Most investors would agree that Warren Buffett is one of the greatest investors of our day and perhaps all time. He is widely known for his ability to pick winning stocks, which is what earned him the nickname Oracle of Omaha. However, his advice to investors can be applied to other areas like business and real estate investing. Forbes offered seven ways you can take to apply Buffett’s teachings to real estate investing.
1. Look for quality.
This first step may not obviously apply to real estate investing, but it can still by applied. Buffett focuses on high-quality companies that have strong fundamentals. He would rather pay a fair price for an excellent company than a little bit for a mediocre firm.
The same holds true when it comes to investing in real estate. If a property is ever being sold for less than what you think it should be worth, then you should be asking questions to find out why it is so cheap. Some issues can be fixed, and it is possible to find good deals. However, it is better to hold out for a quality property than to invest in one that is cheap but probably won’t be very good.
To identify quality properties, it’s essential to look for those with good bones. Cosmetic issues can always be fixed, often for very affordable prices. However, problems with the location cannot be fixed. Fundamentals are also important, so you should look for properties with attractive financials that make it a good investment as a rental property or property that can be flipped.
2. Real estate investing is a business.
It’s also important that you view all of your real estate investments as a business. Buffett told CNBC in an interview in 2014 that investors should look at their stocks “as a business.” He advises investors to think like an entrepreneur when investing in stocks.
This bit of advice may be easier for those interested in real estate investing. After all, many properties will go on to become rentals after they’ve been fixed up a bit. Even flipping a property is good business.
The key here is to look for deals that just make good business sense rather than going with your gut feelings. Investments should be driven by data and financials rather than guesses or speculations.
3. Stay in your circle of competence.
Warren Buffett has also spoken and written time and time again about what he calls his “circle of competence. He advises investors not to invest in companies or industries they don’t understand. This is exactly why Berkshire Hathaway stayed away from technology stocks during the late 1990s and early 2000s. Buffett didn’t understand the sector, so he avoided it.
When it comes to real estate investing, staying within your circle of competence is much easier. Of course, this means that you should take the time to understand the business side of things before you ever get started with it.
It also means that you should take the time to understand every property you buy before you buy it. Before you sign on the line, you should already have a plan for what you will do with it, whether that involves turning it into a rental property or just outright flipping it. It’s also important to understand not only the property you intend to invest in but also the market it is in. If you don’t understand the property and the market, it’s best to move on and find something else.
4. Don’t forget about the possibility of loss.
No investment is a sure thing, and real estate investing is no different. Thus, it’s important to realize that there is always some level of risk involved, no matter how much of a sure thing a property appears to be.
Before buying or investing in any property, you should consider what the worst-case scenario might be. This is a critical part of the process because it will bring you back down to earth if it feels like you’re getting too excited about a particular property.
Understanding the worst thing that could happen to any property will also help you figure out where your own risk tolerance stands and determine how much you should keep in reserve.
5. Remain disciplined.
It’s also important to remember to follow real numbers and concrete data rather than your emotions. It’s very common and quite easy to have a knee-jerk reaction to movements in the stock market, but it is possible to have sudden reactions to real estate investments as well.
By creating a strategy and sticking with it, you will be able to keep your wits about you when everyone else is panicking or getting overly excited about the market.
6. Look for undervalued properties.
One of Buffett’s main guidelines when it comes to identifying stocks to buy is looking for value stocks, which are those that are undervalued. It is possible to do the same thing in real estate investing.
Real estate agents set the price of properties after looking at the prices of comparable properties and speaking with their client about where they want to set the price. There will always be opportunities presented when prices are set lower than what the property is worth. If you have taken the time to get to know the market and the type of property you’re looking into, then you should have a good idea of when something is undervalued. This will give you a chance to take advantage of these underpriced properties.
7. When the going gets tough, be aggressive.
Finally, there will always be difficult times in real estate investing, just as there is in other kinds of business and investments. Sometimes the market as a whole will not be doing very well, but an aggressive investor can still find opportunities, even if those opportunities won’t pay off for a while.
Like most value investors, Buffett is very patient when it comes to investing in underpriced stocks. He goes in with a long-term mindset, and the same should be true of real estate investors. The market may be down temporarily because there is an oversupply of properties, and that’s the time to buy. However, you may have to wait a while if you’re going to flip the property because you will need to wait until the supply is less to bring in whatever the property is really worth.