Buying Advice

2023 vs. 2009 – Hawaii Real Estate Investing Advice From Warren Buffet

There has been a bunch of fairly recent press on “why Warren Buffet thinks real estate is a lousy investment.” Mainly, if I understand his thinking, managing properties takes a lot of work relative to financial assets, and it takes a lot of work to figure out the right properties. They quote him talking about his “circle of competence.”

That “circle of competence” observation reminded me of blog post I wrote early in 2009, before I was on the Hawaiʻi Life platform. I am re-publishing this and the follow up post from 14 years ago, because some rules of investing apply regardless of the specifics of the market cycle. It is good to be reminded of them. Note that in the text below, I have included some new comments with [these].

Snowy mauna kea at sunset on big island hawaii

Snow on the summit of Mauna Kea, Hawaiʻi Island

Warren Buffett on Hawaii Real Estate (A Post Written In 2009)

Warren Buffett has definitely been to Hawaii. At least once. And quite possibly only once, because on page 637 of Alice Schroeder’s authorized biography “The Snowball,” he flies here “for the first time” to attend Bill and Melissa Gates’s wedding. Although he does not invest in real estate, he did buy a mobile-home maker. I’m sure if you asked him his opinion on buying real estate in Hawaii, he would say that the topic was outside of his carefully drawn “circle of competence.”

If you are wondering why I waded through over 800 pages of text and almost 100 pages of footnotes about Warren Buffett, it was actually not in search of insight into the Big Island real estate market. However, having spent the past three weeks immersed nightly in the mind of Warren Buffett, I have been musing on whether and how his principles and success might apply to buying real estate in Hawaii.

Buffett still owns a second home in California which his late wife Susie insisted on buying, and once he bought a farm for himself and another time for his son Howie. But he does not look at his real estate holdings as investments. Perhaps that is the first lesson. Buffet is incredibly clear about the principles upon which he invests in companies and financial instruments. He acknowledges that there are also times he allocates money to businesses he personally likes (newspapers and fractional jet ownership come to mind) but that are unlikely to generate the kind of return his pure investments do. You can do the calculation no matter what the state of the market, and it will turn out to be cheaper to pay to vacation in a hotel than to buy a vacation home in Hawaii. As any of us who live here full-time can tell you, there are cheaper places to spend your retirement.

If you are buying a second or retirement home, you might as well be honest about the joy you will get out of owning it. Being the kind of business person who was schooled to cultivate relationships rather than chase transactions, I tend to spend a lot of time with my clients long after they’ve purchased. It is the best part of my job—to see them gleeful and giddy and sunburned, still madly in love with their Hawaii home. That’s the real return on their capital.

Nevertheless, it is hard not to wonder whether to buy NOW, whether prices might still have farther to drop. Recently other agents have quoted Warren Buffett to me in the context of a conversation on the many qualified buyers who are currently looking and still nervous about buying. “Be greedy when others are fearful, and fearful when others are greedy…” is what they are telling their clients. I found the quote on page 825, in the context of investing in the stock market. It brings to mind the [then-]recent NY Times piece by columnist David Brooks, who opines that what we have is less an economic crisis than a psychological crisis. If the pendulum had swung too far towards belief (on the part of both investors and consumers) in a low-risk economic world…now the pendulum has overshot in the opposite direction, inducing a kind of fearful paralysis. Perhaps the more relevant quotation from the Buffett book might be this one from page 719: “Berkshire’s best opportunities always came at times of uncertainty, when others lacked the insight, resources, and fortitude to make the right judgments and commit. ‘Cash combined with courage in a crisis is priceless,’ said Buffett.”

Elsewhere in the book, Buffett speaks of the importance of being long-term greedy versus short-term greedy. My clients who purchased here a year or two ago [might, in the short term, lose?] value, but aside from the joy they get spending time here, they are mostly old enough to have lived through a cycle or two and realize that over the long term they will be fine. Buffett does not try to pick the bottom of a market. He instead gauges the degree to which he believes a market to be overvalued based on fundamentals and historical relationships…and then sets a point at which he will begin to buy again. At that point, in his mind, the bigger risk will be missing the first and best opportunities, the ones he can grab before others are ready to commit.

One final point: Buffett thinks investing is best left in the hands of professionals. Your equation is clearly different if you are a true investor in real estate than if you are buying a second or vacation or retirement home, which you will use and love. If you are a successful real estate investor reading this, feel free to post some comments about where you think the opportunities are in today’s market. Buffett’s advice to start making your “snowball” with wet snow is a little tough to follow here in Hawaii…

The Only Thing I Would Add…

Right now we have a heck of a lot of snow on the Big Island summits, but I would not recommend going up there in search of actual wet snow. I do think there are a lot of good insights available from the agents writing here on Hawaii life…and thatʻs my recommendation for where to begin to build your competence around the Hawaiʻi real estate market.

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