5 Warren Buffett Principles for Real Estate Investment

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Warren Buffett needs no introduction. The legendary owner investor of Berkshire Hathway, has generated a phenomenal return of 21.6% annually for over 50 years! I have always followed his investment philosophy ever since i had the opportunity to meet with him at his office in Omaha. (He used to meet with MBA students from top US business schools those days & I happened to be a lucky one!). Though he has been primarily an equity investor, his investment philosophy can be replicated in any asset class. I have used his investment principles in the last one decade with fairly decent success.
Presenting 5 golden rules of Buffett Principles that can be modified for real estate investment:
1) Be extremely careful with your money
  • Don’t gamble with your hard earned money. I never recommend people to invest in unapproved projects. It is way too risky to invest in such projects. If things go wrong, you may never be able to recover your money from such investment.
  • Always invest in a location you are familiar with. Or research about the location, visit it multiple times on different days (weekdays, weekend) at odd hours (morning, afternoon, evening, late evening) to understand what happens in those locations. Do your homework.
  • Do not invest in a first time project of any builder. Chances of project never getting completed or longer delays  in such projects would be very high.
  • Don’t invest in a property just because your friend bought it & recommended it to you.
2) Be a Long term investor
  • Invest in a property if you can hold it for say 5 to 10 years. Longer time horizon (>5 yrs) is recommended for plots and commercial assets.
  • Don’t invest in real estate for short term (< 3 years) just because your friend did it and earned good return.
3) Buy from credible & stable builders
  • Look for builders who have been in business for at least 5 years and have consistently delivered quality projects on time. Consistency in project delivery is very important.
  • Try to meet with promoters of builders – you will get a clear idea about the professional level of the company. If promoters are not available (typically for large builders) try meeting with senior management / directors. Don’t invest just by talking to a sales executive.
  • Always look for customer friendly builders. Several builders have started monthly engagement events with their existing as well as potential customers. These events are great opportunity to assess the builder.

4) It’s better to buy a wonderful property at a fair price than a fair property at a wonderful price

  • My favourite Buffet quote “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
  • Don’t regret or hesitate paying a premium for a wonderful property (excellent construction, location & builder). You won’t regret doing it as a beautifully constructed and maintained property has huge future appreciation and rental potential.

5) Take advantage of market conditions

  • Take advantage of market conditions – for example current market is completely skewed in favour of buyers. Negotiate heavily in a buyer market. Don’t fear just because others are not buying a property in this market condition.
  • Even in a normal market condition there are always wonderful opportunities. Always prepare a competition mapping of projects in a given micro-market. Find out which projects are selling at what price. It is always interesting to find out why projects in the same micro-market sell at different prices, sometimes difference is more than 30% even for similar products. Ceteris paribus, prices of projects should not differ much. However, some builders will have intrinsic problems such as poor sales, cash flow problem, management issues etc and hence may be willing to negotiate more compared to their competitors. It is very important to find out about builders as these information will provide leverage to buyers in price negotiation.
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