Warren Buffett's Cautious Investment Advice | Real Estate Investing

Have you ever met someone famous? Or gotten to know them?

Be honest—after the initial awe wore off, were you disappointed? Most people are.

One day, my pastor relayed how he grew up in awe of a Boston Red Sox legend. He was thrilled every time that player went to bat, and he dreamed of playing on the same field someday. He worked hard for 18 years, chasing that dream.

Then, he met his idol. Actually, he didn’t only meet him—the legend became his coach!

And that’s when the disappointment set in. The guy was anything but the hero he played on TV. He was quite the contrary, in fact.

My Encounter with a Real Estate Idol

I was in a room a few months back, when one of the nation’s leading multifamily syndicators showed up unexpectedly and grabbed the mic. I was delighted!

I had heard of his exploits but never listened to him speak. But now, there I was, seeing a guy in-person whose story may ultimately go down in history.

He talked about how bullish he was on multifamily. As the author of a humbly-titled book on the subject, I obviously agreed—at least about the multifamily business and its long-term prospects.

Then, he said (I’m not quoting him verbatim), “Don’t worry about overpaying for multifamily. Just get a great property in a great location, and get in the game for the long haul.”

I looked around the room. Was I alone in being shocked? Was this some kind of a joke?

I waited for the punchline—that he never delivered. He was serious.

And I later learned one of my investors actually saw a document showing that he was buying a large multifamily deal at around a 1 percent cap rate.

I spent some of that day wondering about my life and priorities. My company has been passing on dozens—no hundreds—of multifamily deals over the last four years.

It was always something. Over-priced! Marginal location! Out-bid! (Again.)

We were sitting on the sidelines while this truly brilliant and savvy guy has amassed a fortune in multifamily and other holdings. He drives the same car as the British royals and has at least one private jet.

Am I the One Who’s Out to Lunch?

What’s more, a few weeks ago, I saw the most recent annual report of multifamily sales from CBRE. The headline proclaimed, “2018 Multifamily Demand Highest Since 2000.”

Here are a few highlights from the report:

The U.S. multifamily market remains healthy, as 2018 net absorption reached the highest level since 2000.
Construction activity was also strong, with completions only slightly under 2017’s amount. Nevertheless, demand exceeded new supply for the year.
The overall vacancy rate of 4.5% in Q4 was down 20 basis points year-over-year.
Rent growth climbed to an annual rate of 2.8%, up from 2.3% a year ago.
Multifamily acquisitions totaled $173 billion in 2018, the highest level in 19 years and up 12.1% from 2017.

I guess it was the last one that really bugged me: multifamily acquisitions were way up.

So, here I am, the guy who called multifamily “the perfect investment,” going as far as to write a book by that title. I even did a BiggerPockets podcast of the same name!

However, I haven’t been acquiring multifamily lately. In fact, I have been warning people about it being overheated in post after post after post on BiggerPockets.

All of that, and I’m actually an optimist!

But then…

I watched a number of friends pay seemingly inflated prices for deals in questionable locations (in my opinion) and still make a killing.
I heard one of the world’s most successful multifamily syndicators telling the world why it’s OK to overpay.
The new CBRE report explained that scores of others were buying multifamily in 2018.

Meanwhile, my firm wasn’t getting in on any of it.

What Would Warren Buffett Do?

Confused, I revisited the advice of one of the most successful investors of all time, Warren Buffett:

In a 2001 Berkshire Hathaway investor letter, Buffett wrote, “After all, you only find out who is swimming naked when the tide goes out.”

I also read up on Gary Vaynerchuk, one of the world’s greatest marketers. What did he have to say on this topic?

“That bubble will burst, and then we’ll get to see who’s still around. And then we’ll get to see everyone else who says ‘entrepreneur’ in their Instagram profile right now, when they’re working at Bank of America in 24 months. And so, that’s what I’m waiting for. I’m most excited for, and waiting for, and hoping for, complete global economic carnage, so that we can weed out the B and C and D players,” Vaynerchuk said on stage at the 2018 Consumer Electronics Show.

He continued, “If you’re not a good entrepreneur, you should have a job. Merit and the truth are always the winners, in the macro. We’re just in a micro right now, and people are confused.”

Considering the Advice of Other Major Players

Friends and fellow real estate investors, let’s all remember that some of the best deals you will ever do are those that you don’t do.

Take it from me, the guy who hosts the How to Lose Money podcast and who has made lots of mistakes over decades of investing.

More importantly, you’ve heard it from giants like Buffett and Vaynerchuk.

So, what are you going to do to prepare for the outgoing tide, which is inevitable but impossible to time? Are you skinny dipping with sharks? That could be… well, very painful.

Have you met any of your investing idols? How did it go?

Comment below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.