What would Warren Buffett say about how I approach my property investing?
And why do I even care?
Well… Buffett who is 90 years old is consistently ranked amongst the world’s richest people, is arguably the most successful investor of the 20th century, and has an estimated net worth of $107 Billion.
This means, he’s earned (on average) over $11 million each and every year of his life, which is thousands of times more than the average worker in Australia earns.
Anyway… I think he’d be impressed with how I invest because there are some similarities in our investment philosophies.
Now don’t get me wrong…
Clearly, I’m not in Warren Buffett’s league as an investor and Buffett much prefers investing in companies than buying real estate.
And of course, he really wouldn’t bother himself with how I do things, so all this is hypothetical.
Having said that, I’ve grown a very substantial property portfolio over the last almost 50 years of investing that has given me financial freedom and choices in life, so I thought it would be an interesting exercise.
Here’s what I’ve done…
When I first started investing I really didn’t know what I was doing and I made more than my share of mistakes.
Luckily around the time, I bought my first property in the early 1970’s Gough Whitlam became prime minister and inflation in Australia rose from 5 per cent to over 15 per cent.
Now it’s amazing how rampant inflation pushes up property values and helps cover up mistakes.
The problem is, one of the worst things that can happen to a novice property investor is to get it the right first time!
It gave me a false sense of confidence and invincibility.
However, rising interest rates, a recession, and falling property values in the early 1980’s taught me a few important lessons.
Fortunately, I developed an investment strategy over the years, (I really didn’t have one when I started) using a Top-Down approach to select the right location, and then my 6 Stranded Strategic approaches to ensure I only buy the type of property that will outperform the averages in that location:
I recognise the location will do 80% of the heavy lifting of my property's capital growth, therefore I only invest in selected suburbs of our 3 big capital cities.
Of course I recognise that other areas are going to exhibit capital growth as well, but I don't fight the big trends – I recognise that the big capital cities with more jobs are going to be created and in particular more higher paying jobs (Skill level 1 and 2 jobs) which are going to attract more affluent people who can afford to and will be prepared to buy properties which will keep pushing a property values.
I then invest in the more affluent, established established money suburbs with a high proportion of what the ABS classes as Skill level 1 and 2 workers – people who earn more than the average.
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These will often be gentrifying, aspirational, and desirable lifestyle suburbs in the inner and middle ring.
By the way… these are areas which will not only attract more affluent owner occupiers, but more affluent tenants who will be able to pay higher rent over the years.
People will be renting in these more affluent suburbs for lifestyle reasons, not just because they can't afford to own a property.
1. I buy a property below its intrinsic value – that’s why I avoid new and off-the-plan properties that come at a premium price.
2. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area.
This will be an area where more owner-occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have high disposable incomes.
3. I buy the type of property that would appeal to owner-occupiers because they’re the ones that drive up property values.
4. I look for properties with an element of scarcity - not look alike legoland apartments or houses in estates where there is no shortage of land. Abundance of supply is the enemy of capital growth.
5. I look for properties with a high Land to Asset Ratio - that doesn't mean necessarily mean a large amount of land, – it means more valuable land because of its location, including the land below underneath family-friendly apartments in low density blocks.
6. I look for a property with a twist – something unique, special, different or scarce about it and finally…
7. I buy a property where I can “manufacture” capital growth through refurbishment, renovations or redevelopment.
Warren Buffett’s Investment Philosophy
As I said, Warren Buffett invests in companies not property, and of course not just any company – he has a set of strict selection criteria.
- Rather than investing in the latest fad, he invests in tried and proven industries. This is why he didn’t get burned in the tech wreck of the early 2000’s.
- He understands the importance of timing and countercyclical investing.
- He doesn’t buy cheap companies – he buys great companies with strong brand value and growth prospects.“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
- He buys these companies cheaply (below intrinsic value.) For example he bought companies like Gillette and Coca Cola at great prices - and has made an absolute killing.
- He buys companies with strong upside potential.
- He invests for the long term. “ If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes”
Can you see some common threads here?
So how would Warren Buffett buy Australian real estate?
Again this is just a hypothetical exercise and I’m just guessing what he’d do, but if Buffett were buying properties in Australia he’d most likely look for 5 things.
- Property in an area with strong capital growth prospects.
- Property that’s he can buy for less than the true market value – because he always wants to buy with a margin of safety.
- Property that’s unique, special or different – something that creates a level of scarcity – what I call a “property with a twist.” Just like Buffett bought Cocoa Cola because its brand makes it difficult for competitors to catch up.
- He wouldn’t chase the latest “hot spot”
- He would buy properties to hold in the long term, and not consider trading or flipping.
So just like Warren Buffett carefully selects his investment targets, if you want to become a successful property investor it’s important for you to develop a set of strict selection criteria for your property investments.
Let’s finish with a great quote from Buffett:
'I am a better investor because I am a businessman, and a better businessman because I am an investor.'
The lesson: strategic property investors treat their investments like a business.