Warren Buffett is without doubt the greatest investor of all time.
He has a great track record of creating and maintaining his wealth through share investments, but many of his principles also apply to property investors. So let’s look at some of Buffett’s investment principles and see how we can apply them to our property investing.
ADHERE TO A PROVEN STRATEGY
Buffett’s success has often been put down to his extraordinary patience and discipline, never deviating from his proven investment strategy even when faced with short term changes in the market. This is a great lesson for property investors, as most don’t have a plan or adhere to a proven strategy.
If you don’t have an investment strategy to keep you focused, how can you hope to develop financial independence?
It’s too easy to get distracted by all the “opportunities” or attractive deals that keep cropping up. Unfortunately many of these supposed opportunities don’t work out as expected. Look at many of the investors who bought off the plan or in the next “hot spot”, only to see the value of their properties underperform. We need to think in terms of income, not appreciation.
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.
INVEST COUNTER CYCLICALLY
Buffett is a renowned counter cyclical investor, advising:
“We attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
This is also the investment strategy of many successful property investors and has proven to be a winning formula for many who invested in property last year when many predicted that property prices would fall further.
So be skeptical of conventional wisdom – not because the crowd is always wrong but because the crowd is always late. If you want to know what’s coming up in 2017, explore it here.
INVEST FOR VALUE
Buffett is a value investor who says:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
And it’s the same with property. You make your money when you buy your property but not by buying a bargain.
You lock in your profits by buying the “right property” – one that will outperform the averages in the long term because of its scarcity or the potential to add value. 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.
Remember, the price you pay for a property isn’t the same as the value you get. Successful investors know the difference.
SPECIALISE – DON’T DIVERSIFY
Buffett has adopted a very focused investment philosophy, investing the bulk of his funds in a few companies.
However, most investment advisers would suggest diversifying. This is really just playing the game of investment not to lose rather than playing the game to win and leads to average results.
On the other hand, successful investors specialise. They become an expert in a niche and reproduce the same results over and over again
SOMETIMES IT’S BEST TO DO NOTHING
A great quote from Warren Buffett is:
“The trick is, when there is nothing to do – do nothing.” Yes, sometimes, “nothing” is the best thing you can do.
Yet many investors get itchy feet and want to do more, put another deal together or buy another property for fear of missing out. There are stages in the property cycle and times in your investment journey when it is best to sit back and wait for the right opportunities because wealth is the transfer of money from the impatient to the patient.
INVEST FOR THE LONG TERM
Buffett admits he can’t predict which way the markets will move in the short term and he is quite certain no one else can either.
So instead, he takes a long-term view of the market saying if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.
Similarly those who have created wealth out of property took a long-term view.
This doesn’t mean buy and forget – you should regularly reviewing your property portfolio.
When was the last time you checked to make sure you were getting the best rents or that your mortgage was appropriate for the current times?
Maybe it’s time to refinance against your increased equity and use the funds to buy further properties?
And sometimes it is appropriate to consider selling an underperforming property to enable you to buy a better investment.
DON’T INVEST IN ANYTHING YOU DON’T UNDERSTAND
During the boom years investors’ hunger for returns took them into exotic terrain, whether they realized it or not.
Property promoters often promised large profits using opaque schemes, and the same is starting to happen again as they new property cycle rolls on. Warren Buffett never invests in anything he doesn’t understand – nor should you.
MANAGE YOUR RISKS
Many investors don’t fully understand the risks associated with property investment and therefore don’t manage them correctly. One common error is not having sufficient financial buffers to see them through from one property cycle to the next.
Smart investors have financial buffers in their lines of credit or offset account to not only cover their negative gearing but to see them through the down times like we experienced in the last few years. They don’t only buy properties; they but themselves time. Another way smart investors minimize risk is to buy their properties in the correct ownership structures to legally minimise their tax and protect their assets.
A final lesson from the master is that bad times will come and go with surprising frequency over our investing lifetimes, but if we have a plan and stay focused on sound financial strategies, we can gain financial independence through prudent investing.