Lessons from Buffett's key principles

(File pix) Invest passively in return for extra money or build a sustainable real estate portfolio for big and long-term gains. Archive image for illustration purposes only.

By K. BEGUM for NST Property- May 31, 2018

HOW do you invest in properties and make money from them? Real estate investing is a great business option for most investors.

A good line of credit can go a long way in helping you establish a successful real estate portfolio.

Do it right by investing in progressive, forward-moving areas and you can reap big financial benefits in the form of short-term and long-term gains.

You can either invest passively in return for extra spending money, or build a sustainable real estate portfolio for big and long-erm gains.

Warren Buffett, the chairman and chief executive officer (CEO) of Berkshire Hathaway, is widely considered as one of the greatest investors of all time.

He is currently the third-richest person in the world, with a net worth of US$84.7 billion (RM337 billion). While he made most of his money from stocks, having started at the tender age of 11, real estate investment has also contributed to his wealth.

Carrie Law, CEO of China’s real estate website Juwai.com, has reinterpreted Warren Buffet’s five most important principles that can be applied by property investors.

“By following his advice, you can look forward to many profitable years,” she said.

BUY AND HOLD, AND HOLD, AND HOLD

“Stick with big easy decisions and eschew activity”. Buffet likes to buy an asset “for life” and this differentiates him from investors who buy and sell for quick gains.

He says of all the assets available for investment, only a relatively handful are both of high quality and available at a low price. Finding these true gems could take a lot of hard work.

If you find a great asset that is of high value and generating returns, why not hold to it for life? Once you sell it, you will have to find something else to put your money into.

In real estate, the transaction cost is often high and consists of taxes, commissions, and closing expenses. Buying and holding a great asset keeps your transaction cost to a minimum.

TIME IS YOUR FRIEND

Time is “the friend of the wonderful investment and the enemy of the mediocre”. Your investment will generate cash flow and capital gains over the years and you can reinvest the cash to create more gains.

This is Buffett’s gold standard — an investment which generates cash that can be reinvested to generate more cash, which can in turn be reinvested to generate more and more cash.

PREPARE FOR BAD YEARS

Investors should always be prepared for “economic discontinuities”. Adopting this approach in real estate investment is easy as long as you are realistic and take a long-term view. In any market, there will be good and bad years.

Protecting yourself from disasters during a bad year is more important than earning a little during good years. This is to ensure that your long-term returns will be much higher.

Buffett’s taste for debt is very low and this aversion to leverage has dampened his returns over the years but helped him sleep well. He believes it is “insane to risk what you have and need in order to obtain what you don’t need”.

Property investors should keep their debt low enough to be manageable even during a stretch of bad luck. Just as Berkshire uses the float from its insurance companies to make more investments, you can use equity from your existing assets to fund additional acquisitions.

But don’t risk being forced to sell an asset at a discount because your debt is too big to service.

BUY DURABLE COMPETITIVE STRENGTHS

Look for companies with durable competitive strengths. For real estate investors, this means purchasing properties with valuable features and add-ons, including a central location, access to transit, proximity to good schools, low operating costs, and water views.

Many amateur investors are lured into buying properties in marginal neighbourhoods where prices seem to be growing more quickly than in more established locations. In bad times, marginal locations are the first to lose value. Look for safe value rather than risky gains.

PAY A SENSIBLE PRICE

Buffett’s key tenet — only buy if you can obtain a sensible purchase price. Investors should always measure price against value, not against the market average. By acquiring assets at a discount from its true value, you give yourself a “margin of safety” which will protect you from possible losses.

The desire to acquire good assets at good prices is also behind Buffet’s famous rule: “You want to be greedy when others are fearful. You want to be fearful when others are greedy. It’s that simple,” he says.

When others are fearful, they are willing to sell assets for less than their true value. It’s an opportunity for smart and brave investors.

Buffett has beaten the stock market over the past 53 years and more than doubled the wider market’s compound annual gain. US$1,000 invested with him in 1964 would be worth almost US$16 million today.