One of the most interesting things about Warren Buffett (Trades, Portfolio)‘s career, in my opinion, is the fact that this billionaire investor has never owned a significant amount of real estate investments. Most wealthy individuals do own large real estate portfolios, and some individuals have made vast fortunes investing in real estate alone. However, Buffett is not one of them.
Buffett’s property portfolio
Based on the public knowledge available to us, the Oracle of Omaha does not have significant real estate holdings. He owns his home in Omaha, which he has owned for decades, and he used to own a holiday home in California. He also owns a farm, which he acquired decades ago, though it seems unlikely that he manages the farm himself.
On the other hand, Charlie Munger (Trades, Portfolio) has had a significant interest in the real estate space in the past. He made his first million dollars by developing properties, and he still has a hand in property developments to this day.
Buffett has remarked before that one of the reasons why he does not have any significant real estate interests is the fact that he does not particularly understand the sector.
He likes to invest in companies and sectors he understands well and knows how and why they make money. It seems as if he does not understand real estate as well as he would like.
Avoiding the market
Lack of understanding appears to be the primary reason for avoiding the sector. But there is also another reason why Buffett is not particularly interested in property. Buffett once said:
“I mean when I look at the transactions REITs engage in currently, and you get a lot of information on that sort of thing, they’re very similar and it’s a competitive world, and you know, they all know what a class A office building, you know, in Chicago or wherever it may be, is going to produce. They at least, may all be wrong because of some unusual events, but it’s hard to argue with the current conventional wisdom most of the time in the real estate world.”
Buffett likes to invest in the stock market because he believes the auction nature of the market throws up more opportunities for astute investors to acquire pieces of businesses at depressed valuations.
It is far harder to do that in the real estate market because it is a lot easier to know the market price of these assets. The price of these assets is well advertised and is easy to benchmark against other assets in the local region.
What’s more, because it can take many months to process a transaction, buyers and sellers do not have to accept deals offered at that very minute.
Stocks can decline in value by a double-digit percentage in a single day, throwing up a potential bargain for those investors who can move quickly enough. Real estate is nowhere near as volatile.
Buyers and sellers also tend to anchor around the purchase price. If they cannot get an offer around the price they paid, they are generally unwilling to go ahead with a deal. They will just wait until a better offer comes along, which could be several years. If they can afford to wait, they will. There is very little psychological aspect as there is in equities.
Ithink that is the main reason why the Oracle does not invest in a big way in real estate. He cannot get the deals he wants. Therefore, there are not as many opportunities to take advantage of. That has been the core principle of his investment strategy since the late 1950s - finding something cheap other investors are avoiding for one reason or another.
Investors do not have to follow this approach, and there are many ways to profit from real estate investing, but it is worth noting that there are other ways to make money that may be better depending on the individual investor.