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.
Buffett: 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 as a disadvantage
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 effort is necessary besides putting an offer of sale from your account.
tag: warren buffet real estate company
BERKSHIRE HATHAWAY INC
Berkshire Hathaway real estate: Berkshire Hathaway Home Services is a real estate franchise network tailored to meet the demands of the modern real estate market. The company caters to many clients, from first-time home buyers to those searching for their dream home. When you choose Berkshire Hathaway, you can always count on their down-to-earth team members and local experts to provide you with the best service, skills, and support.
1. BERKSHIRE HATHAWAY INC CHART. BRK.A
2. BERKSHIRE HATHAWAY INC. CHART BRK.B
Seritage growth properties, CHART SRG
About Serigate
Website: 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)
Conclusion
Warren Buffet prefers to invest in REITs instead of real property because they are a great source of passive income, are reward-oriented, and are 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.
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 the following 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).
