Warren Buffet recently released his annual letter to Berkshire Hathaway, Inc. shareholders. What was unique this year was that he based his letter on income properties, not his corporate investments. And Mobile Home U has been teaching these same theories for almost a decade.
Buffet invests in income property – and you should, too.
Buffet bought a 400 acre farm in Nebraska in 1986, and added a retail center near New York University’s campus in 1993. He knew that the farmland would always be productive, and the retail center would always be in demand by NYU students. He also liked the fact that the retail center was anchored by a retailer that still had nine years on their underpriced lease.
Income properties have little downside
In the letter, Buffet talks about how there can be little downside to owning a property that is income producing, because the focus is on how much money can be produced, rather than the price of the asset. While stocks can go up and down through speculation – and no tie to actual net income (think Facebook) – real estate is bought and sold based on “cap rates” of the net income. Unless the net income significantly declines, the prices of income properties rarely go down.
Since they are income producing, you have no immediate need to sell
With the exception of raw land, in which the property makes no money until the eventual sale (or loss on sale if values have declined), income properties, such as mobile home parks, make money every month for the owner, so there’s no rush to sell them. That also means that timing (another thing that Buffet hates) is no longer key, as you can make money without having to spot the bottom on buying or the top on selling. He uses the analogy that you can either sell your farm, or keep on farming, but there’s no real pressure to sell at any given moment.
He never visits them, but they perform fine and he has no desire to sell them
Buffet writes that he has only seen the farm twice, and never visited the retail center. But it has no effect on their return on investment, and he has no desire to sell them as long as they are producing cash flow. This is the same thing that Mobile Home U teaches – that you don’t have to be there to create value add; you are being compensated strictly for being the owner of the land. And in a world of 2% CDs and 4% junk bonds, it is very difficult to replicate the income a mobile home park can produce, so selling the park is often not as good a strategy as keeping it for the long term.
Mobile Home U and Warren Buffet obviously think a lot alike. The skill to investing is best represented by good income properties, and mobile home parks are among the best.