For decades now, Warren Buffett's name is synonymous with legendary success in investing for the long haul. After all, he has grown Berkshire Hathaway (BRK.A -1.05%) (BRK.B -0.83%) from a New England textile manufacturer he first bought out in the mid-'60s to a multinational conglomerate with shares trading at about $500,000 apiece.
Buffett and his investing partner Charlie Munger have built an empire of hundreds of companies, and Buffett has become one of Earth's wealthiest residents, without much direct involvement in what's typically regarded as one of the most reliable ways to build such wealth: real estate. But he does have some experience to share in that regard.
Buffett lays out his philosophy about investing in real estate in a 2018 letter to shareholders in which he tells two stories: one of a failed farm he purchased in Nebraska in 1986 and the other a piece of commercial real estate next to New York University that he bought in 1993 from the Resolution Trust Corp. after the savings institution that owned the property failed.
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Buffett got a good price for both properties and has left the details to his investment partners, people who were experts in managing Nebraska farms and New York City retail properties, respectively.
Both properties have provided steady, not spectacular gains, for years, and Buffett -- who said he's been to the farm twice -- said he expected that to continue for years. He also makes some salient points that can apply to any real estate investor. They're worth reading (they're from pages 17-18 in the letter), but here are two major takeaways:
- You need to understand the numbers, the finances, and financing. Beyond that, expertise isn't necessary, but recognition of your limitations is. That's where property managers come in.
- Focus on the asset's future productivity, not its short-term valuation swings. If you don't have a clear picture of the possibilities, move on.
"Income from both the farm and the NYU real estate will probably increase in the decades to come," Buffett says in that letter, adding, "Though the gains won't be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."
The best time is a long time
Buffett has made clear over the years that he doesn't care about getting in first, hitting home runs, or market timing. He looks for solid companies with equally solid prospects in industries and companies that he understands. And, if you want to invest in real estate that way -- wisely and for the long term -- there are multiple avenues where that approach can be applied.
For instance, there are real estate investment trusts (REITs), which own income-producing property and are required by tax law to pay out at least 90% of their taxable income as dividends. Buffett has a major stake in one: STORE Capital (STOR).
This retail REIT was formed in 2011 and got a serious boost when Buffett bought $377 million of its stock, about 9.8% of total shares outstanding, in 2017. STORE stock then handily beat the S&P 500 and Berkshire Hathaway stock alike in total return up until the pandemic. It's not recovered like the latter two, but patient shareholders can expect to be rewarded again as time goes on while enjoying a 5.25% yield now.
More than one way to follow his advice
There are other ways to invest in real estate without owning it directly, of course. You can buy stock in a homebuilder like D.R. Horton or retailer like Target that owns much of the real estate it occupies. Or you can invest in crowdfunded projects through platforms like RealtyMogul or CrowdStreet. You can also make your own hard money loans to developers or put money into tax-advantaged investment pools like qualified opportunity funds.
Whichever channel you choose, if you want to actively reap passive income from buy-and-hold investments in real estate, you can do worse than following this advice from Buffett's 2018 letter: "Keep things simple and don't swing for the fences."
