How to Apply Warren Buffett's Investment Approach to Real Estate
Taking advantage of this strategy, used by one of the world's most successful investors, could lead you to major profit in an area you may be overlooking.
At just 11 years old, Warren Buffett learned one of his first lessons about investing. He bought three shares of stock at $38, which quickly dropped to $27 before slowly creeping back up to $40. Young Buffett sold the shares for a small profit. Later, that stock jumped up to $200 a share. Feeling the regret of selling so quickly, he realized the importance of patience in long-term investing.
Warren Buffett learned to play the long game, and his approach to investing can be applied in other areas that some people fail to consider — like real estate. Buying real estate is the most significant investment most people will ever make. It can be hard to imagine that paying such a hefty price tag and keeping up with monthly payments will ever be worth it, but with patience, it pays off to make that long-term commitment. Learn from one of the most successful investors in the world, and transform your perspective on how purchasing real estate (both personally and commercially) can impact your life and business.
1. Make long-term investments
“Nobody buys a farm based on whether they think it’s going to rain next year … they buy it because they think it’s a good investment over 10 or 20 years.”
Young people with only a few years in business may find it less scary or confusing to focus on short-term gains, but long-term investments are the really profitable ones. Warren Buffett doesn't care about getting in on the ground floor or waiting for the perfect time — he looks for solid, long-term investments like when you purchase real estate. Watching his dad, learning from his mistakes and building upon those experiences taught Buffett the benefits of a long-term approach early on.
When you focus on the short-term, it can be hard not to sweat the minor setbacks, so instead of jumping on the bandwagon of a fad, make investments with a broad perspective. I’ve watched business and real estate for over 45 years, seen trends come in, get hot, cool off and become forgotten entirely, all before coming back again like it’s brand new. With a more expansive frame of reference, you can easily see how real estate pays off more than any promise to get rich quickly.
2. Worst case, stay safe
“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”
With a long-term outlook, Warren Buffett knows to plan for worst-case scenarios. Covering your basic needs should always be a part of that plan. An economic crash can leave you with nothing, but invest in real estate, and you always have a place to live or work. Rent a building at $10,000 a month, and when you leave two years later, you’re out a quarter-million dollars with nothing to show for it. Purchase and sell that same building after two years and, even if you only break even, you get back those two years’ worth of payments. Not to mention the income tax deductions that save you tens of thousands of dollars.
Worst-case scenarios can come even in the best of times, but having real-estate investments will cushion your fall. In 2001, I was living in California. My company was worth $100 million, and I was flying high. Then, September 11th happened, and it all disappeared overnight. After 10 years of working my ass off to build my business, I ended up with nothing to show for it. But I still had my house, and that saved me. When I sold it a year later and moved to Florida, the money I made in the sale was everything I had to my name. While spending no time on my house at all, I made over $100,000 just by letting the market flow — money that I used to get my next multimillion-dollar business off the ground.
3. Patience brings great rewards
“Someone's sitting in the shade today because someone planted a tree a long time ago.”
At the core of Warren Buffett’s investment strategy is patience, a skill that requires little effort but goes a long way. Not everyone realizes how much money they can make just by spending years living in their house and paying their mortgage. A working-class retirement may be about $100,000, but buy a home for $100,000 and pay it off over 20 years, and your net worth jumps because that $100,000 house is now worth over $400,000, all from a passive investment in real estate — your home.
No investor can make 120% every two years, but invest in a house, and you can do even better: $150,000 made on the stock market in two years still has a 25% capital gains tax, but just live in your house for the same amount of time, and the government lets you sell it tax-free, up to $500,000 profit per couple. Real-estate prices are the most likely to increase more than any other stock, and last year in Florida, they were up 20%. I bought the building I’m currently in over a year and a half ago for about $2.2 million, spent about $400,000 fixing it, and I’ve already made nearly a million dollars in increased equity.
Related: You Are Your Best Real-Estate Asset
You don't need to be Warren Buffett or have his Midas touch to excel in real estate, but I recommend two rules: First, in real estate, if it sounds too good to be true ... buy it! Ignore the million “what ifs” that keep you from taking action. Second, no matter how big of a mistake you make in real estate, 20 years from now, you look like a genius. Whether you’re looking for a new place for your family or your business, make the commitment, stop second-guessing, figure out the down payment and invest in real estate. Years later, you will thank yourself.
Entrepreneur Leadership Network Contributor