Scaling Up | Real Estate Investing Warren’s Way

So in part 1 we talked about how Warren Buffett was able to invest and achieve above average returns by using the principles of Value Investing. In Part 2 I’m going to highlight exactly what he did with those profits that eventually lead to him being considered the greatest Investor of All time.

By emphasizing Return of Capital on the investments that he made early in his career Warren Buffett investments were able to outperform the overall stock market average, year in and year out. With all of those profits that he generated Buffett was not content with simply living off of them. Instead, his strategy consisted of another level of Investing that was outside of his mentor Benjamin Graham’s wisdom.

This next level of Investing outlined by Buffett’s second in command Charlie Munger can be summed up by this Munger quote: “Buying a great business at a fair price is superior to buying a fair company at a great price.”

In the 80’s With so much cash on hand from the profits of his holdings, Warren pivoted his investing principles from solely seeking homerun opportunities from almost unknown companies to now considering fairly priced opportunities to buy well known companies. This shift in practice was partially due to there not being enough small deals available, like the acquisition of Berkshire Hathaway. To make efficient use of all of his capital which had grown his Net Worth to Billionaire status by 1986, purchasing stakes in Class A companies was the answer to his cash on hand problem.

During this pivot is when Buffett made some of the purchases that now make up the pillars of his Multi-Billion dollar portfolio today. These purchases include large stakes in companies like Geico, Coca-Cola, the Washington Post, Disney, and C’s Candy. All of these purchases matured into long term, forever holdings for Warren Buffett and his Berkshire holding company.

In real estate terms, this strategy would be like owning a few small multifamily properties in your local Class C or B areas, cashing out, and using the profits to buy Larger Multifamily properties in Class A markets like Miami or Manhattan.

Looking further into this, trading up in Real Estate here in the US can be done by using 2 strategies 1) By using a 1031 exchange, you can defer capital gains taxes on the profits from the sale of your property as long as you follow the rules closely, and 2) By using a Cash-Out Refinance, you can cash out on the equity in your properties without selling them and potentially triggering a taxable event.

With these 2 strategies, the everyday Real Estate InvestorI and Landlord can achieve Buffett like success with consistent application over an extended period of time. To learn more about the practicality of what implementing this strategy can mean to your wealth and legacy down the line, tune in to part 3 of this series. I’m Albert with Capital Street Management. Thanks for reading this post.