Warren Buffett, Chairman and CEO of Berkshire Hathaway
In todays market I find it to be very similar to years gone by. When investing in real estate the most important thing is to buy right. The number of people who watch a TV show and believe they can buy a house put some hard work and money into it and flip it for a profit is huge. I truly feel that they are absolutely correct if they follow a few basic guidelines. I know your setting there thinking ” right or whatever”. The truth is, yes just about anyone can buy a house and flip it. Now some are more successful than others and some actually fail at it, but the key to house flipping or farming or what ever business you get into is understanding the business. If your not an expert become one, if you don’t have the time then bring on a team member who is. After years of research and listening to multiple investors I would agree that location is a crucial part of house flipping. The second piece is buying it with value built in already ( buying right or below market value ) this is even harder than location. The third piece is to hire the right team to do the work. In the world of real estate investing time is money and your time is best finding money and finding deals. To many investors hear the term sweat equity and do the painting themselves. Hire professionals so you can have more projects working than one at a time.

There are numerous billionaires out there who give advice all the time. Does this make them an expert because they have lots of money ? Well kind of, it makes them smart enough to know that if they didn’t know part of their business the people they surrounded themselves with sure did. I once heard a quote from Sam Walton ” Would you rather have slow quarters or fast nickels? ” So I took that to mean in his business of retail that volume was everything. Real estate is no different, today the real estate agent that is successful surrounds themselves with a team. On most teams today you have a buying agent, listing agent, admin and of course the owner or broker. I ask you why would a successful agent want to bring in people who he has to split his commission with and increase his operating cost? It is simple “fast nickels” they see the benefit of volume. Plus when they go on vacation the business is still operating. I find today that the age of buying a house and renting it out till its paid off and then find the next one and repeat is a thing of the past. Todays house flipper or landlords are understanding the idea of fast nickels also. I have interviewed many Real Estate investors or flippers and one commonality of the most successful ones tell me its all about finding the money and finding the deals not swinging the hammer. In fact most of them have never actually done any of the demo you see so much on TV. Funding for flippers is a huge business, many people find that their 401ks have not done so well over the years and are moving it into a self directed IRA so they can invest it with real estate re-developers for a healthy return. Remember become the expert or hire one.

I have to share with you an interesting read about a billionaire that goes right along with what I have been saying.

There is no lack of information available about the institutional investment strategies of the world’s billionaires — how they move money in their capacity as the heads of large public companies and investment funds — but how often do you get the chance to look inside the personal investments of those billionaires? And how often does a billionaire offer you insights that you can use in your investing?

Warren Buffett did just that with his annual letter to the shareholders of Berkshire Hathaway (BRK-A), which he sent late last month. In it, he highlighted two personal investments in an area he is not normally associated with — real estate.

He talked at length about a 400-acre farm he bought in Nebraska and a retail property purchased near New York University and in the process provided a number of lessons for anyone thinking about investing in real estate. Here are five takeaways from the letter and Buffett’s words supporting each.

1. Invest in Undervalued Real Estate

From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier.

And….

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to NYU that the Resolution Trust Corp. was selling. Again, a bubble had popped –- this one involving commercial real estate –- and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

2. Think in Terms of Income, Not Appreciation

With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.

If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.

3. Focus on Underutilized Properties

I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

And regarding the New York property …

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the project’s space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings.

4. Use Partnerships to Fill In Gaps in Your Expertise

I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be.

And …

I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

5. The Macro View Is More Important Than the Micro

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following –- 1987 and 1994 -– was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.

Conclusion

Perhaps unsurprisingly, Buffett’s philosophy on investing in individual companies is similar to the one he applies to investing in real estate. Find investments that produce income, have long-term value prospects not currently being recognized by the market, and, once you buy them, increase their operational and managerial efficiencies to maximize recurring revenue.

These are ideas that you don’t need to be a billionaire to understand, nor to put them into practice in your own portfolio.

Brian Lund, AOL.com

Mar 24th 2014 10:10AM