Real estate is often considered a relatively reliable way to build wealth. That’s why it’s surprising that two of the most famous investors in the world — the late Charlie Munger and Warren Buffett — shied away from this industry.
During a Berkshire Hathaway investor meeting in 2002, Munger said real estate tends to be a “very lousy investment” for companies like their own.
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Lousy investment … for them
During their meeting with shareholders, Buffett mentioned that under most conditions it’s hard to find mispriced assets in the real estate market. He famously targets assets that are trading at a discount to intrinsic value, and that’s not common in the real estate sector.
Munger explained that he and Buffett wouldn’t have any competitive advantage over experienced real estate investors, and Berkshire Hathaway’s corporate structure would mean it would be hit by a “whole layer of corporate taxes” if it invested in real estate. A Real Estate Investment Trust or REIT, for instance, has several tax advantages over a corporation like Berkshire Hathaway.
“It is unlikely that the disadvantage of our structure combined with the competitive nature of people with better structures buying those kinds of assets will ever lead to anything really interesting [for us],” Buffett summarized.
“I would say we missed the boat to some extent during the RTC days. It was a sufficiently inefficient market at that time and there was a lack of financing.” He was referring to the Resolution Trust Corporation, a federal agency that operated from 1989 to 1995.
However, just because Berkshire Hathaway doesn’t directly own real estate doesn’t mean it has avoided this multi-trillion dollar asset class altogether.
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Real estate adjacent investments
During their career, Buffett and Munger have made several investments in real estate-related ventures.
HomeServices of America, a subsidiary of the Berkshire Hathaway group, is one of the largest real estate services companies in the country, offering brokerage, mortgage origination, title insurance and relocation services.
Buffett has also accumulated a position in homebuilders Lennar (LEN) and NVR, Inc. (NVR), according to his company’s latest 13F filing.
Lessons for common investors
Berkshire Hathaway’s unconventional approach to real estate highlights the fact that this is a market where retail investors might have an edge over a massive corporation.
If you’re an individual investor or landlord, speak to a tax planning specialist to understand all the tools at your disposal, including the capital gains exemption limit for primary property and 1031 exchange, which could boost your returns from this asset class.
If you don’t have the capital to buy real estate directly, consider REITs. These specialized trusts are designed to minimize the tax impact of real estate investments and are ideal for income-seeking investors.
REITs also allow retail investors to access niche segments of the real estate market. Digital Realty (DLR) offers exposure to a portfolio of data centers, while Lamar Advertising (LAMR) owns billboards across the country. Getty Realty (GTY) operates a network of gas stations, convenience stores and car washes across the U.S.
These REITs could help you diversify your portfolio and potentially improve cash flow from dividends.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
