Warren Buffett’s Shocking Advice: How to Avoid the Next Real Estate Tsunami

by | BiggerPockets.com

It was a warm and sunny December day at the beach for tourists seeking refuge from colder weather in Khao Lak along Thailand’s western coast. But why were the animals acting so strangely? Why were elephants trumpeting in agitation?

And why were flamingoes and scores of bats taking flight to head inland? Why did typically obedient dogs refuse to take their daily walk on the beach?

Eventually, the elephants’ trumpeting turned to wailing. They became so agitated that they broke their chains to flee to high ground, in several cases carrying startled tourists with them.

While over a quarter million people lost their lives in the devastating tsunami that struck hours later, widespread reports from around the Indian Ocean said the animal population escaped virtually unharmed.

Even at the hard-hit Yala National Park in Sri Lanka, stunned wildlife officials reported that hundreds of elephants, leopards, tigers, wild boar, deer, water buffalo, goats, dogs, monkeys, birds, smaller mammals, and reptiles had escaped unscathed.

“We have not found any dead animals along this part of the coast,” said Goson Sipasad, manager of Khao Lak National Park. He added that all of the elephants under his care went high into the hills and did not return for some time.

Yet more than 3,000 people were killed by the tsunami at Khao Lak alone, according to Times News Network. And the final death toll was a devastating  227,898 human lives across 14 countries.

Frustratingly, seismologists have sophisticated instruments that can measure quake factors during and after the fact, but no one can predict exactly when one will happen.

So, how is it that animals can not only know that a disaster is coming, but also know exactly what they need to do to respond?

It’s undeniably interesting to think about, but you might be wondering what it has to do with real estate investing.

I’m glad you asked.

Small Elephant Family Running in Full Motion Away into the Forest

What Does Warren Buffett Do When Markets Fluctuate?

As some of you know, I’m doing a series of Warren Buffett-related posts with my friends John Jacobus and Bryan Taylor. John and Bryan are investing in mobile home parks right now, and to prepare for that, they spent years gobbling up as much Buffett wisdom as possible. You’ll find them at Berkshire Hathaway’s annual meetings, and if you need to know Buffett’s opinion on almost anything, they probably know it off the top of their heads.

Warren Buffett is arguably the most famous investor of our time. He’s also one of the most successful. So, you may be surprised when I share with you how he thinks and invests with the prospect of an economic tsunami in mind. I know I was.

When all signs point to a potential market boom or market bust, and most investors begin strategizing about what to buy, what to sell, and what to hold in the face of ups and downs, Warren Buffett does absolutely nothing.

Wait, what?

That’s right. Buffett takes no action based on these factors.

Buffett doesn’t look at his investments that way. He doesn’t try to predict market cycles or time his entrances or exits.

Buffett is famous for saying that he cannot predict the market—and anyone who says they can is not telling the truth. Therefore, he wastes no time contemplating what will happen in the future, especially at the macro level.

His steadfast way of thinking boils down to the fundamental stance that he views his decisions based on individual business and investment opportunities. He analyzes investments using a margin of safety and often completely ignore any predicted macro trends.

At the 2003 annual Berkshire Hathaway meeting, Buffett said:

“We have $16 billion in cash not because of any predictions [about a market decline], but because we can’t find anything that makes us want to part with that cash. We’re not positioning ourselves. We just try to do smart things every day, and if there’s nothing smart, then we sit on cash.”

Humans don’t seem to have the abilities that some animals do to predict tsunamis and other natural disasters. And the same applies to markets and macro trends.

So, if you can accept that this is true for you, just like it is for Buffett, maybe you should consider reducing your exposure to these disasters—literally and metaphorically.

Don’t live next to the ocean. (Buffett lives in Omaha, after all.)

Related: What Would Warren Buffett Do? 12 Quotes for Smarter Investing

More Buffett Investing Wisdom

Check out this excerpt from Buffett’s 1988 letter to shareholders:

Considering Berkshire’s good results in 1988, you might expect us to pile into arbitrage during 1989. Instead, we expect to be on the sidelines.

One pleasant reason is that our cash holdings are down—because our position in equities that we expect to hold for a very long time is substantially up. As regular readers of this report know, our new commitments are not based on a judgment about short-term prospects for the stock market. Rather, they reflect an opinion about long-term business prospects for specific companies. We do not have, never have had, and never will have an opinion about where the stock market, interest rates, or business activity will be a year from now.

Even if we had a lot of cash we probably would do little in arbitrage in 1989. Some extraordinary excesses have developed in the takeover field. As Dorothy says: “Toto, I have a feeling we’re not in Kansas any more.”

We have no idea how long the excesses will last, nor do we know what will change the attitudes of government, lender[s]and buyer[s]that fuel them. But we do know that the less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs. We have no desire to arbitrage transactions that reflect the unbridled—and, in our view, often unwarranted—optimism of both buyers and lenders.

In our activities, we will heed the wisdom of Herb Stein: “If something can’t go on forever, it will end.”

sea wave during storm in atlantic ocean

How Should Real Estate Investors Apply Buffett’s Advice?

Yesterday, one of my California investors emailed to get my opinion about whether or not she should invest in a rental home in a resort area on Florida’s coast. After all, prices there have more than doubled since the recession, and they seem to be going up with no end in sight.

I kindly pointed out that Florida residential prices also fell over 50 percent in the last downturn. And while some investors have made a fortune timing the market in Florida, I reminded her that they had the discipline to buy at the bottom.

But this ain’t the bottom, sister.

I reminded her that certain types of real estate have inherent predictability and stability that you can’t get by investing in stocks, commodities, and other investment vehicles.

Since real estate investors have this wonderful benefit, why should we add an unnecessary layer of risk into the mix? Why would we mess it all up for ourselves?

This is one of many reasons that my partners’ and my funds are invested in mobile home parks and certain self-storage assets. These asset types did very well in the Great Recession—and have done very well in boom times since.

Think about it.

If I was your landlord and I raised the rent on your thousand-dollar apartment by 6 percent, you may choose to move rather than pay me an extra $60 per month. This is especially true if you know you plan to rent long-term, and that means $720 extra this year—and even more next year.

But if you are renting a self-storage unit from me for $100 per month, and I raise your rent by 6 percent, you will probably not take a day off work, rent a U-Haul, and recruit your friends to help you load up all your stuff and move it down the road to save $6 per month.

For reasons like this, self-storage tenants are inherently “sticky,” meaning they tend to rent for quite a while.

Or let’s say you live in a mobile home park and a professional new owner takes over from a mom and pop. In addition to cleaning up the place and adding amenities, you learn that your lot rent is going up by 10 percent—from $300 to $330.

You may be mad. But are you going to spend $5,000 to hire someone to pick up your trailer and move it down the road to a crummier place to save $30 per month? Not on your life.

And if you get laid off, or your income drops, or you don’t like the idea of living in a mobile home park anymore, where else will you go? The price of every other option is substantially higher.

(Please don’t tell me you’ll move to a yurt. I know some people who did that; no one visits them. It’s not surprising given the place smells like body odor… and goat milk.)

This is why mobile home park tenants are inherently sticky, too.

Related: BiggerPockets Podcast: $600,000 Per Month in Gross Rents from Mobile Home Parks

Relatively Stable and Predictable Investment Opportunities

There are other real estate asset classes that are largely predictable and stable. And like self-storage and mobile homes, many real estate investments have stability and a lot of upside, too. Look for asset classes and deals that provide:

  • Steady income that will continue to flow during good times and bad
  • Opportunities to force appreciation by increasing income and compressing cap rates
  • Mom and pop-owned and operated assets (where you can pay a fair price but there is a lot of meat on the bones to increase income and value)
  • Assets in the path of growth (population and job growth are key indicators)
  • Operator-partners who have weathered multiple economic storms and have a long-term view like Buffett

If you’ve already decided to invest in real estate, you have made a decision to invest in stability, predictability, and a future of enjoying surprising tax breaks and compounding wealth, which are uncommon in the world of investing.

And you have a chance to join Warren Buffett and America’s first Nobel Prize winner in the field of economics, Paul Samuelson.

Paul once said, “Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Or move into the path of the next tsunami. Both are exciting! And deadly.

Me? I’ll take my chances uphill with the elephants.

What about you? Do you seek roller coaster-like thrills when investing and enjoy buckling in and riding out extreme ups and downs? Or do you enjoy the peace of mind provided by stable, long-term investments?

Let’s discuss in the comment section 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.

11 Comments

  1. Brannan Beasley

    Excellent advice for times like these, and rare (and welcome) to see patience, moderation, and fundamentals instilled as guiding principles. When people are foaming at the mouth to buy real estate, it’s hard to resist joining the party by investing outside your area of experience and fundamentals. Tough times for most cash flow investors right now.

    I aspire to owning mobile home parks or storage units but am not at that level yet. The bullet-point principles at the end are good criteria for solid investments. It might be a topic for it’s own post, but with your experience in larger multifamily (and now self-storage), what advice can you give on how to make the jump from a small portfolio of small multifamily and SFRs into commercial? How do you get to that scale? I’d love to own the mobile home park; right now I own the mobile homes.

    Thanks again for this article and the others you’ve written, “We just try to do smart things every day” is going to be my new motto.

  2. Josh Collins

    Paul,
    Very good article. I’d also like to add one more idea to add to your list above: Buy in good markets for less than the cost to build. With construction costs of materials, property, and labor going up, demand is going to outstrip supply which will inevitably push rents up too. I think this makes for an even smoother transition when raising rents.

  3. Josh Brook

    Fantastic article! I’m really glad you’re doing this series.

    Another Buffett takeaway is his practice of buying businesses that have a “moat.” This is another way investors can protect themselves from market drops and competition, too.

  4. Michael P. Lindekugel

    with all the garbage on the internet too many people erroneously believe that there is some magical way of analyzing and investing in real estate. there is not. it is the same exact financial statements and financial analysis for any asset class – buying stocks, bonds, pizza franchise, REIT, real development, duplex, 1000 unit apartment building, strip mall, hotel, fix and flip.

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