Warren Buffett Doesn't Buy Real Estate

…glad I learned this lesson at a young age – stocks for the long run.

Why Warren Buffett Doesn’t Buy Real Estate And Most Other Investors Shouldn’t Either
https://finance.yahoo.com/news/why-warren-buffett-doesnt-buy…

Buffett isn’t opposed to investing in real estate and has invested in several real estate investment trusts (REITs) over the years. However, he knows it makes little sense to get into the business of being a landlord.

intercst

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And that’s the thing. Owning rental houses is not an investment, it is a business.

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I have had no regrets after selling my rental…. Except the tax bill.

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Warren Buffett doesn’t do a lot of things, that doesn’t make them bad. He doesn’t buy sports teams and watch their value skyrocket. He doesn’t buy tech and make a fortune. He doesn’t do venture capital. And, apropos to this thread he doesn’t do real estate.

I’ve told the story enough times to be bored with it, but I was a landlord. It probably took 12 hour a year, except in exceptional circumstances, as happened two or three times across my one holding. The only downside for me was that the condo was in Boston while I bounced around the country, making those occasional trips more difficult than if I had a more steady line of employment.

I had one tenant stay 11 years, another 5 or 6. (I rarely raised the rent, encouraging them to re-up. Less hassle for them, less hassle for me, mail them the new lease, done.)

At the beginning I took a $5,000 loan from my father, used it to secure a $65,000 bank mortgage, lived in the place for a couple years then rented it out for the next 35 years. Sold it two years ago for over a million. The tenants “paid the mortgage” for all but a couple months of those years, and it became significantly cash flow positive quickly, especially considering the tax breaks I got (depreciation! Yes!) along the way.

So, I turned $5,000 into $1,000,000 over 35 years, a compound rate of 16.5% including two large recessions of the 80’s, the recessionette of the 90s, and the financial collapse of 2008. (Actually I turned $0 into a million, but it’s hard to calculate a rate for that.) There was never a time when I couldn’t find a renter, nor was I worried about “my business” going out of business.

Like with companies it depends on buying right at the beginning and watching it along the way, but it was not significantly more labor intensive than, say, reading somebody else’s annual report once in a while.

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Like with companies it depends on buying right at the beginning and watching it along the way, but it was not significantly more labor intensive than, say, reading somebody else’s annual report once in a while.

Yep. Real estate is a business, not an investment, but it can be a very good business if you have good timing and good tenants.

My landlord, who has 5 SFH’s total, and manages them himself, bought this one for $300k in 2016. It’s now worth $500k. My rent is $2,300, increasing by $50/month each year, per the lease, through mid-2024. No rent control here, so who knows what the increase will be in 2024? Landlord’s property taxes went up 17% recently (to $4,300/yr), and if this house were available now he could get close to $3,000/mo, so we’ll see.
Meanwhile, he says we’re perfect tenants, which is true. So it’s all working out very well for him.

Working out well for DH & me also. I don’t feel like moving again anytime soon, and our index funds are doing well. The house we sold for $1M in 2018 is now worth $1.3M, so we “lost” $300k, but our net worth is up by about $300k (despite a tax hit from converting trad IRA’s to Roth’s in March 2020), so it’s all good. Not as get-filthy-rich-by-renting as intercst, but our housing requirements are different from his, so, given that, good enough.

All that said, I wouldn’t want to be a landlord myself. Just not suited for it, personality-wise.

OP’s linked article argued in favor of REIT’s instead of owning individual properties, to get the benefit of real estate without the headaches. From the link:
“Buffett isn’t opposed to investing in real estate and has invested in several real estate investment trusts (REITs) over the years. However, he knows it makes little sense to get into the business of being a landlord.”

From an owner’s POV, an REIT is better, but that’s unfortunate, because from my POV as a tenant individual landlords are best. I’m on my 3rd (since 2018), and they’ve all been great.

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net worth is up by about $300k

Actually, that’s just the appreciation on our taxable accounts. Doesn’t include what we’ve put into them since 2018, which we can do because rent is less than the cost of ownership so far. Looking at total net worth, not just investment returns, wow, maybe we are on an intercst-type path!

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Goofy writes,

So, I turned $5,000 into $1,000,000 over 35 years, a compound rate of 16.5% including two large recessions of the 80’s, the recessionette of the 90s, and the financial collapse of 2008. (Actually I turned $0 into a million, but it’s hard to calculate a rate for that.) There was never a time when I couldn’t find a renter, nor was I worried about “my business” going out of business.

Like with companies it depends on buying right at the beginning and watching it along the way, but it was not significantly more labor intensive than, say, reading somebody else’s annual report once in a while.

You have to admit that your Boston condo was off the charts in terms of investment returns. The average small landlord isn’t getting anything like that. It’s more akin to me buying DELL and PFE in the early 1990’s.

When I was working for Exxon in the early 1980’s as a 25-yr-old, it seemed about half of the older guys in the office had strings of rental properties and the other half invested in the stock market. I just watched and learned. It became apparent that the guys with the rental properties were a lot busier on the weekends. I played golf and tennis with the stock guys.

And of course as we’ve all learned, you don’t even need to read annual reports and invest in individual stocks (Heresy, I know.) The return on a portfolio of 2 or 3 index funds is quite ample and will beat most of the people researching and buying individual stocks. Why spend (and waste) the time?

intercst

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"Why spend (and waste) the time?

intercst "


Some folks enjoy learning about industries and companies - and as long as a person does not get
pulled into an investment simply because a company becomes an interesting story (I have lost
money after thinking “What a great idea!” several times by not doing sufficient investigation
into the company management and implementation of the “great” idea) the time is not wasted.

Howie52

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Howie explains,

"Why spend (and waste) the time?

intercst "

**************************************************************************

Some folks enjoy learning about industries and companies - and as long as a person does not get
pulled into an investment simply because a company becomes an interesting story (I have lost
money after thinking “What a great idea!” several times by not doing sufficient investigation
into the company management and implementation of the “great” idea) the time is not wasted.

If you’re doing it for entertainment, why put your capital at risk? Just buy the index fund and beat the vast majority of your peers. You can still create a fantasy stock portfolio to indulge your passion for “investing”.

intercst

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Y’all sure that Mr Buffett does not buy Real Estate?

I mean, sure, this could be two individuals (Berkshire & Hathaway), who merged their businesses together

https://losbanos.bhhsdrysdale.com/

Or perhaps not?

HohumYNWA asks,

Y’all sure that Mr Buffett does not buy Real Estate?

I mean, sure, this could be two individuals (Berkshire & Hathaway), who merged their businesses together

https://losbanos.bhhsdrysdale.com/

Or perhaps not?

That’s a real estate brokerage firm collecting “the skim” of a sales commission from the sellers in the transaction. Big difference from putting your own capital at risk.

You either want to be collecting “the skim” for yourself, or minimizing it, if you’re the one paying it.

intercst

Personally I think real estate is one of the best ways for someone to accumulate wealth. Having someone else pay off your mortgage and the use of leverage is hard to beat. I never did it much because of my risk aversion to going all in on any form of investment.

I had one SFH home that I rented out for 8+ years and had an opportunity to get in deeper during the 2008-11 crash in RE prices in AZ but I didn’t think I had enough cash, and was of an age where if something went wrong, I wouldn’t have had enough time to recover. As I thought at the time, it would have been a very lucrative time to invest.

I’ve known more than a few military guys who on their postings (at least in the past) would buy a property and then rent it out as they moved to their next posting. They would accumulate a number of properties and most did quite well.

I realize there is a segment of people here and elsewhere that just fear renting real estate but it works far more often than it fails. Just a matter of being very careful or finding a quality property manager to vet renters. In some states it may be more difficult.

I certainly think it is much easier to multiple money into a large pile in real estate than in stocks.

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“I certainly think it is much easier to multiple money into a large pile in real estate than in stocks.”

One of the problems of real estate is when you go to sell your collection of rental properties after 20-30 years. When the mortgages all paid off…and you’ve written them off with depreciation over the years. You get to pay full income tax rates on the gains.

With stocks, you only pay capital gains on the sales price.

Makes many older folks ‘reluctant’ to sell their properties and have to take the tax hit. But they still need maintenance, likely have been depreciated to zero, and still give you ‘cash flow’…

There have been times when folks have lost a bundle on a house they bought at the wrong time…and the market there crashed. Houston…Denver…

With interest rates ratcheting up…who knows what happens to house prices. Mortgages are up to 4% now, and with more inflation, maybe 8%. I remember by first house in the late 70s. Think I had an 8.5% mortgage rate then on my first 1300 sq foot house, 3 bedrooms, in rural VA on 5 acres.

Moved in 1983 to NOVA and think that loan was big interest rates too. Did fantastically well…house value nearly doubled in 7 years.

TX…well…can’t say much for annual increases. Some folks around here have a string of rental properties…but they keep them busy. Not worth it.

t.

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I’ve known more than a few military guys who on their postings (at least in the past) would buy a property and then rent it out as they moved to their next posting. They would accumulate a number of properties and most did quite well.

I believe you’ve been fooled by survivorship bias. You didn’t see the much larger number of guys who lost their shirt.

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That’s a real estate brokerage firm collecting “the skim” of a sales commission from the sellers in the transaction. Big difference from putting your own capital at risk.

You either want to be collecting “the skim” for yourself, or minimizing it, if you’re the one paying it.

intercst

And that collecting “the skim” is different from one of BH’s pillar investments, insurance, exactly how?

…the guys with the rental properties were a lot busier on the weekends…

As my financial advisor says, “Your stocks might nosedive, but they’ll never call you at 3 am about a clogged toilet.”

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Personally I think real estate is one of the best ways for someone to accumulate wealth. Having someone else pay off your mortgage and the use of leverage is hard to beat.

Yeah, I thought that for a long time, and I think it’s true SOMETIMES. Right time and right place, etc. I read Goofy’s story and admire that and am happy for him… but it’s certainly not always the case.

I became a landlord somewhat involuntarily when the real estate market hit its nadir and I had to move. Had the best tenant for 6 years, during which the market recovered and the house appreciated a lot. I felt rich.

But then good tenant left, average tenant came, and so did some unexpected repairs along with some expected repairs.

Then came terrible tenant, COVID, changes at my management company, and some more repairs caused by and exacerbated by terrible tenant.

I made the decision to sell last year. After tallying everything up, I would have come out financially better if I’d sold the house at a loss back in 2012 and moved on, and been emotionally way better off without the stress and worry.

I think probably if I powered through and held on to the house for another 10 years I’d have been in good shape, but at the same time with the day-to-day stuff, it wouldn’t have been worth it.

Might have been different if I’d not been 8 hours away to keep a better eye on things, and if managing my real estate portfolio was my full time job.

Every situation is different, though, and I know people do well. But I can’t discount the fact that sometimes a little luck is involved.

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I became a landlord somewhat involuntarily… I would have come out financially better if I’d sold the house at a loss back in 2012…

Ric Edelman used to say (probably still does), “Never rent out a house you’d rather sell.”
At retirement seminars sponsored by DH’s company, a common question is, “If I’m downsizing and my house doesn’t sell, should I just rent it out until the market improves?” The answer is always, “No.”

There are people who like to be landlords, which is great. Presumably they do better financially than reluctant landlords; at least, I hope so! It would make sense that pro-actively buying a house for the purpose of renting it out, after first running the numbers to assure a satisfactory positive cash flow, would provide a better result than finding yourself with a house you don’t want and just trying to make the best of a bad situation. A bit of luck is required in either situation, but I think more so in the latter.

Ric Edelman used to say (probably still does), “Never rent out a house you’d rather sell.”
At retirement seminars sponsored by DH’s company, a common question is, “If I’m downsizing and my house doesn’t sell, should I just rent it out until the market improves?” The answer is always, “No.”

Yeah, wish I’d read that at the time! :blush:

I’m pretty happy with nice “set it and forget it” index funds, with a small sprinkling of individual stocks. No repairs, no crazy tenants moving 20 people in, and I can cash out in a day if I want to. I’m not saying I’ll never be a landlord again, but I probably won’t.

With stocks, you only pay capital gains on the sales price.

Or never. With a diversified portfolio of a few broad index funds, there’s never the need to sell big chunks if you have enough. Live off the dividends and interest and perhaps sell a few percent a year to get to a 4%SWR. Die someday and your heirs get the step-up (which, as we’ve seen, is in the crosshairs). But a 3-fund portfolio reduces the risk of individual stocks, individual properties, and the need to sell big chunks of your portfolio.

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