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What would Buffett be doing with Single Family homes NOW? (WWBD)


Sionnach
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Invitation homes recently IPO'd. The company is a product of Blackstone's single family home acquisition spree in mid-2012. They now have a portfolio of 50k single family rental homes.

 

For those who don't remember, back in early 2012 Buffett said in early 2012 that if he could be investing his money anywhere it would be in single family homes.

 

Here's a thought experiment: Let's say in another dimension Buffett DID acquire 50k homes after the crisis. What do you think he would be doing now?

 

Sell it to invitation homes? Use the cash flow from rental income for other acquisitions? Sell the homes in the market? Keep it as a sustainable business?

 

What do you think and why?

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Buffett wouldn't sell it because he wouldn't want to take the tax hit on the capital gains. There's a reason he didn't go out and buy a bunch of homes in 2012 and lack of funds wasn't one of them.

 

Also btw, I wouldn't want to buy anything that Blackstone is selling.

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Sell it to invitation homes? Use the cash flow from rental income for other acquisitions? Sell the homes in the market? Keep it as a sustainable business?

 

What do you think and why?

 

He would sell to invitation home if they were going to buy it above fair and market value. It will depend on price.

I think keeping overvalued business in not likely to be a good idea. Going by his example and comment he made in recent interview, he invests because he likes that asset deployed by American companies produce remarkable results over time.

 

I see less of that with real estate unless you add financial engineering or leverage. There is very less scope of innovation in real estate compared to other companies. In aggregate real estate underperforms stock market. But definitely there are time when you can take advantage of certain opportunities to earn better return.

 

If I can own a commercial building in NYC or own a Sees candies for a billion dollar valued, See's candies is better asset to own than building in NYC. Of course there are risk involved in both but at least from Buffett perspective he prefers later.

 

 

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I like real estate because of the ability to use leverage. You can take modest savings, throw in a partner and buy a large enough building for someone to manage for you. You can upgrade one that may need it and then raise rents which will add to your equity as well as the reduction of debt per year.

 

You're buying an existing business. Getting 15% return on equity is pretty doable. The leverage matches the asset as well. In most cases, for major people it's easier to find a partner for real estate investment versus partners to start an investment fund for stocks

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Buffett didn't buy singer family homes because:

 

1. He would need to buy a tremendous amount of them.

2. They are a little harder to operate unless you can buy enough in close enough areas to gain the scale benefits that apartments have.

 

Real estate in the form of leasing out doors for rent meets Buffett's criteria of:

 

1. An existing business, usually with cash flows that meet his return requirements.

2. Reasonably conservative

3. Durable in the since that someone will always need a place to live. You may not have crazy branding that a KO or Neste has but you have barriers to entry if you buy below the replacement cost. Often times building permits per door are as expensive as the purchase per door of an existing building.

 

Real estate that consists of new construction is akin to stock speculation.

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I remember hearing him say something along the lines of "if I could snap up 500,000 single family homes in one order I would; it just doesn't work like that though". Granted when you have money its not as much of a challenge, but between the time and the fees necessary to make a large enough investment he probably would have just been better off buying stocks. Which is what he did.

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