Warren Buffett’s 5 Rules for Real Estate Investors

Everyone knows Warren Buffett is the stock guy, but here's the thing, the exact same principles that made him and Charlie Munger billions in the stock market can make you wealthy in real estate. In this episode, I'm going to share five timeless Buffett-Munger investing rules and show you how to apply them directly to buying rental properties. And I'm joined by my friend, Michael Zuber from One Rental at a Time, where this episode originally aired. Thanks to Michael for letting me share it with you. As you know, Warren Buffett and Charlie Munger, I'm a big fan of their thinking and it's how they invest, but I think the most useful thing is to apply it across the spectrum. They buy businesses, they own some really amazing businesses in Berkshire Hathaway, but I think they actually, their principles apply even more to real estate investing. And so I'll just go down the list and then I want to hear your feedback too, because I think it's interesting. The first thing that I reviewed with them was they always recommend that you invest inside your circle of competence. And to me, I see so many of this mistake myself sometimes, but also to so many people when I'm coaching other people in real estate investing. They listen to a podcast, they listen to a YouTube thing and they're like, oh, that strategy sounds cool. Like co-living or rent by the room or short-term rentals or blah, blah, blah, whatever this niche or strategy is, or even a different market. This market across the country is great. I've heard it's got great rent to price ratios, but is that inside of your circle of competence? Are you good at that? And I love the advice, Charlie Munger really talks about this a lot. He says there's no shortcut to making money. And the main hurdle you have to get over is knowledge. You have to get good at something, you have to master some area of knowledge. In real estate investing, that to me is understanding the market. You and I talk about doing the work, studying your market. It might be going deep on some little subject. It might be like, you're really good at remodels, you're really good at short-term rentals and leasing and figuring out the niche of how to price your short-term rentals. It might be that you're really good at some acquisition strategy. I know people who buy properties at auctions, at a foreclosure auction, and they just study that stuff like they're getting a PhD in the local auction. So I guess that's number one, Michael, is there's no shortcut. You have to stay inside your circle of competence. And if you step outside of that, you're asking for trouble in investing. Yeah, no, I think this has to be number one. Sometimes you can look at it the other way, shiny objects. How many people have we talked to, day one, they want to do boring monthly rentals, and then they want to do STRs, and then they're doing ground-up development, then they're doing syndications, and then, and then, and then. So yeah, figure out what your circle of competence is, invest there, and then also realize it takes consistency. That's another thing that you saw from both Warren and Charlie is that they were remarkably consistent. And they realized that getting wealthy takes time. This is not a get rich tomorrow thing. So I love number one. What do you got for number two? Number two is all about the moat. So think about a castle, a castle has a moat, and this is probably one of their number one investing principles is that you have to buy a business, an investment that has a competitive advantage against every other investment out there in the market. And so to me, real estate's a really good example of this. They buy businesses that have competitive moats, usually like a brand. They buy Coca-Cola, and it's almost impossible to replicate the brand that Coca-Cola has. It's almost impossible to replicate the brand that Apple has, for example. So they buy brands, and those are really good moats, obviously, but in real estate, each little property we own, I think, is like a little cornered resource. And there are certain properties that are much more rare and hard to replicate and have a competitive advantage than others. For example, I like to buy properties that are very close to the campus of the university where I am, so Clemson University. I like to also buy them on a bus line. I like to also buy them that are walkable to little coffee shops and things that you can... So when you start narrowing all those things down, those are all the things that most of my tenants and the people who want to buy my properties, that's really in demand. They love those things. And yet, if you were to go out and build the same house that I own or the same multifamily property that I own, you could build it two miles out, but you wouldn't have this convenience of being close to those things, those specific locations. And so that's what a cornered resource is to me. There's a moat around that. It's almost impossible to replicate that exact location, that convenience. The only thing that new builders can do is go out and build it on the edge of town. And that is a competition in a way, but they don't have the same location. And so I think there's probably other ways that we could talk about for competitive advantages, but location is the big deal. No, I think a moat is, again, if you're going to talk Charlie Munger and Warren Buffett, that's definitely a key to theirs. And again, a moat to me in our world is nothing more than your buy box, right? What are you looking for? And again, lots of people get distracted, right? They may come into having a buy box and then they get distracted and they look elsewhere and then they don't get the economies of scale and they don't get the learnings and all of that. So love number two, moat. Number three? Number three is to buy with a margin of safety. The quote from Charlie Munger, I keep on quoting him because I've been reading him more recently, is that price is what you pay, but value is what you get. And there's a delta. As an investor, you want a delta, right? You want to have the most simple example in real estate investing. If you buy a property that's worth 400,000 bucks and you buy it for 300, you're buying with a margin of safety. There's a gap between what you bought it for, but that's kind of the simplistic way of looking at it. If you can buy cheap, if you can buy low, great. But I also look at a margin of safety in how we borrow money as well. And today is borrow low, rent high, I think is like the number one way to make money is because interest rates are seven or 8%. If you can figure out a way to borrow at 5% with subject to creative financing, seller financing, other ways to get cheap debt, that's another margin of safety. And really the essence of all of these, buying it low, borrowing low, is that the future is uncertain. We don't know exactly what's going to happen. Even if we think we're brilliant and we can figure out this market's going to be amazing, what Warren Buffett would say is most of us are bad at predicting the future. Most people in general are bad at it. So we have to, yes, predict the future, but then be humble enough to know that we aren't really sure. So just buy with a margin of safety just in case. No, I mean, I'm reminded of the pain that I saw people go through in the great financial crisis with those arm resets. I'm reminded of all the LPs losing their money today because they got into bridge debt unknowingly with GPs. And yeah, you got to have margin of safety. The ultimate margin of safety for one rental at a time in small and mighty is cashflow. If you set up the debt structure and you cashflow day one, the chances that that's going to go away are low, but you should really have a decent margin of safety and be able to hold for the long term. Wealth comes from holding for the long term. So love number three. All right. Number four, it's closely related to all the other ones, but it's about being patient. And I love this story that they both told a lot. There's a baseball player, old baseball player named Ted Williams, who's a hall of famer. I think he was maybe still the only batter to ever hit over 400. Last guy to hit over 400. Okay. Last guy. Okay. Last guy to hit over 400. But he had this whole book he wrote about the science of hitting, and he divided the strike zone into like 70 something little squares. And what he said is like, I have like 10 squares, like might be on the inside, on the down, that is my sweet spot for where I like to hit. There's like 60 something little squares that I don't want to hit. I don't like it. And what he would do is he'd sit there and he'd wait until like the ball went into one of his little sweet spots. And if it didn't hit a sweet spot, he didn't swing the bat. And Warren Buffett is this exact same way. He says like, investing is like being in a home run derby, where in a home run derby in baseball, they can keep throwing balls at you until for as many as you need. You don't have to swing. Like you can sit there and watch every single pitch. And so we small and mighty investors are patient that the successful ones, we wait for the right pitch. We probably look at dozens and dozens of properties until we find the one that is a fat pitch. But when we see the fat pitch, we swing hard and we put all our money into it and we go for it. Yeah. Patience is a big one. I mean, you meet lots of different people trying to do this journey and some folks just almost act like they have money burning a hole in their pocket. They got to rush it away. I hear people say things like, I know I'm going to lose money on the first deal, but it's price of admission. All of these things that they tell themselves, no, the goal is not to lose money. The goal is to figure out what a good or great deal is and do those. And again, we have to remind people. I remember there was a, I think it was a nine month period where I was trying to buy, and I think I wrote a hundred offers and got nothing. You just keep going. The next offer, you get closer to the next yes. So again, you got to be patient. Don't be in a rush. Don't lose money on purpose. Come on, guys. I think this was the hardest psychologically for a lot of us. There's something you said about the cash burning a hole in your pocket. There's a FOMO that people get that I'm going to miss out on something. But the reality is if you have cash in the bank and you have persistence, you will get a deal. It's just a matter of time, right? Just a matter of time. Consistency wins every time. Yeah. All right. Number five. What do you got for number five? All right. Number five is it has to do with other people on your team. And the way they described it is they could have everything else right. They could buy with a margin of safety. They could have a moat. They could be inside their circle of competence, but ultimately as an investor, you depend on other people. And so you have to have competent and trustworthy people, and you have to have both of those, by the way. So there are people who are super competent, and if they're really, really competent, but they're not trustworthy, they will take your money very fast, right? They're going to be really good at taking your money. But if they're trustworthy and not competent, they can be a nice person, but you don't want to give them your money. A lot of people invest with the family or somebody they trust, but the family member is not the good real estate agent, right? They're not going to find good deals. That combination of competence and trustworthiness applies to your real estate agent if you're using them. It applies to a property manager. It applies to your contractors. And I don't know about you, Michael, but the places I've gotten burned personally the most have been in this area, and this is places where I didn't listen to that and I had a tenant or a contractor or somebody else who burned me. But then on the other hand, the most pleasant experiences, the best experiences of my entire real estate investing journey are the amazing tenants that I've had and the amazing contractors and the amazing property managers. So this, this to me is like one of the undersold parts of the whole business. Yeah. I love that. I love that one. Yeah. This is one of the things that you learn very quickly in this business is real estate investing is a team sport. I mean, it just is it, you know, I did it wrong the first three to five years I lived in my spreadsheet. I spoke to no one. You're not going to go very far and you're going to make lots of mistakes. Once you get in other communities like yours and mine, you can learn from others, be inspired from others, get help from others. It's just so much easier and a lot more fun. Yeah. Right. Because otherwise it's just lonely. It's, it's nice going through a jungle of building wealth and you have other people with you. Yeah. So I love that. So I've got some for you because again, we, we kind of texted back and forth on this topic. The first one is a Charlie Munger quote that I love, and there's kind of a story to it, right? Warren Buffett. So Warren Buffett and Charlie Munger when they were alive, they did these Q and A's at their yearly investor event. And at one of the events, somebody asked them, what should the average person do in Warren Buffett? Like good old uncle Warren basically said the average person should just do index funds. And you know, he went on for a while, but that was basically his answer. Just buy low, low cost index funds. And then Charlie always does what Charlie does. And Charlie basically gets up and says, you know, Warren is technically correct, but he's, he's correct for a reason that you probably don't understand. And Charlie went on to say that basically the reason index funds are the right answer for most people is most people are lazy and stupid. So you know, Charlie's answer to the person was, is you should go figure out what you're investing in. Put all your eggs, put all your eggs in one basket and watch the effing basket, right? Warren Buffett's talking diversification, protect yourself, low risk. And Charlie's like, well, hey, yeah, Warren's right for most people because they're lazy and stupid. But for me, I'm going to choose what I invest in and I'm going to, I'm just going to watch that. So I just love Charlie's bluntness and directness, very much my style. So that's the first thing I think about. Yeah. I love that one. In general, if you haven't watched some of the old, you know, highlight reels of the annual meeting with Charlie Munger and Warren, Warren is like the one who gets all the attention, but Charlie, Charlie Munger is like the color commentator. And sometimes he says nothing, he's just sitting there like, you know, and other times he has these zingers that you will never forget. So make that your homework to watch some old, some videos of Charlie and Warren. Totally agree. Another one, Warren Buffett was asked one time, why does he give away all his investing advice for free? Why does he tell everybody how he does it? And his answer was because nobody will do the work, right? He's basically, he basically tells people why he's the best at it. He reads four or five hours a day. He's been doing that for 50 years, right? He buys all the principles that you talked about, invest in the circle of competency, get a moat, buy with margin, be patient, invest in the team, right? He gives everything away all the time. Yeah. And people don't do it because it takes time and it's hard. It's easy to understand. It's easy to understand intellectually, watching it, nodding your head. It's a lot harder to implement those things when you have to have the discipline to be patient, when you have to have, we said circle of competence, number one, that sounds like just check that off the list. That means you're studying for months and years. And even like, even if you're brand new, like what does that mean? That means you study every single sold comp in your neighborhood, in your market and every single property for sale. And if Michael and I came to your town, we rode around with you. If we pointed to a house, you'd be able to say, yeah, that house sold for $355,000, right? That's what they're talking, because nobody will do that. Yep. No, I totally agree. And I got one more for you. And this is a classic one I learned way back when I was getting my MBA. Basically Warren Buffett's idea of buying companies was, we are not trying to buy bad companies at cheap prices. We are trying to buy good properties at fair prices, kind of your value in price. But it really, in real estate, that means a lot because how many people have you bumped into over time, especially California investors who say, I can't buy here. So I'm going to go to X because X is cheap. Again, it's not about buying cheap properties at great prices. It's about buying good properties at fair prices. And I think a lot of real estate investors get that wrong. I think a lot of investors look at spreadsheets instead of the real world. And a lot of investors have been burned buying cheap property. Yeah. Let's translate that. You might have a deal that looks like a deal because it's 60 cents on the dollar, 50 cents on the dollar. But that deal might not be as good as an amazing location that you buy for 85 cents on the dollar. Correct. Meaning you will make more money on the 85 cents on a dollar property than you will on the 50 cents on a dollar property. And that's hard to understand at first, but that's the truth. Well not only you're going to, I mean, let's just break that down, right? When you say make more money, it's all around. You will likely make net cashflow higher, maybe not month to month because maybe a few months there's no turnover in their cheap property. But when you look at a year or certainly multiple years, your cashflow will be higher on the good property at a fair price. But number two, appreciation, right? The cherry on top, it will be much higher on the good property at a fair price. And people just don't understand the full picture of real estate in wealth building. Yeah. Love those bonus ideas. Those are some of my favorite quotes and ideas as well. Let me know in the comments. Are there any other quotes or big investing principles from Buffett or Munger that you really like? I would love to hear from you. And thank you again to Michael Zuber. If you're not following his channel, One Rental at a Time, he posts a lot of amazing content, including daily financial news. I have interviews with him very regularly. So check it out. I have a link to Michael Zuber's channel below. And if you like this episode and talking about the big picture principles investing, I think you'll like my next video, which gets into the specifics of how can you actually achieve a 15% return in real estate investing. So taking those principles we learned from Warren Buffett and Charlie Munger and specifically applying them to buying a property and showing you how much return can you actually get. So that's what I break down on the whiteboard in the next video. If you're watching on YouTube, you can click on the thumbnail above me here, or if you're listening on the podcast or watching on YouTube, you can also click on the link in the podcast or the YouTube description below. Thanks so much for watching. I'll see you in the next episode.