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Warren Buffett is arguably 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.
Not surprisingly many of these are very relevant to the “interesting” times we are currently experiencing in the property markets
1. 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 ever develop financial independence?
It’s too easy to get distracted by all the “opportunities” 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 “mining town hot spot”, only to see the value of their properties underperform.
Over the last few months as our property markets have moved into the growth stage of our property cycle there’s a whole new generation of property “gurus” offering to tell you what to do with your money and what the next big opportunities will be.
And there’s a swag of buyer agents who are well-intentioned but really enthusiastic amateurs with no long-term experience.
And yes…I know some of the “opportunities” they suggest you should pursue may sound attractive, but I see major pitfalls in some of them – I’ll explain more about what you could do in a moment.
In my mind, you need to follow a strategy that has always worked, rather than one that works now.
This only comes from experience and perspective – and if you don’t have the years behind you to give you the experience, learn from someone who has.
2. 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.
In fact last year I made public recommendations in my podcasts and blogs that early 2023 would be the turning point of the property cycle which I know set up some of my readers and listeners to take advantage of what has turned out to be a great time to enter our property markets.
By the way… It’s not too late to be early this property cycle.
There is still significant growth left in some of our property markets.
However, you can’t just buy any property and hope it will be an “investment grade” property.
3. 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.”
Yet many investors get itchy feet and want to do more, put another deal together, or buy another property.
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.
By the way…
I don’t think this is the time in the cycle to do nothing.
There are some great opportunities for those who know where to look for them.
Let me clarify that – there are definitely some places where you “should do nothing”.
There are clearly some segments of the property market you should avoid.
4. Specialise – don’t diversify
Buffett has adopted a focused investment philosophy investing the bulk of his funds in a few companies.
However, most advisers 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 one area or niche and reproduce the same thing over and over again getting great results.
I know this has worked well for me – for years I have invested in a particular type of property and it has grown my wealth.
Capital growth properties with a “twist” such as development potential that allows me to manufacture some capital growth and increase my returns allowing me to own high growth, high yield properties – the best of both worlds.
5. 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 location, its scarcity, or the potential to add value.
While most Australian property markets are currently booming, they are likely to slow down later this year.
Now I’m not suggesting property values are going to drop, but price growth is going to slow as affordability (or lack of it) starts to bite.
While properties in more affluent, “established money” and lifestyle suburbs are likely to keep growing strongly in value, middle-tier properties and properties in the outer suburbs are likely to experience less capital growth due to strained affordability.
What worked for many over the first stage of this property cycle is unlikely to work as well over next year as the pace of property price growth is likely to slow… the easy ride is over (for those who don’t adjust).
Remember, the price you pay for a property isn’t the same as the value you get.
Successful investors know the difference.
6. 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 review 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.
7. Don’t invest in anything you don’t understand
During the boom years, investors’ hungered for returns that took them into exotic terrain, whether they realised it or not.
Promoters often promised large profits using opaque schemes, and the same is starting to happen again as the new property cycle rolls on.
Warren Buffett never invests in anything he doesn’t understand – nor should you.
8. 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 accounts to not only cover their negative gearing but to see them through the downtimes as we experienced in the last few years.
They don’t only buy properties; they buy themselves time.
Another way smart investors minimise 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…
Both good and 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.
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