Can you imagine if Warren Buffett was your investment advisor? Wow, that would be awesome wouldn’t it? Getting advice from the most successful investor in the world would be incredible, huh?
A few years ago, myself and bunch of other real estate investors gathered from around the country to study the man, the legend, the Oracle of Omaha, Warren Buffett himself. We studied in-depth a book called “Buffettology”, a book that embodies his investing principles and techniques throughout his decades of making billions of dollars for himself and his shareholders. We all learned so much from it. And our goal was to take from that book how Warren approached investments, how he bought them, how he made money from them, and lastly, how we could take what we learned and apply it to our own real estate investing lives. Here’s are 5 what I call, Buffett Nuggets below:
This week, I’m going to share with the two remaining Buffett Nuggets and how you can use them in your very own apartment business.
Buffett Nugget #3: Warren seeks expansion in his investments
I can tell you once I understood this nugget, it really sold me that investing in apartments rather than single family homes. How I saw expansion was literally playing the game of monopoly with my real estate investments. First buy a few small green houses and later exchange them into large red hotels. I realized that having a 25-unit apartment complex was better than having 25 single family homes. I no longer had to worry about 25 aging roofs!
Also, when I had a tenant move out of one of my homes, that investment was 0% occupied with no income. On the other hand, my 4-plex, when it had one tenant missing, I was 75% occupied with excess income – cash flow. So, I took several of my single family rentals and sold them and started buying apartments. In one transaction, I went from a single family home into an 87-unit apartment building by using the 4th nugget we’ll learn below, leveraging. That was both, expansion and leveraging. I’m sure Warren would have been proud of me!
Buffett Nugget #4: Warren maneuvers leverage in and out of his investments
Warren found a way to acquire other people’s money to manage so he could profit from his investing expertise. He did this by starting an investment partnership and later by acquiring insurance companies. Once he acquired their money (I call this leverage), he even leveraged that. And the rest is history – all of his early investors are now millionaires several times over. As apartment investors, we are like Warren where we don’t have unlimited money in our personal bank accounts to acquire apartment complexes. Like Warren though, we need rich friends. Warren hosted chicken dinners at his home for doctors who wanted to invest their money so they wouldn’t have to work forever or hard as they have been.
Once I saw this, that’s exactly what I set out to do – acquire other people’s money and use my expertise in investing it. You should do the same thing. Start small is my best advice. A second way to leverage your apartment investment is to understand the power of the net operating income the property generates. On an 8 cap rate property, for every dollar you increase the net operating income, your property value goes up by $12.50. Now, is that leverage or what?! Increasing your net operating income by $5,000, which is not hard to do, will increase your property value by $62,500!!
Doesn’t all this make sense? There’s no rocket-science or complex formulas here, right? That’s what I like about Warren’s style of investing. So, there you are folks…plain ol’ fashion good advice that you can apply yourself to your apartment investing right now.