Invest Like Warren Buffett
“Applying Warren Buffett’s investing knowledge to Multifamily”
Notes from Old Capital Podcast #173
As most people know, Warren Buffett puts out an annual letter to Berkshire shareholders. This is an event that many investors look forward to every year. Since he’s widely considered to be the best investor ever and has a great track record of outperforming the market, we can all learn from him and apply his investing principles to what we do.
Old Capital has a great podcast and is one of the best sources to learn about and stay current with what’s happening in the multifamily market. One episode #173, they summarized Buffett’s letter and how it relates to multifamily investing. Here are some key takeaways that I learned after listening to this podcast.
Know your track record and how your returns compare to other investment alternatives. Investors have several choices on what to do with their capital.
Communication before the deal: educate and stay in contact with your investor group so that they’ll be ready when the deal comes along.
Values can fluctuate but cash flow should be the focus. Focus on operating returns. With cap rate fluctuations, values may vary from year to year. The value’s not crucial until it sells. Cash flow is always crucial!
Buy businesses with favorable and durable economic characteristics at sensible prices. Find out what your property’s advantage is and how you can sustain good occupancy in challenging times.
Differences between NOI vs. Cash Flow. Focus on true net income and cash flow, not EBITDA. Watch out for “one time expenses” that keep re-occurring.
Never risk getting caught short of cash. Raise more money than you think you’ll need. Make sure that you have a healthy operating reserve, one year of insurance up front, tax escrow needing to be paid at closing, and your renovation budget with contingencies.
Know what is generating cash for you so that you have capital to invest. Do not focus on short-term results. Have long-term focus.
Don’t have short term numbers to hit that will force you to make bad decisions for the property. Get long term fixed rate financing.
Full transparency to investors is everything. Overly communicate everything.
Government owns an interest in your earnings after tax returns. Understand your after tax return.
It’s all about the disciplined underwriting of deals. Know accurate comps, expenses, and upside potential.
Use debt carefully. “At rare and unpredictable intervals, credit vanishes and debt becomes financially fatal.” Giving out preferred returns to LP investors can be similar to debt for the general partners. Make sure to structure the deal right so the GPs stay committed.
Distribute earnings prudently. Make sure you have a reserve and don’t distribute so much that you don’t put money back into the property and the property suffers.
Defer taxes as long as possible. Accelerate depreciation using cost segregation. Get the gain in January and figure out a way to reinvest the money so that it offsets by end of year.
Get over historical pricing. Many investors are stuck on prices per door 5-10 years ago. You have to value the deal based on the cash flow and how that compares to other investment alternatives.
Pick the right jockey. Know who’s going to be running your investment.
Understand fees and the impact on returns.