Warren Buffett, investing guru and the fifth richest person on the planet, said, “Risk comes from not knowing what you are doing.”
Jimmy Buffett, musical icon and lead Parrothead, said, “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.”
To Warren’s point, real estate investing is only risky for those who don’t bother to learn about its nuances. And Jimmy tells us that while we can’t control real estate market fundamentals, if we understand them, we will know how to react. Both offer wisdom that can teach us about real estate investing.
To provide insights on surviving the buffeting of challenges in buying real estate, we offer a buffet of knowledge inspired by our two favorite Buffetts :
Real Estate Growth Isn’t a Straight Line
Warren Buffett is known for his wry take on things, and real estate investors can learn from his whimsical take on patience. “No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.” Real estate investing requires patience and an ability to ignore short-term price fluctuations.
As with most asset classes, real estate is subject to periodic highs and lows. Remember that real estate investing is a long-term undertaking. Property values may temporarily drop. Don’t get spooked if you see that the value of your investment is down somewhat. Remember that, with time, it will gain back that loss and more. Be patient.
Take Advantage When Prices Drop
A temporary drop in the real estate market can be a great time to add another property to your portfolio. Warren urged investors to “be greedy when others are fearful,” meaning that when uninformed buyers are afraid to make purchases because prices are down, savvy investors can win by being brave. In a down market, you can buy while real estate is on sale. Then, when the recovery inevitably happens, you see a quick increase in your equity.
Start Early
Jimmy said he is “…inspired by people who keep on rolling, no matter their age.” And no matter how old you are, there is still time to benefit from real estate investing. Buying a property with positive cash flow–meaning the rent is higher than the expenses–means you instantly have a monthly income. However, the longer you own a property, the better the numbers look. Thanks to appreciation, your rents increase over time while a fixed-rate mortgage payment stays the same. As if that weren’t already great news, the property appreciates so that when you finally sell it, you receive an excellent payday that you can use to fund your retirement or supplement other income. So the earlier you start, the better, and the best time to start is now. Then you can let the money keep on rolling in.
Property Selection is More Important than Price
The cheapest house isn’t always the best deal. When choosing a property, don’t be lured by low prices alone. Getting a great deal is fantastic and can help a property be more profitable. But it’s only a great deal if it makes money. Warren explained this concept well when he said, “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.” You’re buying homes instead of companies, but the same concept applies.
You wouldn’t buy an ugly shirt just because it is cheap. And you shouldn’t buy a property just because the price is low. Yes, you need to look at properties you can afford, and you do need to ensure you aren’t paying more than it’s worth. But far more important than getting a cheap property is getting one that can start making you money immediately.
You want a turn-key property ready to rent rather than a home that needs extensive work. Ideally, you’ll also purchase a home that will be cash-flow positive. A low-cost house that will bring in a very low rent still loses money. Always run the numbers before jumping on a deal.
You also want investment properties in neighborhoods with rising prices rather than those that seem to be fading, even if that requires paying a bit more. That will increase the likelihood of seeing rapid equity growth.
Focus on buying wonderful rental properties rather than just cheap homes.
Don’t Be the Source of Your Own Failure
Over the long term, real estate makes money. Look at any graph showing average real estate prices, and you will see that the trends are always upward. That means your investments will succeed–you will make a profit–if you give them time. When you look at the reasons real estate investments fail, you’ll see that they all come down to not giving the venture enough time. If you give up too soon, you may be the cause of your own failure. Jimmy sings, “Some people claim that there’s a woman to blame. But I know it’s my own damn fault.” Don’t be at fault for your own investing failures. Give your investments the time required for them to grow.
Having this more profound understanding of investment properties will help ensure you enjoy eating a Cheeseburger in Paradise, thanks to the financial success of informed real estate investing. If you follow the advice of Messrs. Buffett, you will automatically be abiding by Warren’s famous edict: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.”
