Invest like Warren Buffett: Applying the Oracle of Omaha’s principles to property

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 Buffet’s investment principles and see how we can apply them to our property investing.

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. In fact, they spend more time planning where they’re going to holiday than they do planning their financial future.

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 “hot spot”, only to see the value of their properties underperform.

Invest counter-cyclically

Buffett is a renowned countercyclical 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.

So be sceptical of conventional wisdom – not because the crowd is always wrong, but because the crowd is always late.

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.

Specialise – don’t diversify

Buffet 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.

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.

In today’s strong property market, don’t look for a bargain. Remember, the price you pay for a property isn’t the same as the value you get. Successful investors know the difference.

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.

Don’t invest in anything you don’t understand

During the boom years the hunger of investors for returns took them into exotic terrain, whether they realised it or not.

Property promoters often promised large profits using opaque schemes, with the same starting to happen again as the new property cycle rolls on. 

Warren Buffett never invests in anything he doesn’t understand – nor should you.

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 past 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 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.

Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is best-selling author, one of Australia’s leading experts in wealth creation through property. Subscribe to his daily Property Update blog.