Warren Buffett: Why Real Estate Is a LOUSY Investment?

We’ve both had a fair amount of experience in real estate and charlie made early money in real estate the second point is the more important points real estate is not a commodity but i think it tends to be more accurately priced critically developed real estate more accurately priced most of the time Now during the rtc period when you had huge amounts of transactions and you had a you had an owner that didn’t want to be an owner in a very big way and they didn’t know what the hell they owned and all of that sort of thing i mean you had a lot of mispricing then

and i know a few people in this room that made a lot of money off of that but under most conditions it’s It’s hard to find real estate that’s really mispriced i mean when i look at when i look at the transactions that reits engage in currently and you get a lot of information on that sort of thing they’re very similar but it’s a competitive world and and you know they all know about what a class a office building and you know in chicago or wherever it may be is going to produce at least they have they may all be wrong as it turns out because of Some unusual events but but it’s hard to argue with the current conventional wisdom most of the time in the real

estate world but occasionally there have been some you know there there could be big opportunities in the field but if it if they exist it will certainly be because there’s a there probably there’ll be a lot of chaos in real estate financing for one Reason we’ve done some real estate financing and you have to have the money shut off to quite a degree probably to get any big mispricing across the board charlie yeah we don’t have any competitive advantage over experienced real estate investors in the field and we wouldn’t have if we were operating with our own money as a Partnership and if you operate as a corporation such as ours which is taxable under chapter c of the internal revenue code you get a whole layer of corporate taxes between the real estate income and

the use of the income by the people who own the real estate so by its nature real estate tends to be a Very lousy investment for people who are taxed under sub-chapter c of the code relating to corporations so the combination of having it generally allows the activity for people with our tax structure and having no special competence in the field means that we spend almost no time thinking about anything in real estate and then such Real estate as we’ve actually done like holding surplus realist trying to sell it off i’d say we have a poor record ad yeah c-corps really does it doesn’t make any sense i mean i know there are c-corps around that that are in

real estate but there are other structures that are more attractive there really aren’t other structures i mean lloyd’s is an attempt at it to Some degree but there aren’t other structures that work well for big insurance companies or i mean you can’t have a walmart very well that does not exist in a c corp so they are not subject to s corp or partnership competition that determines the returns on capital in in in in the discounts to our field but if you’re competing With s equivalent of s corps reits uh or partnerships or individuals you’ve just got an economic disadvantage as a c corp which is for the those of you who don’t love reading the internal revenue code it’s just a standard

vanilla corporation that you think of all the dow jones companies all of the s p companies and so on and as charlie says it’s unlikely that The disadvantage of our structure combined with the competitive nature of people with better structures buying those kinds of assets will ever lead to anything really interesting although i would say that we missed the boat to some extent during the rtc days i mean uh it was a sufficiently inefficient market at that time and there was a lack of Financing that we could have made a lot of money if we had been geared up for

it at that time we we actually had a few transactions that were pretty interesting but not but nothing that was significant in relation to our total capital we thought significantly about buying the irvine corporation and it became available so that’s the only big one i can remember That we seriously thought about yeah that that was in 1977 or so yeah mobile oil was interested in you know don brent ended up putting together a group port but you know that kind of thing could conceivably happen but it’s unlikely.