Over the past couple of decades, Warren Buffett’s long-term buy-and-hold strategy has proven to be immensely successful. Even during various extreme macroeconomic climates. So it’s odd that the billionaire investor hasn’t bought any buy-to-let properties over the years like many of his peers.
Apart from owning a few real estate investment trusts (REITs) through Berkshire Hathaway, the ‘Oracle of Omaha’ hasn’t really ventured into this space. And that’s despite his investing partner, Charlie Munger, making his fortune in this sector. Why?
Warren Buffett versus buy-to-let
Buffett’s lack of interest in the property sector has less to do with his well-known circle of competence. But rather the challenges and headaches associated with being a landlord.
Buying a rental property in the long term can be immensely profitable. With the monthly income generated more than covering the mortgage payments and house prices typically remaining stable during economic wobbles, buy-to-let certainly seems like an enticing idea.
But it’s worth remembering that house prices don’t always go up. And despite many real estate investors spending time researching the location, and long-term development prospects, macro-factors like interest rates have thrown quite a spanner in the works this year.
What’s more, even if property values remain strong, managing a property can be a real pain. Let’s not forget that landlords have to deal with repairs, late payments on rent, and in the worst-case scenario, evictions. The latter two can be particularly problematic if they rely on rental income to cover mortgage payments.
Pairing all this with all the additional complications of ever-changing tax and regulatory requirements for landlords, it’s not surprising that Buffett hasn’t ventured into the buy-to-let space.
Investing in the stock market for the long term
On the other hand, buying shares is far less problematic, at least from a managerial perspective.
Owning a robust portfolio of top-notch businesses offering a sustainable dividend can yield similar returns as buy-to-let. The key difference is it’s a far more hands-off approach to building wealth. After all, shareholders aren’t involved in the everyday running of their businesses.
Plus, even if investors are keen to own real estate, buying shares in a REIT, as Buffett has done, is often seen as a viable alternative. And one that opens the door to owning industrial properties like warehouses, hospitals, and retail parks that a standard mortgage would never be able to cover.
Of course, investing in high-quality shares is far from risk-free. As 2022 has perfectly demonstrated, the stock market can be a volatile place. And even REITs have been hit hard lately.
However, for many businesses, their long-term strategies remain intact. Providing they have the fundamentals to support operations during the ongoing storm, today’s depressed prices offer some exciting buying opportunities for my portfolio. And it would seem Buffett agrees since he’s spent over $50bn buying shares so far this year.
