“From time to time, you have seminal personalities who really change the way the world sees itself – people like Gandhi, Martin Luther King, Nelson Mandela. Warren Buffett is that kind of person in the business world” —Guy Spier
I am a huge Warren Buffet fan. He is truly one of my heroes!
It is not an exaggeration to say that I quote him like the Bible.
Through years of success, Buffet has been affectionately called the Oracle of Omaha.
His success is the stuff of legend. The chairman of Berkshire Hathaway, he has an astounding 20%+ return on his investments over a 54-year history.
That is unheard of!
There is so much that this man can teach us.
But how does this apply to real estate?
Well, let’s get into it!
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
When the markets are doing well, people are often fearful that they are missing out. And when things are going bad, they are fearful their investment will do poorly.
Now, this isn’t to say that fear or greed are good, but it is a saying to think about.
See the fear and greed in others and move in the other direction. Be willing to separate from the pack. If everyone else is doing the same thing, there is a good chance the market is flooded, or they are lemmings about to race off of a cliff.
What this boils down to is to be a contrarian investor.
If you see everyone doing something, do the opposite.
This relates to what is going on right now in 2021. The stock market is high. Single-family real estate is high. And this makes you wonder… what comes next?
Again, be willing to do the things that others are not. Look at alternative ways to use your money to invest.
Buffet, for example, is currently sitting on a huge cash reserve (estimated at around $100 billion!) waiting to see what is going to happen next.
If, for example, there is another recession or pullback in the stock market, having cash reserves is a great idea.
We can’t all have the luxury of waiting on our cash piles, so look at alternative assets.
Think of things like multi-family syndication where you will generally have ROI passively.
Look at other real (physical) assets such as gold and silver.
This isn’t to say never invest in stock or other forms of investment. But this quote from Buffett reminds us not to fall into the herd mentality that has led many investors astray… or even off the deep end.
“Margin of safety”
Buffett says that the three most important words in investing are:
Margin. Of. Safety.
What does he mean by that?
Well, if you think that you are always going to have these crazy returns, then you are going to be very disappointed.
Everyone knows that in life sometimes things can go better than expected. But that is not always the case.
Things can also go much worse than expected.
So when Buffet is talking about the margin of safety, he is saying to be conservative in your investments moving forward.
Estimate of what you expect the ROI to be. Then plan for the outcome to be half as much.
For example, in a multi-family deal in Dallas, you may expect a 5% rent growth based on previous years. But going forward, use the 2.5% rent growth number to plan out the deal.
This gives you realistic expectations in case something goes wrong, and you have that extra wiggle room in case you need it.
You don’t want to be shooting for the best-case scenarios when it comes to investing.
Not having a good margin of safety is how you get burned.
That is why I always preach to dig into multi-family deals. You want to make sure that the sponsor considers the margin of safety. Without it, you are opening yourself up to much more unneeded risk.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
In this quote, Buffet is hitting home that it is better to find rock-solid investments rather than bargain basement ones.
But often people go against this advice, and they go for the lower sticker price.
This is something I see in real estate investing all the time.
Early investors will often buy C or D class properties in run-down neighborhoods. Or they buy something cheap, but then they have to sink in much more money into the property to make it workable.
Long term, these investments never go as well as you hope. They always have more costs that you aren’t going to be able to plan for.
Think of real estate as a company. It is better to find a more expensive “wonderful company” than the “fair company” that will cost you more over time.
Keeping with the metaphor, you want to look at the business plan of the investment.
That is why I always recommend multi-family syndication. These deals are set up like business to generate profit for you and everyone else involved.
Look at the minutia. Look at the area, the rent growth, and the sponsor’s history of turning a profit. Find the underlying details of the business.
Do the work to find that “wonderful business” that may cost a little more upfront, but will make you much more in returns over time.
Overall, Buffett encourages us to:
1. Be conservative –
Look at all the possible outcomes, not just the best possible ones. Make sure you understand everything that could go wrong and don’t overpay.
2. Be patient for the right deal –
There will be a time when you wish you had the cash for the good deal that is coming along.
Right now with the possibility of post-pandemic inflation, for example, is a great time to invest, but don’t let yourself fall for a deal that isn’t just right.
Do the work, and the investment will work for you.
What is the work you need to do to get into passive multi-family deals? Well, I got you covered!
Check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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