Warren Buffett: Why Real Estate Is a Lousy Investment

Warren Buffett prefers to invest his capital in things that both create consistent cash flow and also grow in value. Ownership of whole companies and investments in stocks of the best companies at a good price are his preferred investment vehicles for Berkshire-Hathaway and himself.

While real estate can hold its value during inflation as a hedge against a devaluing currency most of the time and produces some cash flow it doesn’t have asset production value so it doesn’t have the ability to scale. Buffett prefers holding stocks of companies that produce commodities like oil and gold during a recession as a hedge not real estate.

He has bought and owned farmland when he was young that produced a harvest each season. So he does like the production value of farmland but not the cash flow structure of collecting rents on real estate holdings. I would also assume he liked the diversification of more customers with a business with the ability to grow and scale versus the fixed amount of tenants available to rent and lease to with real estate.

“We have both had a fair amount of experience in real estate, and Charlie made his early money in real estate. The second point is the more important point, real estate is not a commodity, but I think it tends to be more priced-particularly more developed real estate, most of the time.” — Warren Buffett

“Now, during the RTC period, when you had huge amounts of transactions and you had an owner who didn’t want to be an owner in a very big way and they didn’t know what the hell they owned, and all of that sort of thing. I mean you had a lot of mispricing then, and I know a few people in this room that made a lot of money off of that, but under most conditions it’s hard to find real estate that’s mispriced.” — Warren Buffett

“I mean when I look at the transactions REITs engage in currently, and you get a lot of information on that sort of thing, they’re very similar and it’s a competitive world, and you know, they all know what a class A office building, you know, in Chicago or wherever it may be, is going to produce. They at least, may all be wrong because of some unusual events, but it’s hard to argue with the current conventional wisdom most of the time in the real estate world.” — Warren Buffett

“Occasionally there have been, you know there could be, big opportunities in the field, but if they exist it will certainly be because there’s a-they’ll probably be a lot of chaos in real estate financing for one reason or another. We’ve done some real estate financing and you have to have the money shut off to quite a degree to probably get any big mispricing across the board.” — Warren Buffett[1]

“Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees.” — Warren Buffett

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