Warren Buffett Real Estate | 3 Reasons Why Warren Buffett Invests in Real Estate Through REITs

Warren Buffet does not allocate capital to direct real estate ownership. Berkshire Hathaway has held a few REITs. Learn more below.

last updated Friday, December 20, 2024
#warren buffett real estate #Investing in real estate

John Burson

QUICK LINKS

AD
Get access to EB 5 Visa Investment Projects

Warren Buffett is one of a handful of investors who have produced an average 20% annual return on assets under management for over 50 years, vastly exceeding the standard of five to six years. So, when he makes an investment move, everyone pays attention. However, Warren Buffett on real estate investment approach differs from mainstream investors.

Although the CEO of Berkshire Hathaway (NYSE: BRK.A)¹ (NYSE: BRK.B)² rarely invested in real estate in the past, he has recently made substantial investments in real estate investment trusts (REITs) as part of his passive income strategy for real estate. Out of more than 200 publicly traded REITs in the U.S., only two companies have managed to attract Buffett:

Store Capital (NYSE: STOR)³
and Seritage (NYSE: SRG)⁴.

By examining Store Capital and Seritage’s profiles, we can better understand why Warren Buffett chooses REITs over physical properties for significant investments. So, we’ll take a closer look at these companies as we discuss the three reasons Warren Buffett and Berkshire Hathaway invest in REITs.

Buffett: Real Estate Ownership is a Business, Not a Passive Investment.

Since it is a business, owning real property can be a mistake for investors looking for passive income investment. Ownership involves maintenance, rent collection, and problem-solving unless you hire a property manager.
On the other hand, a REIT investment is a much better source of passive income than property investments. For example, Warren Buffett holds a 9.8 stake in Store Capital for substantial passive income. This investment makes sense because Store Capital ranks in the top five in its class with a 5.22% yearly dividend yield and a dividend payout ratio of 1.56.

Warren Buffett’s REIT-dominated passive income strategy might help you make wiser investment decisions when investing in real estate when considering the reasons for his Store Capital investment choice.

Rewards vs. Management

In real estate investing, rewards and management are opposite terms. For example, Warren Buffett's REITs investments favor rewards over management.

Rewards in real estate come in two forms:

growth potential
and dividends.

Warren Buffett’s investment in Store Capital is fulfilling its reward by focusing on dividend growth. However, he purchased an 8.03% stake in Seritage with a different motive. This company has a mediocre dividend yield, but Buffett invested in Seritage because of its growth potential from its planned rent increases on lease-holding stores. Also, the company has signed 535,000 square feet of new leases, and the expansion project has aligned with Buffett’s growth perspective.

By investing in real estate through REITs, Buffett benefits from the growth potential or dividend yield rewards without owning, managing, or financing properties. REITs also provide tax advantages, diversification, and leverage.

Liquidity as a disadvantage

The most ignored yet significant aspect of investing is liquidity. When you invest in real property, your capital could be tied up for a long time, making a traditional real estate investment illiquid. This disadvantage can be problematic in uncertain times.

On the other hand, when you invest in real estate through REITs, you can sell your units anytime you want, as it is a publicly traded financial instrument. You have to pay your broker a percentage of the exit load. No other effort is necessary besides putting an offer of sale from your account.

tag: warren buffet real estate company

BERKSHIRE HATHAWAY INC

Berkshire Hathaway real estate: Berkshire Hathaway Home Services is a real estate franchise network tailored to meet the demands of the modern real estate market. The company caters to many clients, from first-time home buyers to those searching for their dream home. When you choose Berkshire Hathaway, you can always count on their down-to-earth team members and local experts to provide you with the best service, skills, and support.

1. BERKSHIRE HATHAWAY INC CHART. BRK.A

2. BERKSHIRE HATHAWAY INC. CHART BRK.B

Seritage growth properties, CHART SRG

About Serigate

Seritage website

Website: seritage.com

CEO: Andrea Olshan (Mar 2021–)

Subsidiaries:

Seritage Src Finance LLC,
GS Portfolio Holdings II, LLC
MS Portfolio LLC
GS Portfolio Holdings (2017) LLC
SF WH Joint Venture LLC
SI UTC LLC
GS Portfolio Holdings II LLC

Founded: 2014 Headquarters: United States Number of employees: 32 (2022)

Best REITs to Invest In: Insights from Warren Buffett

When considering the best REITs to invest in, many investors look to Warren Buffett for guidance. While Buffett is primarily known for his stock market expertise, his investment principles can be effectively applied to REIT investing.

Understanding REITs Through Buffett’s Lens

Warren Buffett emphasizes investing in businesses with strong fundamentals and reliable income streams. This philosophy aligns perfectly with the concept of REIT stocks, which focus on real estate properties generating consistent rental income. By selecting the best REITs to invest in, investors can benefit from stable dividends and potential property value appreciation.

Key Sectors Buffett Might Favor in REIT Investing

Buffett would likely favor REITs in high-demand sectors such as:

Commercial Real Estate: Properties like office buildings and retail spaces that maintain steady occupancy rates.
Healthcare Facilities: Medical offices and senior living communities that cater to an aging population.
Industrial Spaces: Warehouses and logistics centers that support the booming e-commerce industry.

These sectors not only provide consistent rental income but also offer resilience against economic downturns, making them attractive choices for REIT investing.

Are REITs a Good Investment? Warren Buffett’s Perspective

Are REITs a good investment? According to Buffett’s investment strategies, they can be. By focusing on REIT stocks with strong management teams, solid asset bases, and growth potential, investors can build a diversified and robust portfolio. Buffett’s approach encourages looking for value and long-term growth, both of which are achievable through strategic REIT investing.

Top REITs to Consider

While Buffett hasn’t publicly endorsed specific REITs, applying his investment criteria can help identify top performers. Look for REITs with:

Consistent Dividend Payouts
Reliable income streams are a hallmark of strong REITs.
Quality Assets
Properties in prime locations or growing sectors ensure long-term value.
Experienced Management
A capable management team can navigate market fluctuations and drive growth.

Conclusion

Warren Buffet prefers to invest in REITs instead of real property because they are a great source of passive income, are reward-oriented, and are more liquid than property ownership.

Aside from following Warren Buffett’s successful principles, REITs can be desirable if you prefer real estate assets over securities but lack significant capital to invest in real property. You can start investing in real estate through REITs for just $ 1,000.

Frequently Asked Questions

What is the dividend payout ratio?

The dividend payout ratio is the number of dividends paid to company shareholders relative to a company's income. It measures the percentage of net income the company distributes to its shareholders through dividends.
For example, if the earnings per share are $1 and the dividend per share is $0.60. Then, the payout ratio is 60% or 0.6.

What does Warren Buffett Think About Real Estate Investments?

Warren Buffett said, “Real estate can be a good investment under certain circumstances.” In the past, Buffett has made several successful investments in real estate through his company, including purchasing a large real estate brokerage firm and a mobile home manufacturer. However, Buffett has also cautioned that investing in real estate can be risky, particularly if an investor doesn't have the proper knowledge or resources to evaluate a property. He has advised individual investors to research any real estate investment before committing to it.

Does Warren Buffett invest in REITs?

The short answer is yes. Berkshire Hathaway does allocate capital real estate ownership throughout REITs. Learn Warren Buffett REIT investments below.