 Why does Warren Buffett not believe that real estate is a fantastic investment? Why do both him and Charlie Munger now say that real estate is a lousy investment? I have three videos that I wanna look at and I wanna make just one kind of real estate compilation video. Let's dig in. In this first one, both Warren Buffett and Charlie Munger are gonna explain why they don't do it in Berkshire and they're also gonna explain how it's typically priced right so there's less of an opportunity. Let's look. We don't have any competitive advantage over experienced real estate investors in the field and we wouldn't have if we were operating with our own money as a partnership and if you operate as a corporation such as ours which is taxable under chapter C of the Internal Revenue Code, you've got a whole layer of corporate taxes between the real estate income and the use of the income by the people who own the real estate. So that was Charlie Munger explaining why Berkshire itself doesn't do it. It's mainly because there's tax advantages in real estate which make it more attractive but since you can't get those advantages in a corporation because of the double tax system, it doesn't make any sense. An individual would actually have better shots at taking advantage of those real estate benefits but the corporation like Berkshire wouldn't wanna do that necessarily because they don't get to capture that benefit. Now let's look at what Warren Buffett has to say about the pricing of real estate. We both had a fair amount of experience in real estate and Charlie made his early money in real estate. This is the second point is the more important one. Real estate is not a commodity but I think it tends to be more accurately priced, accurately priced, pretty developed real estate, more accurately priced most of the time. Now during the RTC period when you had huge amounts of transactions and you had an owner that didn't wanna be an owner in a very big way and they didn't know what the hell they owned and all of that sort of thing, I 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 but under most conditions it's hard to find real estate that's really mispriced. I mean when I look at the transactions that Leeds engage in currently and you get a lot of information on that sort of thing, they're very similar but it's a competitive world and they all know about what a class A office building in Chicago or wherever it may be is going to produce but at least they may all be wrong as it turns out because of some unusual events but it's hard to argue with the current conventional wisdom most of the time in the real estate world but occasionally there could be big opportunities in the field but if they exist it will certainly be because there's a, there'll probably be a lot of chaos in real estate financing for one reason or another. We've done some real estate financing and you have to have the money shut off to quite a degree probably to get any big mispricing across the board. Seacorps really doesn't make any sense. I mean I know there are seacorps around that are in real estate but there are other structures that are more attractive. There really aren't other structures. I mean Lloyd's is an attempt at it to some degree but there are other structures that work well for big insurance companies or I mean you can't have a Walmart very well that does not exist in a seacorps so they are not subject to S corp or partnership competition that determines the returns on capital in the discount store field but if you're competing with equivalent of S corp's REITs or partnerships or individuals you just got an economic disadvantage as a C corp which is for those of you who don't love reading the Internal Revenue Code it's just a standard vanilla corporation that you think of all of the Dow Jones companies all of the S and P companies and so on and as Charlie says it's unlikely that the disadvantage of our structure combined with the competitive nature of people with better structures buying those kinds of assets will ever lead to anything really interesting although I would say that we missed the boat to some extent during the RTC days. I 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 if we had been geared up for it at that time. We actually had a few transactions that were pretty interesting but nothing that was significant in relation to our total capital. So as you can see they don't hate real estate Warren Buffett doesn't hate real estate. They just have to get certain amounts of reward earnings yields or just they have to meet certain parameters and just realistically doesn't do it for their situation. They will double in the financing because they look to get like eight to 10% or whatever, a little bit more than treasuries for the risk and if they don't see a way to do that they're not that interested. So let's look at another one. Here they're gonna talk about owning real estate again. I think Warren is also gonna mention he invested in real estate outside of Brookshire so it's gonna be an interesting one to share. Yeah, Charlie and I, I mean both more Charlie than I, we've had certain personal real estate investments over time and it's a field that in general we understand we don't bring that much special to the game but we understand it, we've made money in it and actually at the time that the Nasdaq about hit its high a reach were quite cheap in my view and I would, I have a less than 1% of my net worth outside of Berkshire but basically I had it, I had that portion all in reach. They're all small ones at that time but they were selling at discounts at that time, they were selling at discounts to the values of properties and those values of properties were much more conservatively figured than today. Today you have very fancy prices on real estate and on top of that you have the reach often selling at a premium though so I regard reach as quite unattractive now certainly compared to five or six years ago but that's a group of security. So that's where an individual you regard them is unattractive? Yeah. And for a corporation that much more so? Yeah, right, right. The situation changed dramatically from five or six years ago. I mean the stock market in many respects from the 1999, 2000 period is down significantly, reach are up significantly, reach were very unpopular five or six years ago, now they're popular and it's better to pay attention to something that is being scorned and something that's being championed. So there Warren Buffett shares with us how he would jump into real estate and he has not inside Berkshire but he'll personally buy REITs, real estate investment trusts when the price makes sense so the price was down and there was opportunity to make money when nobody wanted them or not as many wanted them and then later there was a real estate bubble so less interesting when the price is elevated and there's less of a gap to make money and again, they reinforced the idea that owning those in a corporation doesn't make as much sense as owning them individually. Now this next one is some of the latest content about Warren Buffett and his thoughts on commercial real estate and banking. In 2023, early part there's been some bailouts from commercial and regional banks so let's hear what he has to say. We have had lots of investors in commercial real estate who have come in and said that this is going to be a crisis point that the government is going to have to step in that something should be done because there are so many commercial real estate loans that are coming due between now and 2025 and that they won't be able to get credit from the banks in the same way to renew or once those maturities come due to refinance. Well let's say they lose a hundred billion dollars in the banking system. Most of the banks can take that loss that they're sure of that loss and a few of them because they did other things. Their shareholders will end up losing the money but the depositors won't lose money but if you lend money to somebody and it comes due and they can't pay. The old story about the banker, I never made a bad loan. Of course some of them turned bad after I made them. And that's exactly what happens in whether it's in commercial real estate and people, if money rates are 2% or we were lending money out of four basis points at Berkshire to the federal government not much more than a year or a year and a half ago or something like that and if those rates change, let the person who bet that they wouldn't change lose money. I mean, if you make mistakes in business there's people plenty of people make mistakes. You pay for them. If you've got a big profitable business on top of it which a good many banks do, you take your losses and you keep going on. I mean banks can take a lot of loan losses but they can't take something that wipes out their capital and expect the world to ignore that fact. Meaning that you don't think anything needs to be done on the commercial real estate front. I think that the people who lend too much money should take losses and they're getting properties handed back to them now. I mean, within the last month or six weeks. The banks. Yeah, I mean they've got some office buildings in Los Angeles and Blackstone walked away from something. And if you get a non-recourse, everybody goes in the real estate business. It's told the first rule, the second rule, the third rule is never sign your name to anything. And so you have non-recourse mortgages and they're gonna walk away and the bank's gonna get stuck with losses and maybe they'll hold the property a long time and it'll come back. And I mean there's all kinds of ways that if you got capital strength you may decide, well I'll just hold it. But that money is sterile for quite a while and that's part of banking. I mean you expect to lose some money in banking. It's not a sure thing on every loan and you build that into your calculations and then you have capital that protects your depositors from eating into their money and if it does eat into their money then the FDIC which is in effect really a mutual insurance company of a very peculiar sort essentially spreads the losses among the continuing banks by higher FDIC assessments in the future. There you go, Warren Buffett is saying if you made risky bets you have to accept the consequences. So those are the three videos I thought would be relevant to Warren Buffett and his thoughts on real estate from what it sounds like. It doesn't work for them because they're mainly investing out of a corporation but they would do it or enter in the financing if there was enough juice to squeeze like if there's enough discount where they can make a profit or margin of safety they would be interested, they're not opposed to it but it has to meet their investment parameters. It implies that for an individual investor it might be better to invest in real estate but it would also be good not to just jump in when times are good, if you can wait for a discount or tight markets or a recession that's most likely what Warren Buffett is saying would be the best for individuals. Let me know if you agree with that in the comments. Cheers.