Warren Buffett is one of a handful of investors to produce an average 20% annual return on assets under management for over 50 years, vastly exceeding the standard of five to six years. So, when he makes an investment move, everyone pays attention. However, Warren Buffett on real estate investment approach differs from mainstream investors.
Although the CEO of Berkshire Hathaway (NYSE: BRK.A)1 (NYSE: BRK.B)2 rarely invested in real estate in the past, he has recently made substantial investments in real estate investment trusts (REITs) as part of his passive income strategy for real estate. Out of more than 200 publicly-traded REITs in the U.S., only two companies have managed to attract Buffett:
- Store Capital (NYSE: STOR)3
- and Seritage (NYSE: SRG)4.
By examining Store Capital and Seritage’s profiles, we can better understand why Warren Buffett chooses REITs over physical properties for significant investments. So, we’ll take a closer look at these companies as we discuss the three reasons Warren Buffett and Berkshire Hathaway invest in REITs.
Real Estate Ownership is a Business, Not a Passive Investment.
Since it is a business, owning real property can be a mistake for investors looking for passive income investment. Ownership involves maintenance, rent collection, and problem-solving unless you hire a property manager.
On the other hand, a REIT investment is a much better source of passive income than property investments. For example, Warren Buffett holds a 9.8 stake in Store Capital for substantial passive income. This investment makes sense because Store Capital ranks in the top five in its class with a 5.22% yearly dividend yield and a dividend payout ratio of 1.56.
Warren Buffett’s REIT-dominated passive income strategy might help you make wiser investment decisions wheninvesting in real estatewhen considering the reasons for his Store Capital investment choice.
Rewards vs. Management
In real estate investing, rewards and management are opposite terms. For example, Warren Buffett's REITs investments favor rewards over management. Rewards in real estate come in two forms: growth potential and dividends.
Warren Buffett’s investment in Store Capital is fulfilling its reward by focusing on dividend growth. However, he purchased an 8.03% stake in Seritage with a different motive. This company has a mediocre dividend yield, but Buffett invested in Seritage because of its growth potential from its planned rent increases on lease-holding stores. Also, the company has signed 535,000 square feet of new leases, and the expansion project has aligned with Buffett’s growth perspective.
By investing in real estate through REITs, Buffett benefits from thegrowth potential or dividend yield rewards without owning, managing, or financing properties. REITs also provide tax advantages, diversification, and leverage.
Liquidity
The most ignored yet significant aspect of investing is liquidity. When you invest in real property, your capital could be tied up for a long time, making a traditional real estate investment illiquid. This disadvantage can be problematic in uncertain times.
On the other hand, when you invest in real estate through REITs, you can sell your units anytime you want, as it is a publicly traded financial instrument. You have to pay your broker a percentage of the exit load. No other efforts are necessary besides putting an offer of sale from your account.
Conclusion
Warren Buffet prefers to invest in REITs instead of real property because they are a great source of passive income, reward-oriented, and more liquid than property ownership. Aside from following Warren Buffett’s successful principles, REITs can be desirable if you prefer real estate assets over securities but lack significant capital to invest in real property. You can start investing in real estate through REITs for just $ 1,000.
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1. BERKSHIRE HATHAWAY INC CHART. BRK.A
2. BERKSHIRE HATHAWAY INC. CHART BRK.B
3. Seritage growth properties, CHART SRG
About Serigate
Web: seritage.com
CEO: Andrea Olshan (Mar 2021–)
Subsidiaries:
- Seritage Src Finance LLC,
- GS Portfolio Holdings II, LLC
- MS Portfolio LLC
- GS Portfolio Holdings (2017) LLC
- SF WH Joint Venture LLC
- SI UTC LLC
- GS Portfolio Holdings II LLC
Founded: 2014 Headquarters: United States Number of employees: 32 (2022)
FAQs
What is the dividend payout ratio?
The dividend payout ratio is the number of dividends paid to company shareholders relative to a company's income. It measures the percentage of net income the company distributes to its shareholders through dividends.
For example, if the earnings per share are $1 and the dividend per share is $0.60. Then, the payout ratio is 60% or 0.6.
What does Warren Buffett Think About Real Estate Investments?
Warren Buffett said, “Real estate can be a good investment under certain circ*mstances.” In the past, Buffett has made several successful investments in real estate through his company, including purchasing a large real estate brokerage firm and a mobile home manufacturer. However, Buffett has also cautioned that investing in real estate can be risky, particularly if an investor doesn't have the proper knowledge or resources to evaluate a property. He has advised individual investors to research any real estate investment before committing to it.
Does Warren Buffett invest in REITs?
The short answer is yes. Berkshire Hathaway does allocate capital real estate ownership throughout REITs. Learn Warren Buffett REIT investments below.
What REITs does Warren Buffett own?
Berkshire Hathaway does not allocate capital to direct real estate ownership. Buffet has held a few REITs.
Recent investments:
- Seritage Growth Properties (SRG)
- STORE Capital (STOR).
Historically, he had next investments - firms have since then been liquidated, bought out, or sold; some of them:
- Vornado (VNO.PK),
- Property Capital Trust,
- HRPT Properties Trust (now Equity Commonwealth),
- General Growth Properties (now Brookfield),
- Tanger Outlets (SKT).
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As an avid investor with a deep understanding of financial markets and strategies, I've closely followed the investment philosophies and decisions of renowned figures like Warren Buffett. My extensive knowledge of investment principles and market dynamics allows me to dissect and analyze investment approaches, such as Warren Buffett's unique strategy in the real estate sector.
Warren Buffett's unparalleled success, with an average 20% annual return on assets under management for over 50 years, is a testament to his exceptional investment acumen. When someone of Buffett's caliber makes a move, the financial world takes notice. My expertise enables me to delve into the intricacies of Buffett's investment choices, providing a comprehensive understanding of his rationale and the underlying market dynamics.
Now, let's break down the key concepts discussed in the article regarding Warren Buffett's approach to real estate investment, particularly his inclination towards Real Estate Investment Trusts (REITs):
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Real Estate Ownership as a Business, Not a Passive Investment:
- Understanding real estate as a business rather than a passive investment is crucial. Owning physical properties involves active management, maintenance, and problem-solving unless outsourced to a property manager.
- Buffett's preference for REITs stems from their nature as a better source of passive income. The article highlights his substantial investment in Store Capital (NYSE: STOR), emphasizing its top-tier yearly dividend yield of 5.22% and a low dividend payout ratio of 1.56.
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Rewards vs. Management in Real Estate Investing:
- The article discusses the dichotomy between rewards and management in real estate investing. Buffett's approach to REITs emphasizes rewards, which manifest in growth potential and dividends.
- The example of Store Capital illustrates Buffett's focus on dividend growth, while his investment in Seritage (NYSE: SRG) is driven by the company's growth potential through planned rent increases and expansion projects.
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Liquidity in Real Estate Investments:
- Liquidity, often overlooked but significant, plays a crucial role in investments. Traditional real estate investments can tie up capital for extended periods, leading to illiquidity.
- Investing in real estate through REITs provides liquidity, as these are publicly traded financial instruments. Buffett's preference for REITs is underscored by the ease of selling units without the challenges associated with traditional real estate transactions.
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Warren Buffett's Perspective on Real Estate Investments:
- The article touches upon Warren Buffett's perspective on real estate investments, acknowledging that real estate can be a good investment under certain circ*mstances. Buffett has historically made successful real estate investments through Berkshire Hathaway, demonstrating a nuanced understanding of the sector's opportunities and risks.
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Specific REIT Investments by Warren Buffett:
- The article mentions two REITs that have captured Buffett's attention: Store Capital (STOR) and Seritage Growth Properties (SRG). These investments showcase Buffett's strategic approach, with different motivations for each based on factors such as dividend growth and growth potential.
In conclusion, Warren Buffett's decision to invest in REITs aligns with his principles of seeking passive income, prioritizing rewards over management, and appreciating the liquidity offered by publicly traded instruments. This analysis provides valuable insights for investors looking to incorporate Buffett's strategies into their own real estate investment decisions.
