Warren Buffett / Why Real Estate Is a LOUSY Investment ?

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00:00We've both had a fair amount of experience in real estate and Charlie made his early money in real estate.

00:05The second point is the more important point. Real estate is not a commodity,

00:09but I think it tends to be more accurately priced, particularly developed real estate,

00:17more accurately priced most of the time.

00:20Now during the RTC period when you had huge amounts of transactions

00:24and you had an owner that didn't want to be an owner in a very big way

00:28and they didn't know what the hell they owned and all of that sort of thing,

00:31I 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.

00:36But under most conditions, it's hard to find real estate that's really mispriced.

00:43I mean when I look at the transactions that REITs engage in currently

00:48and you get a lot of information on that sort of thing, they're very similar.

00:52But it's a competitive world and they all know about what a class A office building

00:58in Chicago or wherever it may be is going to produce.

01:02At least they may all be wrong, as it turns out, because of some unusual events.

01:07But it's hard to argue with the current conventional wisdom most of the time in the real estate world.

01:14But occasionally there have been some, you know, there could be big opportunities in the field.

01:21But if they exist, it will certainly be because there's probably there'll be a lot of chaos

01:28in real estate financing for one reason or another.

01:30We've done some real estate financing and you have to have the money shut off to quite a degree

01:36probably to get any big mispricing across the board.

01:41Charlie?

01:42Yeah, we don't have any competitive advantage over experienced real estate investors in the field.

01:51And we wouldn't have if we were operating with our own money as a partnership.

01:55And if you operate as a corporation such as ours, which is taxable under chapter C of the Internal Revenue Code,

02:05you've got a whole layer of corporate taxes between the real estate income

02:11and the use of the income by the people who own the real estate.

02:14So by its nature, real estate tends to be a very lousy investment for people who are taxed under sub-teptor C of the code relating to corporations.

02:27So the combination of having it generally allows the activity for people with our tax structure

02:33and having no special competence in the field means that we spend almost no time thinking about anything in real estate.

02:41And then such real estate as we've actually done, like holding surplus real estate and trying to sell it off,

02:47I'd say we have a poor record.

02:49C corps really doesn't make any sense.

02:52I mean, I know there are C corps around that are in real estate, but there are other structures that are more attractive.

02:59There really aren't other structures.

03:02I mean, Lloyd's is an attempt at it to some degree, but there aren't other structures that work well for big insurance companies.

03:07I mean, you can't have a Walmart very well that does not exist in a C corp.

03:12So they are not subject to S corp or partnership competition that determines the returns on capital in the discount store field.

03:23But if you're competing with the equivalent of S corps, REITs, or partnerships or individuals,

03:32you've just got an economic disadvantage as a C corp, which is, for those of you who don't love reading the Internal Revenue Code,

03:41it's just a standard vanilla corporation that you think of, all of the Dow Jones companies, all of the S&P companies, and so on.

03:46And as Charlie says, it's unlikely that the disadvantage of our structure combined with the competitive nature of people with better structures

03:57buying those kinds of assets will ever lead to anything really interesting.

04:02Although I would say that we missed the boat to some extent during the RTC days.

04:08I mean, 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

04:18if we had been geared up for it at that time.

04:20We actually had a few transactions that were pretty interesting, but nothing that was significant in relation to our total capital.

04:28We thought significantly about buying the Irvine Corporation when it became available.

04:33So, that's the only big one I can remember that we seriously thought about.

04:38Yeah, that was in 1977 or so.

04:40Way back.

04:41Yeah, Mobile Oil was interested in, you know, Don Brent ended up putting together a group port.

04:45But, you know, that kind of thing could conceivably happen, but it's unlikely.

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