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Many know Warren Buffett as the world's greatest stock market investor. Every year, since 1965, he has been writing infamous annual letters to shareholders of his company, Berkshire Hathaway. His letters would include information about Berkshire’s business fundamentals such as its earnings, profits, etc. He also likes to dedicate a few pages to educate his shareholders on how to become a better investor. The 2013 Letter to Shareholders was just published on March 1st and can be obtained from his website at http://www.berkshirehathaway.com/letters/letters.html.
This year's lessons are special for Property4Prosperity because Buffett wrote about his property holdings, which is a rare phenomenon since he mostly speaks about stock investments. Thus, we were very intrigued to hear what he had to say about property investing. Below are some of the excerpts from Buffett's latest letter to shareholders.
"This tale begins in Nebraska. 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. 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. From these estimates, I calculated the normalized return from the farm to then be about 10%...
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
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 New York University 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.
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... I joined a small group -- including Larry and my friend Fred Rose -- in purchasing the building. 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 initial 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.
Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won't be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."
In the next and final part of this blog, we will examine his two property deals and share with you the key lessons you can take home. These lessons are very applicable and easy to follow. Regardless of your property investing experience, you can learn and emulate how the world's greatest investor invests in the property market.
To Your Financial Freedom,
Chayot & Jennifer Ing-aram
www.property4prosperity.com
Many know Warren Buffett as the world's greatest stock market investor. Every year, since 1965, he has been writing infamous annual letters to shareholders of his company, Berkshire Hathaway. His letters would include information about Berkshire’s business fundamentals such as its earnings, profits, etc. He also likes to dedicate a few pages to educate his shareholders on how to become a better investor. The 2013 Letter to Shareholders was just published on March 1st and can be obtained from his website at http://www.berkshirehathaway.com/letters/letters.html.
This year's lessons are special for Property4Prosperity because Buffett wrote about his property holdings, which is a rare phenomenon since he mostly speaks about stock investments. Thus, we were very intrigued to hear what he had to say about property investing. Below are some of the excerpts from Buffett's latest letter to shareholders.
"This tale begins in Nebraska. 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. 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. From these estimates, I calculated the normalized return from the farm to then be about 10%...
I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.
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 New York University 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.
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... I joined a small group -- including Larry and my friend Fred Rose -- in purchasing the building. 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 initial 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.
Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won't be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."
In the next and final part of this blog, we will examine his two property deals and share with you the key lessons you can take home. These lessons are very applicable and easy to follow. Regardless of your property investing experience, you can learn and emulate how the world's greatest investor invests in the property market.
To Your Financial Freedom,
Chayot & Jennifer Ing-aram
www.property4prosperity.com
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