We have often modeled many successful entrepreneurs and investors, especially when we started Progressive and continue to do so. We learned a great deal from the American philanthropist and the third wealthiest person in the world according to Forbes 2011, often called the “legendary investor” Warren Buffett.
The billionaire has amassed his fortune by identifying companies and properties that he believed were worth more than their current value and investing and holding these investments for the long term. It is fair to say, his decisions have certainly paid off.
Let’s take a look at some of the rules Buffett lives by and apply them to property:
‘Rule No.1: Never Lose Money. Rule No.2: Never forget Rule No.1.’
‘Risk comes from not knowing what you’re doing.’
Buffett is referring to the mindset of a sensible investor who doesn’t ‘bull doze his way into a china shop’. In property investment terms this simply means doing your due diligence. Don’t gamble with your future and think it’s OK to lose. Minimise the risk by being informed and doing your homework.
The following contingencies should be considered and planned for:
• Market conditions
• Interest rates and economic growth
• Demographic and your area to invest
• Property size
• Property type
• Property condition and potential refurbishment
• Lifetime value of tenant
• Property valuation
• Comparable sold/selling prices
• Running cost of your property with contingences
• Remortgage strategy
• Growth strategy
• Tenant management
Buffett only invests in assets he thoroughly researches and understands, and it is imperative to adopt this principle so you reduce any potential loss.
The property market will go up and down, but you should remain focused on your goal of buying a solid long term property asset from day one. You make your money when you BUY [& not just when you sell].
Rule No3. Being a contrarian investor [80/20 or the 99/1 principle]
‘The Golden rule is the man with Gold, rules!”
If you have read our second book “Make Cash in a Property Market Crash” you will know we drill the concept of making money by going against the crowd. Walt Disney coined the phrase [and quoted many times by James Cann] “Observe the masses and do the opposite”, while Buffett explained “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.
The investors who make huge amounts of money in a downturn do so because they buy when everybody else is selling. The mass sell because they believe the market is declining. The person who makes the money is the person who can buy all these properties at a cheap price and wait for the prices to go up. Liquidity [access to cash] in a downturn always wins.
This is not necessarily because the market is wrong, but because the crowd’s wisdom is most likely reflected in market prices.
Rule No.4 Value Investing
‘It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price’.
Buffett is a value investor who likes to buy something for less than it’s actually worth, at rock-bottom prices. He examines what similar companies and properties are selling for and what cash will be generated to determine the “intrinsic value”.
Professional property investors know the key to buying a good buy-to-let property investment is to buy at the lowest possible price, under the prevailing market value [UPMV].
This strategy allows a good safety margin if market conditions drop and maximum profit at the time of eventual remortgage or sale. In our view, buying at 25%-60% discount [for your own portfolio] will be a good investment for your long term wealth. Cash flow is the life blood of any investment decision, so make sure you get paid on a monthly basis, after your debt and other associated costs are been serviced.
Buy properties at wholesale, not at retail prices. If the property needs work, then never pay for more than 70% of the after repair value. Avoid the ‘fat pitch’ and buy at really depressed cheap prices.