Warren Buffett’s Advice to Real Estate Investors: “Stop Skinny Dipping!”

by | BiggerPockets.com

Have you ever met someone famous? Or gotten to know them?

Be honest—after the initial awe wore off, were you disappointed? Most people are.

One day, my pastor relayed how he grew up in awe of a Boston Red Sox legend. He was thrilled every time that player went to bat, and he dreamed of playing on the same field someday. He worked hard for 18 years, chasing that dream.

Then, he met his idol. Actually, he didn’t only meet him—the legend became his coach!

And that’s when the disappointment set in. The guy was anything but the hero he played on TV. He was quite the contrary, in fact.

My Encounter with a Real Estate Idol

I was in a room a few months back, when one of the nation’s leading multifamily syndicators showed up unexpectedly and grabbed the mic. I was delighted!

I had heard of his exploits but never listened to him speak. But now, there I was, seeing a guy in-person whose story may ultimately go down in history.

He talked about how bullish he was on multifamily. As the author of a humbly-titled book on the subject, I obviously agreed—at least about the multifamily business and its long-term prospects.

Then, he said (I’m not quoting him verbatim), “Don’t worry about overpaying for multifamily. Just get a great property in a great location, and get in the game for the long haul.”

I looked around the room. Was I alone in being shocked? Was this some kind of a joke?

man at desk with hand covering face taking a break from work with glasses and open laptop on desk symbolizing stress, frustration

Related: Thinking About Buying a Multifamily? STOP! Wait Until You Read This!

I waited for the punchline—that he never delivered. He was serious.

And I later learned one of my investors actually saw a document showing that he was buying a large multifamily deal at around a 1 percent cap rate.

I spent some of that day wondering about my life and priorities. My company has been passing on dozens—no hundreds—of multifamily deals over the last four years.

It was always something. Over-priced! Marginal location! Out-bid! (Again.) 

We were sitting on the sidelines while this truly brilliant and savvy guy has amassed a fortune in multifamily and other holdings. He drives the same car as the British royals and has at least one private jet.

Am I the One Who’s Out to Lunch?

What’s more, a few weeks ago, I saw the most recent annual report of multifamily sales from CBRE. The headline proclaimed, “2018 Multifamily Demand Highest Since 2000.”

Here are a few highlights from the report:

  • The U.S. multifamily market remains healthy, as 2018 net absorption reached the highest level since 2000.
  • Construction activity was also strong, with completions only slightly under 2017’s amount. Nevertheless, demand exceeded new supply for the year.
  • The overall vacancy rate of 4.5% in Q4 was down 20 basis points year-over-year.
  • Rent growth climbed to an annual rate of 2.8%, up from 2.3% a year ago.
  • Multifamily acquisitions totaled $173 billion in 2018, the highest level in 19 years and up 12.1% from 2017.

I guess it was the last one that really bugged me: multifamily acquisitions were way up.

So, here I am, the guy who called multifamily “the perfect investment,” going as far as to write a book by that title. I even did a BiggerPockets podcast of the same name!

However, I haven’t been acquiring multifamily lately. In fact, I have been warning people about it being overheated in post after post after post on BiggerPockets.

All of that, and I’m actually an optimist!

But then…

  • I watched a number of friends pay seemingly inflated prices for deals in questionable locations (in my opinion) and still make a killing.
  • I heard one of the world’s most successful multifamily syndicators telling the world why it’s OK to overpay.
  • The new CBRE report explained that scores of others were buying multifamily in 2018.

Meanwhile, my firm wasn’t getting in on any of it.

man looking out over river at cityscape and sunset

What Would Warren Buffett Do?

Confused, I revisited the advice of one of the most successful investors of all time, Warren Buffett:

In a 2001 Berkshire Hathaway investor letter, Buffett wrote, “After all, you only find out who is swimming naked when the tide goes out.”

I also read up on Gary Vaynerchuk, one of the world’s greatest marketers. What did he have to say on this topic?

“That bubble will burst, and then we’ll get to see who’s still around. And then we’ll get to see everyone else who says ‘entrepreneur’ in their Instagram profile right now, when they’re working at Bank of America in 24 months. And so, that’s what I’m waiting for. I’m most excited for, and waiting for, and hoping for, complete global economic carnage, so that we can weed out the B and C and D players,” Vaynerchuk said on stage at the 2018 Consumer Electronics Show.

He continued, “If you’re not a good entrepreneur, you should have a job. Merit and the truth are always the winners, in the macro. We’re just in a micro right now, and people are confused.”

Related: How I Hired Warren Buffett as My Real Estate Mentor

Considering the Advice of Other Major Players

Friends and fellow real estate investors, let’s all remember that some of the best deals you will ever do are those that you don’t do.

Take it from me, the guy who hosts the How to Lose Money podcast and who has made lots of mistakes over decades of investing.

More importantly, you’ve heard it from giants like Buffett and Vaynerchuk.

So, what are you going to do to prepare for the outgoing tide, which is inevitable but impossible to time? Are you skinny dipping with sharks? That could be… well, very painful.

Have you met any of your investing idols? How did it go?

Comment below.

About Author

Paul Moore

After graduating with an engineering degree and then an MBA from Ohio State, Paul started on the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They sold it to a publicly traded firm for $2.9 million five years later. Along the way, Paul was Finalist for Ernst & Young's Michigan Entrepreneur of the Year two years straight. Paul later entered the real estate sector, where he completed 85 real estate investments and exits, appeared on an HGTV Special, rehabbed and managed dozens of rental properties, developed a waterfront subdivision, and started two successful online real estate marketing firms. Three successful developments, including assisting with development of a Hyatt hotel and a multifamily housing project, led him into the multifamily investment arena. Paul co-hosts a wealth-building podcast called How to Lose Money and is a frequent contributor to BiggerPockets, producing live video and blog content on a weekly basis. Paul is the author of The Perfect Investment—Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and is the Managing Director of two commercial real estate funds at Wellings Capital.

48 Comments

  1. Carli Cummins

    I see so many new investors in my market buying SFH and small multifamily properties, regardless of the numbers, just because some guru told them that is how to build wealth. Unfortunately, most of them only see the $$$ on paper and not the true reality of real estate investing. At the next REI meeting I am going to mention your podcast How to Lose Money so maybe it will bring them back to reality! I have been a long-time podcast listener and just recently came across How to Lose Money, love it! Thanks for all of your time and wisdom that you give to the investor community.

      • Bobby Shell

        Yes, thank you Paul. Some friends of mine just bought rentals that cash flow -$200 monthly and they said they are willing to pay these dollars just to get the property. This makes absolutely no sense to me! I am excited for the carnage as well because the smart will thrive and take over.

  2. Pancham G.

    Yet another great post Paul! We all need these reminders from time to time. Nothing is penciling out for us either and I constantly find myself reflecting on what is happening out there. I sometimes have these conversations with myself and think that should we loosen up the criteria and then I see your articles… They bring me back to the real world 🙂

  3. Mike McKinzie

    I see ads all the time in the Los Angeles Times, trying to sell large multi family and BRAGGING about the 1% Cap Rate Return! Right now, a 10 year TBill is paying around 2.6% and a 30 year just over 3%. I am looking into large, multi family right now but are just looking and researching. When the market correction comes, I find free and clear Single Family to be a good safe haven. In 2008, I lost about 1/2 my “Net Asset Value” but my monthly cash flow dropped 0%. Who cares what my properties are worth as long as they cash flow!! The question is, “What did I pay for them?” Paying $120,000 for a house that rents for $1,000 a month is much different than paying $250,000 for a house that rents for $1,000 a month. Multi Family is over heated right now because there is so much money chasing a finite number of units. Who knows, maybe we will see 0.1% Cap Rates advertised as being a great return! NO thank you! Very few folks get truly wealthy on SFR, but the advantages are attractive.

    • Paul Moore

      Great thoughts, Mike. Not many people are buying for cash, but I’m guessing Dave Ramsey would concur with you on this. It’s critical to look carefully at cash flow and take into account what it could drop to in a downturn, and assure that we can handle that potential drop. And we need to compare our returns to the “risk-free” rate as you imply here.

    • Vance Baker

      I feel Mike made a great point there: net worth may drop but, as long as the cash flow remains relatively constant…..who will be swimming naked?
      The population isn’t decreasing and costs of living aren’t going down and new construction isn’t going to decrease in price. Maybe I’m a bit contrary but, how could we experience much of, if any, of declining rent? More and more of the population can not afford to buy a home. That equates to more renters and thus increasing demand which can only result in increased rental rates.

  4. James Gorman IV

    Syndicators typically buy using OPM, Correct? RE Brokers & Agents get paid by selling owners on commission.
    Correct? Noboby lends a 0.1% or even 1%, no matter what your deal is with Fed. Regs. what they are.
    May be we need to be talking about ROI & the cost of money; and let’s not forget about TAXES and changes in
    CPI.

  5. James Rodgers

    This is exactly what I needed to read. I have been looking into a house hack as my first investment for a couple months now, but my market A) doesn’t have many small multifamily units and B) even fewer are on market for prices that make the numbers work. I’ve been wondering if I should just jump anyway to get in, but had been shifting my focus to SFHs. Knowing how hot the SMF market is right now I’m glad to see I’m not the only one who is wary of that particular market right now. Great long term strategy, but at the end of the day the numbers have to work. I keep going back to some other great financial testimonies – “you make money when you buy, not when you sell”.

    • Paul Moore

      James. I’m glad this was helpful to you right now. I actually believe you make $ when you buy, but also when you operate and sell. All are critical to a great investment. That’s one of the reasons we have expanded from multifamily into self-storage and mobile home parks as well. More of a fragmented market so more opportunities to buy right and upgrade. Thanks.

  6. Roy N.

    Paul:

    “Over-priced, out-bid!” …. lots of underwriting practice these past, almost three years, but no real apartment deals. We’ve have a couple of corporations and a large private player over-paying for the better properties for several years now – this has both left only the marginal buildings and locations and over-stimulated owners’ expectations of the price their properties should command. Ironically, many are getting their price.

    • Paul Moore

      That is certainly ironic, Roy. But there will be a shift, and a time of “limbo” where buyers’ offers and sellers’ expectations are out of alignment. There could be a lack of deal flow at that time, then a sudden increase in deal flow at lower prices as sellers realize they missed the top of the market and have a moment of panic. If that happens (it may not), that is the time to buy. Wealth if created by catching a falling knife.

  7. Dylan Tanaka

    Great article Paul. As many of us know those who tout certain investments almost have to say it’s always a great time to buy…which it is. If you can acquire at the proper price and terms. I can only imagine a 1% cap doesn’t make tons of send in 95% of the areas in the US.

    The thing with the pundits and gurus is if they don’t have blind followers they’ll have to go back to pure investing and most of them don’t want to do that.

    I love your WWWBD statement. It’s unlikely the Oracle of Omaha would advise us to jump in on over-priced assets right now. As far as Gary Vee is concerned he says he’s hoarding cash for the inevitable shift.

    Until we see clearer waters investors need do 3 things in my opinion:
    1. Buy for less (or more favorable terms)
    2. Stay transactional
    3. Do way more diligence than ever

    Keep up the great work!

    • Paul Moore

      Dylan,

      Excellent thoughts. I agree. Some of the Newrus (New Gurus) won’t want to go back to making money at pure investing, but they may be forced to. Then we’ll see who is swimming without a bathing suit.

      Can you elaborate a bit on your #2 item above?

  8. Paul Moore

    That is certainly ironic, Roy. But there will be a shift, and a time of “limbo” where buyers’ offers and sellers’ expectations are out of alignment. There could be a lack of deal flow at that time, then a sudden increase in deal flow at lower prices as sellers realize they missed the top of the market and have a moment of panic. If that happens (it may not), that is the time to buy. Wealth if created by catching a falling knife.

  9. Alexandra Walser

    We are just starting to investigate REI, and have joined bigger pockets. This article and many others just confuse us more. I don’t, as a less-than-novice, see any direct advice or opinion here as to whether or not MF is a good investment over others. Where can we find more direct “Step One” input and advice? Thanks!

    • Paul Moore

      Alexandra. I understand that it is confusing. Feel free to reach out to me personally at my profile and I will be glad to do a quick call with you to explain where things stand with MF (IMHO at least). There are some great books out there on MF as well, but they don’t necessarily address the current over-heated situation.

  10. Richard Sherman

    Paul, great article. It is always hardest to go against the actions of the crowd….makes us feel like we are “missing” something.

    We were finally tempted out of cash-only and into financing in the past year and have added around 90 units to the portfolio in the past 12 months, mostly due to the location near existing properties and decent turn around deals combined with VERY attractive financing. That being said, it was things OTHER than the price that made them work (operational efficiencies due to neighboring properties we already own, concessions etc.) SO, I agree with you and I think, other than opportunistic purchases, we are out of the market and stacking cash to be ready.

    Sometimes going against the crowd means just standing still and waiting…

    • Paul Moore

      Richard, thanks for reading. You said: “We are out of the market and stacking cash to be ready.” I think this is a great strategy for a lot of people. We shall see where the market goes in the next 12-18 months.

  11. Ashley Wilson

    Great post Paul. I completely agree you should never overpay for anything, no matter the situation. However, I believe there are still deals to be had in both the SF, and MF spaces. Previously, one’s conversion ratio for MF may have been 100:1, it might be more like 200:1 today, or it may even still be 100:1, but in a different area. As we all know, not all markets respond to cycles the same way. A few examples include examining unemployment rate, concessions, and occupancy in MF across the US during the last recession in 2008-2009. With respect to the SF market, I have been at multiple REI meet-ups where people have said “There are no deals to be found on the MLS”; however, I continue to purchase off the MLS, with my most recent AoS being signed last week. I don’t think one’s parameter’s need to necessarily change, but the way in which one filters prospectives is the secret to still finding deals in a market where competition continues to increase. With respect to how MF will fair during the next recession, I believe as long as you buy right (as mentioned previously), and underwrite conservatively (for example assume a 10 year hold), you give yourself the best opportunity to not only live through the inevitable upcoming recession, but also succeed. Like everything, the MF space is changing. I do believe you can still be successful in this space, and I believe the people who will come out on top are not the ones who are buying everything, and overpaying, but the ones who are most adaptable to its changing climate.

  12. Liang Xiao

    Hello Paul, Thanks for this great article. I am new in this market and thinking to buy a single or multi-family property. After reading your article, I will consider more conservative way to evaluate. Would you mind to give me advice of how you evaluate the market? If a market still giving 10% cap rate now, will you invest in?
    Thank you!
    Liang

  13. Brian Jolliffe

    If you sit on the sidelines and don’t build any credibility as a legitimate player in large deal multi-family, when things go belly up you won’t be in a position to be taken seriously as a buyer. The reality is you will have to prudently “overpay” (not 1% cap, that is suicidal) in this current market in order to put yourself in a position for future success when things become more favorable to buyers.

  14. Dawn matze

    Paul,
    I appreciate the ‘going against the feverish trend’ Whenever I get this feeling that Ive missed something and Im not going to be successful, kind of pressure on myself, I take a step back and remember that, that is how I overpaid in the last fury of 2007 right before the implosion. My age helps me to use previous lessons to my advantage. Thank-you I am a fan of all of your blog posts and BP Podcasts! GO PAUL!

  15. Sam Cherry

    Paul,

    Out of the few BP articles I actually read, you always seem to pop up with the right title and right subject.

    I agree 100% and can’t wait until the next crash to wipe out all the neophytes.

    WARNING: If you are reading this an you have bought a property since 2007 and and your LTV is above 50% of the current market value I am talking about you.

    I went from 1990 until 2000 before I found my first property. I currently own 6 properties and have bought and sold 5 others in my lifetime. I am extremely patient and my last 2 deals have a IRR of 25% and I paid cash for them. I am no guru and I am definately not a high roller but I have learned the hard way and I have seen overleverage kill many people.

    I have been around to see 3 real estate cycles and I can attest that this one that started in 2009 is probably the scariest I have ever seen.

    Of the 6 properties I own I get 6-7 mailers a week and 2-3 phone calls or texts of people wanting to buy them.

    In addition, I get 10 mailers a week and 2-3 emails about financing or re-fiing deals. This is scary.

    It just tells me too many people are chasing to few properties with to much easy money and they are all over paying.

    The problem is I don’t see it subsiding until around 2022 if President Trump gets re-elected. The FED is running scared of him and have backed off raising rates, which is just going to drive this mania (and yes it is a mania) higher.

    So my advice is if you have good properties in good locations then hold them or sell them is so-inclined but forget about finding something to 1031 exchange or re-invest in because you will more than likely be overpaying. Unfortunately there aren’t many alternative places you can invest in, so either pay your notes down or raise cash for the next downturn.

    My prediction is it will get so bad that people will practically pay you to take it off their hands. This is the kind of market that comes once in a lifetime and we will be experiencing it in the next 5 years.

    This generational shift happens and can be best illustrated in the book The Fourth Turning. If you have never heard of this I strongly suggest you do a little research and see what I am talking about.

    Another person I would suggest you do a little research on is Jessie Livermore. All I will say is his statement “buy right and sit tight” is just as important as Buffets quote of “be fearful”

    An finally, if you want to see a market that is truly hated right now I would suggest you look at the gold market. Research it and you will learn volumes that no one will ever teach you.

    We are riding on some of the biggest waves of liquidity the world has ever seen. If you don’t understand what I just said then you really don’t need to be in the real estate game.

    I will leave you with this. If you weren’t burned in the stock market in 1987, 2000, 2004, 2008 or burned in the real estate market in 1990, 2000 or 2008 then you are playing with fire and don’t even know it.

    Unlike any other wounds, severe burns typically are extremely painful, have long recovery times, and leave a scar for the rest of your life. The real estate market right now is like swimming in a sea of gasoline.

    I am not trying to be a debbie downer but I don’t want to see people dramatically hurt and this is the setup right-now.

    Sometime the best investment is the one you don’t make.

    Think about it.

    GLTA

  16. John Teachout

    I believe that there are good buys to be had in any market conditions but I’ve been sifting through a lot of properties and haven’t found one of those “good deals” lately. It’s tempting to just “settle” for as good as I can find but if the numbers aren’t there, we aren’t buying. We only do SFR and are not into multi-family but the market around our area has been overheated in my opinion with investors paying more than they should (also in my opinion of course)
    We are working on being prepared for the next deal we find but not ready to just latch onto anything. We’ll look back on this phase in a few years and either take the position of “we were really smart” or “we were really dumb” and unfortunately, it’s only the hindsight aspect that will inform us of which.
    Good article.

    • Paul Moore

      John, I agree there are good deals in any market condition. You just need to have the experience to know the good deal when you see it, and the connections to be able to actually acquire that good deal. As we all know most of the best deals never make it to the public. Thanks for commenting!

  17. Jeremy Brown

    I started in real estate doing commercial brokerage for a company in Los Angeles who also did syndication in 2005. They were selling off some of their properties in LA and buying multi family properties in Las Vegas and Atlanta at decent cap rates (5-6). They lost ALL of those buildings in foreclosure in 2009. Several of their investors sued them and the litigation in combination with the recession wiped out the company.

    I talked to the principals a few years later and he said that almost half (yes 1/2, 50%) of his tenants stopped or could no longer pay the rent.

    Lesson: This is not a risk free asset class if you have leverage. If you are a cash buyer then you have much less risk, but still not risk free.

  18. Albon Shaw

    Great post Paul! Thanks for sharing, we are wanting to step up from flipping to multi-family and have been considering a lot of pros & cons. It sounds like it’s the same as any shrewd investment, If the price is right. Thanks again!

  19. Jay Kadlec

    Paul, love the article and love your podcast! Been listening to your podcast for about a year now and it’s so much more helpful I think to hear those stories of loss (which usually in the end become gain with persistence) than to hear the big win stories. Keep doing what you’re doing!

  20. Chris Rosenberg

    Warren Buffett also said it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. He has also been known to pay up for wonderful companies with moats and higher intrinsic values based on IRR. He won’t overpay, but overpaying for present value isn’t the same as overpaying for the net present value of future cash flows. His job is predicting the future of wonderful companies and buying at reasonable prices when he figures this out, not waiting for a collapse to start buying cheap companies. I don’t think he would buy a 1 cap but he might buy a 20 p/e with a peg under 1, instead of a 10 p/e with a peg of 3. Not sure how this translates into real estate, but Buffett made his money from appreciation, not dividends.

  21. Adrian Ayub

    As a 21-year-old virtual quick turn real estate entrepreneur and a long distance lord of the land (getting set to 1031 exchange my ragtag portfolio of duplexes and triplexes in Northwest Ohio), I can say this has given me the courage to not be pennywise and dollar dumb when it comes to my first apartment complex. Looking at the price only is not investing and there’s no way I’m not going to pull the trigger on something that fulfills my investment wants and needs. Thank you so much Paul!

  22. David Van Rixel

    A great reminder “some of the best deals you will ever do are those that you don’t do.” I was just talking to another investor today that I’m anxious just because I’m not doing a deal at this exact amount, but that is where mistakes can happen. I’m all for being aggressive as long as it’s smart and in line with overall plans for long term wealth.

  23. Jonathan Twombly

    Hi Paul. As you know, I recently sold everything, taking the chance to act on another of Warren Buffett’s maxims, which is to sell when others are buying. I sold my bad deals because I the money on offer was so good as to turn them into good deals for my investors, and I sold my good deals too because the money on offer made them extraordinary. It’s really difficult to envision a scenario in which waiting longer would result in more upside – especially since every minute I waited increased the risk of waiting too long and missing the best moment to sell. After all, real estate is a market that can become nearly 100% illiquid very fast. When things are bad, you can’t sell at all, even at a loss.

    Bulls and bears make money, but pigs get slaughtered. Waiting longer would have been piggish. I generated 23% annualized returns for my investors by getting out when I did and they are all thrilled. It’s highly doubtful I could have made more for them by trying to time the market perfectly. Instead, I just sold when the selling was good.

    And the selling being good means the buying is bad.

    So many people right now are claiming to be finding the “haystack needle” deals that make sense. But something doesn’t smell right, because there can’t possibly be that many haystack needles when prices are at all time highs and cap rates at all time lows. Something just doesn’t add up here, and when the tide goes out we will truly see that a lot of people were swimming naked.

    • Paul Moore

      Jonathan,

      Thanks for sharing this. Very encouraging to hear that someone of your stature agrees with this analysis. It’s easy to feel foolish sometimes, when so many others keep buying and still keep making money. But for some, the tide will go out someday. I just don’t want to take that level of risk again. Been there… done that before.

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