Warren Buffett is considered one of the greatest investors of our time. From his first investment at age 11 to his peak net worth of over $80 billion, it’s easy to see why. Many people all around the globe have aspired to replicate his incredible success, from the investment world over to the stock market. In good news, it is possible to apply seven of his key investment principles to your real estate investment strategy.
Find quality companies.
Buffett invests in high-quality companies with strong fundamentals, quicker to pay a fair price for a great company than a low price for a mediocre company.
When investing in real estate, invest in quality properties. It seems an obvious observation, but it’s one truly worth understanding. What exactly is a quality property? How do you decide a high-quality property versus a low-quality one? In much the same way as Buffett observes companies, I’m talking about properties that have great “bones” and strong fundamental attributes — such as a desirable location and financials that will make it appealing as a rental property or as a flip. Quality should be top priority within an investment strategy.
Look at your stocks as a business.
In a 2014 CNBC interview, Buffett explained, “If you own your stocks as an investment… look at them as a business.”
When I coach new real estate investors, one of the first things I aim for is to get them thinking like an entrepreneur. Even if they are buying their very first property, having that business mindset is key in achieving success. In my experience, investors who mind the numbers and treat their investment as a business venture do much better than those who only follow their gut. Don’t let this scare you, however; you don’t need to be a mathematics genius to become a data-driven investor.
Invest in what you know.
Buffett is famously credited with saying, “Never invest in a business you do not understand.”
The good news is that analyzing a property is much simpler than analyzing and understanding an entire business. However, spending the time to really get to know the type of properties you are investing in, as well as their market, is extremely important for investment success.
Think about your risk of loss.
Always evaluate the worst-case scenario before investing. This is a great tool to use to get you into the correct mindset, especially if you’re just beginning your investment journey.
When it comes to real estate, understanding your worst-case scenario helps identify your own tolerance to taking risks and supports you in calculating how much reserves you should keep.
One of Buffett’s most important guideposts has been following his investment strategy, not his emotions.
I know many people who always seem to buy when the market is very hot, and panic and sell when it’s not. By having discipline, sticking to a well-planned strategy and not deviating from specific investment criteria, you will avoid making this common mistake.
Identify undervalued stocks.
Buffett is a value investor. That means investing in companies that seem to be trading under the value of the company.
This is an occurrence that frequently happens in real estate as well. The asking price of any property is set by a real estate agent who glanced at a few comparable properties and decided where to set the price with their client. Keep this in mind as identifying underpriced properties is essential to maximizing your success. Ultimately, when investing in real estate, you make money when you buy.
Be aggressive during tough times.
Buffett achieved great success when he saw an opportunity to invest when the market was not favorable.
Real estate investing is also cyclical. I’m sure you’ve heard the terms “buyer’s market” and “seller’s market.” A buyer’s market means that the buyer is advantaged; there’s a lot of supply, and buyers have more negotiating power. As the name suggests, when it’s a buyer’s market, it’s time to buy! Real estate investment is very much a long game, so keep a long-term mindset.
When investing in real estate, it really boils down to a few simple questions:
• Have you done your research?
• Is the property undervalued?
• Is it making money? Have you considered the revenue and the expenses?
• Can things be done to increase its value (and cash flow, if it’s a rental property)?
• Will market conditions help increase the value?
• Is it in a desirable location? Have you considered the quality of the school and the job market, plans for future development, crime, etc.?
• Are there major expenses or other risks you need to consider?
• After analyzing everything, is there another property that has more potential?
By keeping Warren Buffett’s investment principles in mind when investing in real estate, you will be set to start building your own empire and find opportunities in every market condition.