Warren Buffett Reveals His Secrets for Investing in Real Estate

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Warren Buffet And Goldman Sachs CEO Lloyd Blankfein Speak On Goldman's Detroit Investment Initiative
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There is no lack of information available about the institutional investment strategies of the world's billionaires -- how they move money in their capacity as the heads of large public companies and investment funds -- but how often do you get the chance to look inside the personal investments of those billionaires? And how often does a billionaire offer you insights that you can use in your investing?

Warren Buffett did just that with his annual letter to the shareholders of Berkshire Hathaway (BRK-A), which he sent late last month. In it, he highlighted two personal investments in an area he is not normally associated with -- real estate.

He talked at length about a 400-acre farm he bought in Nebraska and a retail property purchased near New York University and in the process provided a number of lessons for anyone thinking about investing in real estate. Here are five takeaways from the letter and Buffett's words supporting each.

1. Invest in Undervalued Real Estate

From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier.

And....

In 1993, I made another small investment. Larry Silverstein, Salomon's landlord when I was the company's CEO, told me about a New York retail property adjacent to NYU that the Resolution Trust Corp. was selling. Again, a bubble had popped –- this one involving commercial real estate –- and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

2. Think in Terms of Income, Not Appreciation

With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.

If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.

3. Focus on Underutilized Properties

I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

And regarding the New York property ...

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant – who occupied around 20% of the project's space – was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings.

4. Use Partnerships to Fill In Gaps in Your Expertise

I knew nothing about operating a farm. But I have a son who loves farming and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be.

And ...

I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I've yet to view the property.

5. The Macro View Is More Important Than the Micro

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following –- 1987 and 1994 -– was of no importance to me in making those investments. I can't remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings whereas I have yet to see a quotation for either my farm or the New York real estate.

Conclusion

Perhaps unsurprisingly, Buffett's philosophy on investing in individual companies is similar to the one he applies to investing in real estate. Find investments that produce income, have long-term value prospects not currently being recognized by the market, and, once you buy them, increase their operational and managerial efficiencies to maximize recurring revenue.

These are ideas that you don't need to be a billionaire to understand, nor to put them into practice in your own portfolio.

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Tonia Fletcher

Big Detroit property firm accused of global Ponzi scheme

September 27, 201336 CommentsRead More
The largest buyer of distressed homes in Detroit is accused of operating a multimillion-dollar international Ponzi scheme that bilked retirees of their nest eggs and contributed to neighborhood blight.

The scheme involves Dearborn-based Metro Property Group, which gobbles up hundreds of rundown homes a year at tax-foreclosure auctions and often sells them for more than $40,000 apiece to unsuspecting international buyers.

A group of eight overseas investors – all of them retired – has sued the real estate group, along with others connected to it, alleging racketeering and a “gargantuan enterprise of fraud.” One of the accused is attorney and Dearborn City Council candidate Tarek M. Baydoun, who intimidated investors and allegedly falsified legal records to cover up the bold scam.

Soon after the accusations, Baydoun severed ties with Metro Property, which is operated by family members.

“These investments took the bulk of our retirement savings in order to give us an income,” said U.K. resident Kathryn Llewellyn-Jones, who bought three homes in Detroit for $132,000 and is among those suing. “Not only is there no income, but these dreadful houses are costing us money.”

Investors were lured by the promise of 16%-18% annual returns on houses that Metro claimed were occupied by tenants who were paying up to $1,050 a month. Metro Properties said its houses also were fully remodeled and habitable.

Turns out, neither was true, according to the lawsuit, which also names as defendants Metro Property Management, Apex Global Properties LLC, Global Power Equities LLC, Baydoun Law Group, Meridian Law Group and the the property group’s Sameer Beydoun, Ali Beydoun, David Makki and Mike Alaweih, among others.

Here’s how the alleged scheme worked: New homeowners paid a subsidiary, Metro Property Management, to maintain the properties and collect rent. To make it appear as though there were tenants, the management team sent the investors monthly “rental” checks for several months.

Then the eight investors were told virtually the same thing: The tenant was evicted and caused significant damage to the homes. The investors were billed for evictions that never happened, fined for housing violations and were given estimates of the required repairs, upwards of $13,500, according to the suit.

“Defendants have turned plaintiffs into unwitting and unintentional slumlords,” attorney Debbie Schlussel, who also is a conservative commentator, said in the lawsuit. “The property is not only worthless, but a money pit,”

When investors began to catch on, they received intimidating emails from Metro.

“If I wanted to give you the run around and do the dance, I would simply forward your last email to my attorney and instruct him to crush this case in court,” Sameer Beydoun, of Metro Property Group, wrote to one of the investors, Warren Grover, who was told he owed thousands of dollars in fees and $13,500 in repairs on a house that was supposed to be fully refurbished. “You would have to fly across the world just to lose in court.”

Baydoun, the Dearborn City Council candidate, threatened another homeowner with criminal action and up to 25 years in a U.S. prison in a snarky e-mail.

Baydoun declined to comment on the lawsuit, but defended his integrity.

“I have never done anything unethically, and I will defend this vigorously,” Baydoun told me.

The international buyers sank most of their retirement savings into dilapidated houses that ended up needing thousands of dollars in repairs. Homes had sewer backups, leaking ceilings, decaying roofs and rotting pipes.

Since 2010, Metro Property bought more than 1,600 homes.

Its attorney, David Fink, said the lawsuit is riddled “blatant misrepresentations and omissions.”

Metro Property made headlines over its cold response to a woman who lost her house of 36 years to the company when it bought the property, which was accidentally sold at the Wayne County auction.

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Henderson Eviction Defense
By Terry Hall
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Steve Neavling

Steve Neavling lives and works in Detroit as an investigative journalist. His stories have uncovered corruption, led to arrests and reforms and prompted FBI investigations.

May 05 2014 at 9:54 AM Report abuse rate up rate down Reply
privatelenderbiz

I followed the same formula to great success,though on a smaller scale. Then I met a man (a multi-millionaire private lender) who introduced me to private lending...investing in shorter term loans backed by real estate. Most people can't buy investment real estate outright, but they can invest in it through high yield loans. I'm currently earing 12% on my money, VERY safely and I can get anyone started, no cost...just good information. It's a very safe strategy because each loan is guaranteed by a piece of real estate worth more than the loan, so if a borrower defaults on my payment (they never do), I get control of their collateral property. They don't let this happen because they put 20-30% down. If you'd like to learn more you can reach me at 702-997-8794, I can help you get started. It's actually very easy.

March 26 2014 at 12:19 PM Report abuse rate up rate down Reply
vlady1000

Most investment RE value is based on the income it can produce. Find the one that is producing less than it should. correct the problem or modify the property to produce more $$, and the value will automatically go up accordingly. I never buy anything on speculation, only on cash flows....and a good cash cow will appreciate more than 95% of the "speculation property" over time, and have almost no risk.

March 24 2014 at 5:58 PM Report abuse rate up rate down Reply
alfredschrader

Buffett paid $34,500.00 for the house he lives in. One of the best ways to make money in farm land is to buy land with worn-out or useless soils, and then "fix" it. Over a period of 5 years I developed a new mix of micro organisms, fungi, and living creatures that turn worthless ag soil into prime ag soil. I currently own enough of this material to turn 5,000,000 acres of worthless land into prime ag land worth billions upon billions of dollars. Unless you knew what you were looking at, anyone would think is was just dirt.

March 24 2014 at 5:27 PM Report abuse rate up rate down Reply
rwolfen984

You mean he looks around for some little guy he can steal from, like me

March 24 2014 at 4:18 PM Report abuse -1 rate up rate down Reply
1 reply to rwolfen984's comment
tru_liberal

How widdwe awe you?

March 24 2014 at 5:41 PM Report abuse rate up rate down Reply
TINKDAY

Buy the politicians to get favorable investment and tax policies, that continue to put financial hardship on the other 95 %. And what I mean by favorable, are just flat give aways, that continue to suck the wealth from this country and where does it go , to the pockets of the few super rich, whe the rest of us have to continue to pay for the bailout caused these policies.

March 24 2014 at 2:43 PM Report abuse +1 rate up rate down Reply
Masum Shakih

you can find more information about business here.
http://www.101businessinsights.info/upcoming-topics/strategy-topics/

March 24 2014 at 2:01 PM Report abuse rate up rate down Reply
1 reply to Masum Shakih's comment
alfredschrader

Here's the million dollar trick for eliminating weeds. 99% of all farmers plow, plant the seeds, and then irrigate the soil. The seeds germinate (grow) but also the weeds seeds grow too. Then they spray expensive herbicides like Round up etc. to kill the weeds.

Here's the trick: plow the field, and irrigate like you had planted the seeds, but instead wait two weeks. By then all of the weed seeds have germinated into tiny half inch sprouts.
Then plow again rooting the weedlings up. Then, plant your crop seeds - result, almost no weeds and no herbicide costs either.

March 24 2014 at 5:32 PM Report abuse rate up rate down Reply
jrb359

Hey Warren, did you send that check to the IRS yet? I didn't think so.

March 24 2014 at 1:29 PM Report abuse -2 rate up rate down Reply
sd69plan

Its no secret, buy low and sell high.

March 24 2014 at 1:25 PM Report abuse +1 rate up rate down Reply
jkennedy806

it's easy when you are a major stockholder in banks, and sell them Assurant Insurance thru Berkshire Hathaway so the banks can pad the escrow with forced placed insurance and put the homeowner's in the street and you can steal their undervalued homes that are under utilized

March 24 2014 at 11:52 AM Report abuse -3 rate up rate down Reply