Warren Buffett on Homeownership

Calgary real estate may not be the riskiest housing market, but that doesn’t change the fact that homeownership is a significant milestone in one’s life. In addition,...

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Warren Buffett on Homeownership

Calgary real estate may not be the riskiest housing market, but that doesn’t change the fact that homeownership is a significant milestone in one’s life. In addition, acquiring one’s home is a monumental investment—the biggest one that most of us will probably enter in our lifetimes. Unfortunately, as has been evidenced by the not-so-distant US housing bubble, some consumers simply do not view homeownership as a form of long-term investment, or at least a commitment.

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If you’re a first-time homebuyer interested in making a smart purchase, you should try to understand how to put your assets into good use in conjunction with purchasing and maintaining a house. While a house may not be a surefire investment as history tells us, it will probably be your biggest asset in the long run. Pure and simple, it pays to know the facts and to hear the opinions of experts of the field. And if you’re planning to treat your house as an investment, then there’s no other expert that’s more respected than Warren Buffett himself. So what does the Oracle of Omaha have to say about real estate?

First of all, Buffett has said that the biggest risk in any investment is not knowing what you’re doing. Purchasing a house requires a lot of specialized knowledge—from construction to appraisal, taxes to mortgages, you’re bound to be overwhelmed by all the details involved with buying real estate. For this reason, it is of utmost importance to seek advice from people whom you can trust.

One of the fundamental tenets of value investing is the margin of safety. This term can be applied to real estate in the sense that you should first determine the intrinsic (or real) value of your real estate before purchasing it—and of course, only purchasing it at a discounted or bargain price. It’s a pretty basic concept—one might say commonsensical—and yet it seems to be overlooked often enough. Going back to the practice of buying your house for less than what you think it is worth, you might argue that accuracy will pose a major problem to its application. But that’s precisely why you want to apply a margin of safety: the larger your discount percentage, the more wiggle room you give yourself in case your estimates fall short of reality.

There may be no specific advice on Calgary real estate given by the Oracle himself, but you can chew on these nuggets of wisdom that apply broadly to buying real estate. Buffett’s basic stance with investments is to be prudent and conservative, and these will manifest in the following pieces of advice he has shared before:

  1. Buy only what you can afford. Of course, you’ll probably have to take a mortgage, but make sure that you have the capacity to pay off these mortgages as scheduled, and that you have a backup plan in case something goes awry, especially in terms of income source. If you keep wanting to buy your dream home instead of making practical choices, you may run into trouble sooner or later.
  2. Plan to stay for the long-term. Not only do you minimize the costs involved with constantly buying and moving into new houses, you also avoid the risks imposed by mortgages’ financial constraints.
  3. Opt for fixed mortgage payments. Financial planning is crucial. You will want to know your regular housing expense payments to aid you with your cash flow and to avoid insolvency issues.

The secret to homeownership success is actually no secret at all. To use a fitting cliché, plan for the worst and hope for the best. While you have all these tools that can help you initially—buying at a favourable market, choosing the right mortgage—it is irresponsible to think that your house will eventually pay for itself. Just don’t commit to anything you can’t afford in the future, and hopefully, you’re bound to stay away from trouble in the future. 

Image by Fortune Live Media

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