For more than 50 years, Warren Buffett has achieved the rare feat of generating a 20% average annual return on all assets he has managed. So it’s no surprise that the world pays attention to his investment moves. And while there are over 200 publicly-traded real estate investment trusts (REITs) in the United States right now, Berkshire Hathaway fund founder Warren Buffett was attracted to only a handful of them.
Buffett has not shown much interest in real estate investing in the past. He and Charlie Munger, vice-chairman of Berkshire Hathaway, actively dismissed it for many years. However, Buffett has recently invested in REITs as part of his passive income strategy.
Buffett’s Top Picks
Berkshire Hathaway Inc. owned shares of STORE Capital Corp. until late 2022. Specializing in single-tenant operational real estate (STORE), this REIT announced it was being acquired by Singapore’s GIC and Oak Street in September 2022. The news of this $14 million all-cash transaction resulted in the company’s shares soaring by an impressive 20%. Buffett’s company exited STORE Capital Corp. in 2022, and per Berkshire Hathaway’s latest 13F quarterly report, filed with the Securities and Exchange Commission, Buffett’s portfolio currently has no publicly traded REIT. However, the same filing also suggests Buffett does have plans to invest in real estate.
The filing discloses that Buffett is making several investments in housing. In the second quarter of 2023, the company purchased 5.9 million shares of D.R. Horton, a home construction company, worth $641.6 million. D.R. Horton is America’s largest homebuilder by volume and offers a diverse product portfolio from $200,000 to more than $1 million. During the first fiscal quarter of 2023, the company’s consolidated revenue reached $9.7 billion, registering a year-over-year increase of 11%. Horton’s homes closed, and net sales orders increased by 8% and 37%, respectively. This year, the company’s shares have risen by approximately 18%.
In the second quarter of 2023, Berkshire also acquired 152,572 shares of Lennar Corporation valued at about $17 million. A home builder active in various markets around the country, Lennar delivered 66,399 homes in 2022. The company also offers title insurance, mortgage financing, and closing services. Although the company’s year-over-year home sales revenue dropped by 2% in the third quarter of 2023, it was largely offset by an 8% increase in the number of homes delivered by them.
NVR Inc. is another home builder and seller that garnering interest from Berkshire Hathaway. Buffett’s company picked up 11,112 shares of NVR worth $65.5 million in the second quarter. NVR’s homebuilding business experienced a 27% year-over-year increase in new orders during this period. Most importantly, in 2023, NVR shares increased by 28% and outperformed Lennar and D.R. Horton.
As of October 20, Berkshire Hathaway’s Class B shares fell to about $335, almost the same average price per share paid by the company in June while buying back company shares worth $2.13 million. Experts suggest this could indicate that another buyback is in the cards soon.
Buffett’s Recommendations for Investing in Real Estate
As the most successful fund investor ever, it’s no surprise that the world pays attention to Buffet’s investment moves. However, it is essential to remember that his way of investing in real estate is very different from mainstream investors.
Buffett’s approach to real estate investment is focused on the intrinsic value of real estate. Unlike many other investment options, real estate is a tangible asset with a lower susceptibility to market volatility. In general, its value tends to increase over time. As the value of money decreases during an economic slowdown, there is a high likelihood of an increase in real estate value.
“They’re the businesses that you buy once, and then you don’t have to keep making capital investments subsequently,” Buffett said in a recent shareholders meeting. “So, you do not face the problem of continuous reinvestment involving greater and greater dollars because of inflation. That’s one reason: real estate is generally good during inflation.”
According to Buffet, starting small is the best strategy for newbies in real estate investment. He suggests investors begin by purchasing a single property, learn the intricacies of the market, and then scale up slowly and steadily. This approach mitigates risk and helps new investors learn and adapt to the rapidly changing market. Buffett also believes that real estate investment trusts (REITs) are excellent options for starting small. He recommends investing in locations with solid job growth, robust infrastructure, and population influx to ensure higher returns. He also urges aspiring investors to choose and use their available financial options judiciously.
Investing in Real Estate During Inflation
Most Americans nowadays are worried about inflation and its likely impact on them. During inflation, there is a decrease in the purchasing power of money. Real estate prices are increasing with inflation alongside other goods and services.
Real estate is an excellent hedge against a recession in the context of high inflation. This idea stems from the fact that market swings have a much lower impact on real estate’s value than stocks, bonds, and commodities because this physical asset is a fundamental requirement for all. Secondly, at a time when finding new work is challenging, rental income generated from real estate can help make ends meet with minimum effort. Another critical benefit of real estate is its potential for increase in price over time. There may be occasional dips, but real estate value generally increases in the long run.
Financial Freedom via Real Estate Investment
Real estate is an integral part of a portfolio, which is why Berkshire continues to invest. Like other large-scale institutional investors, real estate investment can be an excellent option for someone looking to build stealth wealth for a worry-free retirement. The biggest benefit of real estate from an investment point of view is its multiple return-generating avenues.
Some of the most effective methods include earning rental income, making a profit by selling the assets at an appreciated value, and financing additional investments by leveraging equity. Moreover, real estate investment reduces overall tax liability because of eligible deductions in mortgage interest payments and property tax.
Inflation often takes a toll on an individual’s investment portfolio invisibly, including retirement funds. Therefore, anyone saving for retirement must consider inflation. In this scenario, retirees need to maintain exposure to equities. While a recession can impact equities, real estate investment has been historically a hedge against these uncertainties.
The House of Representatives has debated potential Social Security reforms that could lead to a 20% benefit cut across the board for the recipients. These changes will increase the retirement age, Social Security payroll taxes and impact valuable retirement benefits such as Social Security spousal benefits. Although these reforms may or may not be implemented, it does make sense for retirees to look beyond Social Security for a financially stable retired life, and real estate is undoubtedly one of their best options.
In today’s uncertain economic landscape, choosing the right investment option is a tall task. However, real estate offers unique benefits, making it a preferred choice for investors at all levels.