Four Real Estate Investment Tips That You Can Learn From Warren Buffet And Other Stock Investors

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ome of the most successful
stock investors ever have       "An investment operation is one
based their investing           which, upon thorough analysis
principals on value investing.        promises safety of principal and
Investors such as Benjamin            an adequate return. Operations
Graham, Irving Kahn, and Warren       not meeting these requirements
Buffet, have used value investing     are speculative".
to build vast empires of wealth.
                                      So, there are 3 things needed for
Value investing was conceived by      something to be an investment:
Benjamin Graham, and David Dodd,      - You need to have done thorough
in their classic book, "Security      analysis.
Analysis", written in 1934.           - You need to be reasonably sure
Although they were talking about      that you won't lose your money.
stocks, there is still a lot to       - You need to be reasonably sure
be learnt from value investing        that you will make some money.
that can be applied to other
investment vehicles. This article     In terms of real-estate, this
will show four things that            means that just buying and
real-estate investors can learn       selling real-estate, does NOT
from value investing...               make you an investor. If you're
                                      buying properties at random, just
1: *Investing vs Speculating*         because there is a boom and all
                                      property is going up in value,
In value investing, it's              you are not investing. You are
important to make the distinction     speculating.
between being an investor, and
being a speculator. In "Security      There is nothing wrong with
Analysis", it is defined as this:     speculating, you just need to be
                                      aware when you are speculating,

versus when you are investing.        future in front of them.

2: *Value vs Quality*                 This is generally a good strategy
                                      for real-estate investors to move
Value Investing doesn't really        to later on, when they have built
have any formulas, or rules. It       up their portfolio. Long term,
is more of a theory, with some        well chosen property will make
general principals. Because of        significantly more capital growth
this, there are many ways to do       than poorly chosen property, and
value investing, and different        may be worth buying even if it
ways to apply it.                     can only be bought at market
                                      value.
Benjamin Graham focused on buying
stocks significantly below value,     And with commercial real estate
with little emphasis in the           investment, it may be worth
quality of the stock, in regards      getting a lower rental yield, if
to their long term prospects.         this means you can have a high
                                      quality tennant, who will pay the
This can be a useful strategy for     rent reliably. This is a strategy
a real estate investor,               that famous New Zealand
particularly when they are first      commercial real estate investor
starting out, and need to build       Bob Jones has applied, with great
up equity fast.                       success.

Warren Buffet still looks at the      3: *Margin Of Safety*
value of a stock, but puts a lot
more emphasis on the quality of       One of the most important
the stock. He only buys stocks        principals in value investing is
that he thinks have good long         "margin of safety".
term prospects, with a bright

Margin of Safety is the idea of
making sure that you only invest      Suppose you are looking at a
if your calculations show that        deal, and you find you can buy
there is a significant profit to      some land for $100,000 and you
be made. There is no way your         can build a 4-bedroom house on it
analysis can be 100% accurate, so     for $150,000.
the margin of safety gives you a
buffer, to use when your              If new 4-bedroom houses in the
calculations are slightly off, or     area are selling for $270,000
you get worse than average luck,      then should you do the deal?
or any number of unexpected           Theoretically, it will only cost
problems occur.                       you $250,000 to buy/build with a
                                      sale at $270,000 so you should
So when estimating the value of a     make $20,000 profit.
stock, you use conservative
estimates for earnings etc, to        But that isn't much margin of
come up with the value. If your       safety. What if building costs
estimated value comes in at $10,      blow out, and it cost more than
then you don't buy the stock if       $150,000 to build? What if you
its currently selling for $9.75,      can't sell it straight away so
because it's too risky, and if        you have some holding costs? What
your calculations are off, you        if the other 4-bedroom houses in
wont be buying a bargain. If the      the area have much better
price is currently $6 though, you     kitchens than you realized, and
might buy it, because you have a      you can actually only sell for
$4 margin of safety to use if you     $245,000?
estimated incorrectly.
                                      There are a lot of unknowns here,
The same principal applies to         and because your margin of safety
real-estate.                          is so small, unless everything

goes right, you can quickly find      Convential wisdom says that to
yourself making a loss.               increase your reward in
                                      investing, you must increase your
If on the other hand, 4-bedroom       risk. This is often true, but the
houses in the area are selling        Magin of Safety principal can
for $350,000 then you have a          turn this around.
projected profit of $100,000.
You can afford for a lot of           When margin of safety is used, a
things to go wrong, and you can       higher reward actully means a
still make a profit.                  lower risk!

In the first case, if building        You can see this is the example
costs go up by $50,000, the deal      above. The deal that is projected
will cost you $30,000.                to make $20,000 is quite risky,
                                      whereas the deal with a projected
In the second case, because you       profit of $100,000 is much safer,
have a much larger margin of          because a lot more can go wrong
safety, if building costs go up       before a loss is made.
by $50,000 then you will still
make a profit of $50,000.             This doesn't mean than high
                                      reward always means lower risk
Margin of Safety is a very            though. The convential Risk vs
important concept to all              Reward wisdom is still correct in
investors, and all real estate        general. So if you borrow more to
investors should think about it       buy a property, your risk and
if they want to be around for the     reward have increased. If you buy
long term.                            in a small town to get a higher
                                      rental yield, your risk and
4: *The myth of Risk vs reward *      reward have increased.

This Risk vs Reward theory is         analysis shows is worth $200,000,
only incorrect when directly          then your reward has gone up,
applied to the Margin Of Safety       while your risk has gone down.
concept. So if you buy something

for $100,000 that all your

About the Author:

Tony John is an experienced investor, who specialises in commercial real estate investment. Get his free email course now, and find out how easy it is for YOU to get your first real estate investment. http://www.freeinvestmentcourse.com