Warren Buffett and his investment holding company, Berkshire Hathaway, are known for their long-term time horizons when it comes to investments and acquisitions. Buffett and his partner Charlie Munger’s buy-and-hold approach would actually work well for homes, too — yet neither of them are real estate moguls. While they are fundamentally averse to buying real estate directly, this is not the case for investments in the sector.
• Buffett doesn’t buy real estate, only invests in REITs
• Owning real estate contradicts several aspects of Berkshire Hathaway’s investment strategy
• Munger: Real estate would be a “lousy investment” for companies like Berkshire
Real estate generates constant rental income, as long as you don’t live in it yourself, and also offers a high profit potential through increases in value. Nevertheless, star investor Warren Buffett only owns a few hectares of farmland and his own home in Omaha. He bought this back in 1958 for $31,500 at the time, and according to data from the online real estate marketplace Zillow, it was worth around $1.24 million in 2022. Buffett therefore knows the long-term potential for increasing the value of real estate first-hand – and even described the purchase of his own house in the shareholder letter from 2010 as one of the best investments he has ever made. Despite this, neither he nor his investment holding company, Berkshire Hathaway, own any other properties. There are several reasons for this.
Real estate ownership is not an investment, but a business
Owning and managing your own real estate takes a lot of time and is therefore more of a business than an investment. Property owners have to be very active, for example to find new tenants or to maintain the buildings, and in doing so they are repeatedly faced with expenses such as repairs or property taxes, which eat into regular income. According to Benzinga, the “returns to be made from owning real estate are […] a direct result of the time, energy, and money invested in them”. However, Warren Buffett sees himself first and foremost as an investor and after an investment is made, he usually puts his money to work for him without getting too bogged down in the operational interfere with the business of the respective companies.
That makes real estate an unsuitable investment for Berkshire Hathaway
At the Berkshire Hathaway shareholder meeting in 2002, Warren Buffett and Berkshire vice president Charlie Munger also gave a few other reasons why they would not buy real estate outright. For example, the Oracle of Omaha said that real estate “tends to be more accurately priced – particularly more developed real estate” and that it is therefore difficult “to find mispriced real estate”. However, an essential part of Buffett’s investment strategy is finding assets that are undervalued by the market. But since, according to him, the real estate market is obviously more efficient than the stock market, there are simply no such bargains there.
In addition, the legendary investor repeatedly emphasized that he stays within his “circle of competence” when investing – one reason why he joined Apple quite late, which has now become his favorite investment has developed. Buffett also looks to make investments that offer a competitive advantage in the form of a moat. In real estate, however, Buffett and Munger seem to lack both of those prerequisites. “We have no competitive advantage over real estate investors in the industry, and we wouldn’t have if we were operating as a partnership with our own money,” Munger said at the 2002 Omaha shareholder meeting. According to “Finanztrends”, the strengths of the two successful investors lie above all in the analysis of the value of future company cash flows, and not in the analysis of the value development of land and buildings.
There’s also one major downside that Berkshire Hathaway would have to take if the investment company were to buy real estate. Because the holding company would have to pay corporation tax on the income from the rental of the property. “If you operate as a taxable business like ours […]you have a whole host of corporation taxes between the real estate income and the use of the income by the individuals who own the real estate,” Munger said in 2002 “, the Berkshire Vice summed up the situation again succinctly.
Warren Buffett still invests in real estate
However, not buying real estate yourself does not mean being completely averse to investing in real estate. Because Buffett invests with Berkshire Hathaway, for example, via REITs – Real Estate Investment Trusts – in the real estate sector. In 2017, for example, he joined REIT STORE Capital on a large scale. REITs offer a passive real estate investment in which investors do not have to take on any administrative tasks and can still benefit from the performance of a large real estate portfolio. REITs are also treated differently from “normal” companies for tax purposes, so that the economic disadvantage for Berkshire Hathaway that Munger expressed with regard to taxation does not apply to a REIT. According to Benzinga, REITs are also required by law to return at least 90 percent of their taxable income to shareholders in the form of dividends — which should make them particularly attractive to Buffett.
Buffett’s investment company also owns its own real estate arm, Berkshire Hathaway HomeServices. However, this does not invest directly in real estate either, but offers services for residential real estate, such as a brokerage service, advice, real estate valuations and other market data, and is also active in the business with real estate loans and insurance.
Editorial office finanzen.net
– on my own behalf –
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