is steady and predictable, and fair value can be easily determined, at least relative to a business.
As a result, there are fewer mispricing and opportunities for value investors like Warren Buffett. Most real estate investors buy properties at around market value and then make money by holding them over the long term.
Basically Buffett has a better alternative, namely invest in REITs, listed real estate investment funds. To give some examples, in the past it has invested in Tanger Outlets (SKT), General Growth Properties, Vornado (VNO), [ora Brookfield (BAM)], Seritage Growth Properties (SRG) and STORE Capital (STOR), recently acquired by Blue Owl Capital (OWL). Bottom line, Buffett rarely invests in real estate because it’s not his specialty, but when he does he tends to favor REITs over rentals.