Real Estate Investment Advice From Warren Buffett

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If you’ve ever longed for real estate investing advice from the “Oracle of Omaha,” your wait is over. In his latest shareholder letter (released March 1st, 2014), Warren Buffett shares the details and lessons learned on two of his real estate investments that – spoiler alert – were wildly successful.

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Real Estate Investment #1 – Farmland

Mr. Buffett purchased 400 acres of Nebraska farmland in 1986 from the FDIC at a fraction of the property’s prior loan balance. Investment results: 28 years later, the farm’s earnings have tripled and the property is worth 5 times more than what Mr. Buffett paid. Smoothing out the cash flow growth over the hold period, this would equate to an estimated 15% unleveraged return.

Real Estate Investment #2 – Retail Building

The second real estate investment discussed is a New York City retail property that Mr. Buffett purchased with legendary NYC real estate investors Larry Silverstein and Fred Rose. The partnership acquired the property in 1993 from the Resolution Trust Corporation, the entity that was created to liquidate bank owned real estate and distressed loans stemming from the savings and loan crisis. Under the RTC’s supervision, the retail building was floundering as the largest tenant’s rent was substantially below market, which was a temporary constraint on earnings. Investment Results: annual distributions now exceed 35% of the partnership’s initial equity investment and the property was refinanced twice, enabling the partners to take special distributions totaling more than 150% of their initial investment. It’s always more fun when you’re playing with the house’s money.

Here are some quotes from the shareholder letter regarding these investments followed by my own takeaways:

“You don’t need to be an expert in order to achieve satisfactory investment returns”

I would guess that Warren knows very little, if anything, about running either a farm or a large retail property. Case in point, he’s never seen the NYC retail investment and he’s been to the farm twice in 28 years. However, Mr. Buffett is certainly savvy enough to recognize an investment opportunity and partner with expert operators to execute a turnaround strategy. As a real estate investor, you have to be willing to invest outside of your home market and trust your team if you want to achieve superior returns. Don’t let proximity dictate your acquisition targets.

“Focus on the future productivity of the asset you are considering”… “If you instead focus on the prospective price change of a contemplated purchase, you are speculating.”

This is a great reminder for real estate investors. Just focus on cash flow, forget the residual sales price forecast. This is difficult to do when you have a shorter duration investment, but if you’re able to hold a property for a longer horizon, don’t worry about the exit cap rate projection (assumed sale price). When pushing to win a deal, it’s too tempting to try and make a higher offer price work by fiddling with the back end cap rate (just ask California trophy apartment investors buying sub 4% cap rates). Instead, focus on the controllable – the property’s stabilized cash flow – when analyzing a prospective deal.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there — do something.”

The illiquid nature of real estate is often cited as a negative. However, this illiquidity protects investors from themselves and their emotions. If CNBC told you that the value of your rental property plummeted by 30% today due to a flash crash, you couldn’t panic sell even if you wanted to. Provided you don’t over-leverage, it is much easier to stay the course (buy & hold) with investment real estate than volatile stocks, where paper losses are just as painful as actual losses.

“Income from both the farm and the NYC real estate will probably increase in decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.”

I don’t know about you but this sounds pretty good to me. I invest in real estate precisely for this reason; I believe it represents the best opportunity to build a legacy of passive income for my family. This might sound daunting, but to Mr. Buffet’s point, you don’t need dramatic gains or even amazing deals to achieve this. Thanks to real estate’s generous tax advantages (depreciation, 1031 exchanges, etc.), rent inflation and forced debt reduction (through amortization), even modest portfolios can provide ample income for your retirement and heirs.

Related: Warren Buffett Cautiously Optimistic About Housing Market

Two additional lessons learned from Warren’s real estate investments:

1.  Banks and loan servicers hate seeing real estate on their books for a reason, they’re horrible investors.                 

Not only are they willing to liquidate balance sheet holdings at fire sale prices, the bank’s asset mangers typically do a lovely job of reducing earnings while the property is under their control. Often these managers / servicers miss easy opportunities to maximize cash flow because they are working a large pool of properties just trying to stoop the bleeding. This leads to easy operational improvements for an active, professional real estate investor that can buy a bank owned property (REO), inject a little equity for capital and tenant improvements and dramatically increase occupancy and thus property value.

2. It’s hard to get hurt when you’re buying properties that offer normalized 10% unleveraged returns.        

It’s implied that both the farm and the retail building were underperforming at the time of purchase, but both assets were projected to deliver 10% yields under typical operating circumstances. Focusing on what Buffett likes to call, normalized earnings, enables real estate investors to recognize buying opportunities. When buying real estate, the current cap rate is typically the headline. However, most people are blinded by the circumstances of the present (or recent past) and overweight the probability that the situation will remain the same. While its always difficult to buy after dramatic decreases in prices, if you can see a clear path to stabilized occupancy / earnings, pull the trigger – major real estate downturns don’t occur every year.

I’m certain there are 10 additional lessons in these two case studies that I’ve overlooked. But that’s the genius of Buffett – his advice seems light and plainspoken, yet the teachings run deep. You might not feel the same, but I was thrilled to read some of Warren’s thoughts on real estate investing. As a professional real estate investor, I’ve often felt cheated that the world’s greatest investment mind has spent a lifetime sharing his invaluable wisdom on the stock market while the real estate world is stuck with Donald Trump and whatever he happens to be selling. At least we had professor Buffett for a day.

Photo Credit: Mark Strozier

About Author

Brad Johnson

Brad is the co-founder of Park Street Partners, a private real estate investment firm focused on mobile home park investments. Park Street Partners seeks to deliver outsized cash flow returns through syndicated real estate investments to help its investors achieve their financial goals.


  1. Except for the bank servicing comment, I think most of his advice applies to how he runs his stock investing business too. Maybe I’m going against the grain here, but I honestly don’t get too excited hearing real estate investing advice from someone who has only done two deals (even though they were great deals) in his life. I’d rather hear from the guys in the trenches any day of the week 🙂

  2. Sara Cunningham on

    I agree with Sharon, he is so hands off that I would much rather be talking and listening to people on ground level who have real experience due to personal involvement. Interesting article though thanks for sharing.

  3. Interesting article. I’m a big Buffett fan. A couple of comments:

    “Focus on the future productivity of the asset you are considering”… “If you instead focus on the prospective price change of a contemplated purchase, you are speculating.”

    True for long term buy/hold. However, I think there are exceptions for flippers (obviously), but also when there are market irregularities

    “Income from both the farm and the NYC real estate will probably increase in decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.”

    One of Buffett’s big constraints – and he’s talked about this many, many times – is that he has so much money to invest. He can’t invest in smaller companies (like buying $1m in a company), because even if they increase by 1000% over the next 5 years, the impact on the portfolio will be so small that it won’t be worth the effort, because he has hundreds and hundreds of millions to invest.

    • Brad Johnson

      Thanks Adrian. The suggestion to analyze a property based on stabilized cash flow (vs exit price) certainly isn’t applicable to flips. However, if you’re buying an apartment building or other commercial property, this might prevent you from buying a deal that only “pencils” if you’re able to sell the property for substantially more than you paid for it. Some investment firms, including my own, assume that the exit cap rate will be slightly above – or at least on par – with your purchase cap rate. This takes non-operating related appreciation out of the equation. While this standard isn’t perfect (as cap rates could certainly increase dramatically over your hold period – especially if interest rates spike) at least the success of your deal will not complete hinge on your ability to predict future cap rates

  4. Good article,
    I too, am a huge Buffet fan and have wished that he would talk more on RE. Just wondering here… am I wrong, but did he not invest in the rail road rights of some sort a few years back, and if he did, wouldn’t that be considered RE (and a lot of it)? Think about it, he owns strips of land from coast to coast… I’m sure that some of you know and could help me out on this.

  5. Warren has wanted to invest in residential bank owned (REO) property for years but has admitted that it is too much trouble for big investors like him to deal with so many properties. There are a few investment firms that have managed to get into the market though.

    Therefore residential property is a good opportunity for the smaller investor, however I would like to add a couple of “real life” points” to this advice….

    Before you purchase an investment property make sure you are aware of all property taxes, HOA fees, and any rental restrictions the community may have. I encourage investors to do conservative, not aggressive math before buying.

    Call a local property manager for a quick rental valuation, then work out what your bottom line is after all expenses including vacancies, leasing costs, repair costs, etc… and be conservative in your expectations. Don’t just trust the sales agent’s valuation of rental property, they have too much of a conflicted interest.

  6. Good Article Brad,

    However just like Sharon said, There is nothing new in the sky here. Owning 400 acres of farmland in Nebraska (Nebraska – the Midwest / heart of farm country), and owning a retail building in NYC ( one of the most expensive markets for RE), does not require any special genius to figure out that the investment will work out either way.

    I too would rather get the inside scoop from someone currently doing deals, coz the RE Market is dynamic and has subtle or not so subtle changes that dramatically affect the outcomes of each investment type i..e flips, buy hold, lease options etc.

    And finally this Adage of “Banks are not in the RE business so they will be dying to discount their REO Inventory to you the investor to get the non performing assets off their books…..” This is not the case right now, at least not in my market- North east, MA. As a realtor I can see that REO inventory is just a handful, usually less than 10 in most markets. The banks are now doing the fix ups themselves and selling these props for higher value, as opposed to just discounting them to investors. My Broker is a licensed GC and is always rehabbing REO for asset managers and selling them on the open market.

  7. I was thinking about getting some real estate to invest in. If I can get some properties, I’ll be able to fix them up, and rent them out. My body is starting to break down on me, so I need a fallback job. This seems like it’s the best way to go for now.

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