Warren Buffett’s Latest Investment Tip

Warren Buffett is often asked why his holding company, Berkshire Hathaway, doesn’t invest in real estate. His response: Why buy real estate when the stock market is so easy? The multi-billionaire, who many regard as the greatest investor of the 20th century, has given investors plenty of timely guidance over the past 50 years. Today, he’s changing his tune about real estate. He may or may not be buying it for Berkshire Hathaway, but recently, on CNBC, he suggested that it’s currently a tantalizing investment opportunity— for the handy.

Exactly how good has Buffett’s advice been, in the past, when making recommendations to the public? You be the judge.

  • When equities were dirt cheap in the late 1970s, Buffett excitedly recommended stocks, describing himself as an oversexed man in a harem, while the media, led by BusinessWeek, was calling for the death of equities instead. Buffett was right, as the U.S. markets averaged more than 17 percent annually for the next 20 years.
  • While Americans grew frothy over the delirium of the internet stock craze, Buffett used his 1999 Berkshire Hathaway annual report to warn that disparities between stock prices and business earnings would eventually result in massive losses for speculators. Once again, he was proven right when the Nasdaq stock exchange plummeted more than 70 percent from its high in 2000 to its low in 2002.
  • At his 2005 Berkshire Hathaway annual meeting, Buffett again warned people—this time, of the excesses in the escalating housing market. Shortly after, home prices crashed.
  • In October 2008, during the economic crisis, Buffett recommended that investors should buy stocks. Those heeding his advice have seen the S&P 500 gain 56% since then.

Yes, there is a reason he’s called The Oracle of Omaha. And now he’s suggesting that foreclosed real estate properties--if you’re handy enough to cover home maintenance and repairs—could be a fabulous opportunity.

The world’s most famous value investor sees American homes as exceedingly cheap. When compared to America’s national median household income, it’s easy to see why. The median home price, as reported by Kiplinger’s, is roughly $170,000. This is barely three times more than the current, median household income, which the Wall Street Journal pegs at roughly $50,000 a year.

For a neighbourly comparison, the typical Canadian home fetches $358,000 U.S. and Canadian households are paying more than five times their median incomes for homes.

I salivate at the thought of buying cheap American real estate. And why wouldn’t I? The 1,700 square foot apartment in Singapore (which I’m renting) has a market value that’s ten times greater than my household income. And I’m not the only foreigner attracted to what might be—comparatively—a free housing lunch. Worldwide, investors are already taking advantage of America’s deeply discounted homes.

According to The Guardian, British investors are chartering tours—not to the Grand Canyon or Disneyland, but to distressed U.S. home districts, looking for real estate bargains. And they’re not alone. Andy Katz, of WiseCat Realtors told Canada’s national paper, the Globe and Mail, that 90 percent of his sales in Miami Beach are flowing to foreign investors from Canada, Italy, Britain and Dubai.

Foreigners, however, aren’t the only people getting in on the action. Many Americans are recognizing the value that Warren Buffett sees as well. The young journalist and finance blogger, Paula Pant, recently scooped a three bedroom house for $21,000 in Georgia. She describes her purchase and total estimated costs, while taking her blog readers through a virtual tour of the home.

If you plan to follow Paula’s lead, you have an advantage over many foreign buyers. Your neighbourhood, after all, is your home turf. However, research any investment opportunities with a keen willingness to learn, and ensure that you can easily afford to pay significantly more than the basic mortgage requirements, with or without a tenant. Be safe and conservative.

Remember the three most important words that Buffett stresses before making any investment: “margin of safety.” Make sure that yours is built in.