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.
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 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 years as our
property markets have turned the corner 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 yes…I know some of these
“opportunities” sound attractive, but I see some major pitfalls in some of them
– I’ll explain more about what you could do in a moment.
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 a few years ago when many predicted that
property prices would fall further.
Some of our property markets turned
a few years ago and some property investors have already made very significant
profits over the last 24 months.
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 do not think this is the time in
the cycle to do nothing.
There are still 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 markets you
should avoid.
4.
Specialize – 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 specialize.
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.
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 scarcity or the potential to add value.
It seems very clear that the next
stage of the property cycle will be very different with subdued growth and some
properties not increasing in value at all.
What worked for many over the last
few property cycles just won’t work in today’s economic conditions … 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 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
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.
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