Is Real Estate a Lousy Investment? A Buffet Perspective.
Real Estate is arguably a safe mode of investing and to a greater extent guarantees safe returns over time. However, the Oracle of Omaha, Warren Buffet does not consider Real Estate a worthy Investment. In fact his investment partner, Charlie Munger joins him in calling Real Estate a lousy investment. We take a look at the reasons behind Warren Buffet’s perspective on Real Estate.
Warren Buffet invested in 400 acres of farm land in 1986 for $280,000, and left it to the care of his eldest son, Graham Buffet. Considerably, the growth in value for the same piece of land does not come close to the value of the stocks he has held since then to date. He believes that real estate is more often than not accurately priced, which makes it hard to make great returns in the industry. Warren believes mispricing in stocks gives investors a fair advantage to buy at considerably discounted prices with great potential for a fortune worth of returns.
Further, Warren considers Real Estate a business that requires much of management time to ensure productivity while predetermined returns are achieved. He opines that he would rather use that time choosing good company stocks as it is something he enjoys and has an edge, which requires less effort for him than it would with real estate.
Real Estate is considered betting on what someone will give you on liquidation. Technically speaking, the price will be determined by what someone is willing to give you with the then prevailing market price in consideration. The same cannot be said for stocks. For Warren the stock market is more productive than real estate hence a worthy venture. Notably, Real Estate Investment Trusts try to come close to the stock business model but returns remain low.
If real estate was compared to the stock markets over a 20 year stretch and other more relative periods, it will be evident that investing in good company stocks gives way more returns. The S&P500 can be used as a good benchmark. A $1,000 invested in land in 1992, would today have way less returns than if it was invested in the S&P500. This is despite any market downturns that might have occurred. Warrens view point might seem relevant to the big investor but if you looked keenly at how he started, you would easily note that he started small. As such, Warren’s investment modalities and methods are applicable to an investor of any level, whether a beginner or experienced.
Inferentially, real estate offers stable, easily predictable and accurately priced returns which makes it a good investment and a solid way of diversification. However, to investors such as Warren Buffet and Charlie Munger who are after superior returns through the power of compounding and choosing good company stocks, real estate remains a lousy investment.
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