money When To Buy A House According To Warren Buffett
Buying a home is probably the most significant financial transaction most people will ever make. For many, this goal is the reason they save, and being able to buy a home is considered the most prominent financial landmark in any life.
However, according to Warren Buffett (Trades, Portfolio), investors should look past this goal when they are planning their long-term goals.
Rather than targeting buying a home, Buffett told shareholders at the 1998 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting, that investors should target wealth creation first, and only look to buy a property when the money required is equivalent to 10% of total net worth.
When to buy a house
Answering a question from a young audience member who wanted some advice from the Oracle of Omaha on the best time to buy a home, Buffett responded:
"I'll just relay one story, which was when I got married we did have about $10,000 starting off, and I told Susie, I said, "Now, you know, there's two choices, it's up to you. We can either buy a house, which will use up all my capital and clean me out, and it'll be like a carpenter who's had his tools taken away for him. "Or you can let me work on this and someday, who knows, maybe I'll even buy a little bit larger house than would otherwise be the case." So she was very understanding on that point. And we waited until 1956. We got married in 1952. And I decided to buy a house when it was about -- when the down payment was about 10% or so of my net worth, because I really felt I wanted to use the capital for other purposes."
However, Buffett then went on to say that if "you have the house you want to buy," he believed in "going out and probably getting the job done."
Depends on your situation
Like everything in investing and financial management, Buffett's comments should not be taken literally. When you decide to buy your first home should depend entirely upon your own needs as a single person or as a family. And your financial situation at the time.
It also depends on where and what you are buying. As Buffett went on to explain in 1998, if you can get an 8% or 9% return from the market, but home prices are unlikely to increase at the same rate, then stocks might be the better options.
At the time, Buffett was achieving over 20% per annum returns. These sorts of returns are pretty unrealistic for the average investor, so it does not make much sense to make a financial decision about buying a house based on what Buffett did in the 1960s.
Still, if you think you can earn 10% or more per annum, it might make sense to put off buying a house as the capital required would be better deployed in the market. If you don't think you can make this sort of return, or believe that the market is set to go nowhere for the next few years, then it might make more sense to use your capital to buy a home.
There are other factors to consider as well, such as monthly income, the price of the property, and interest rates. As I said earlier, there is never a one-size-fits-all solution to these kinds of problems.
Nevertheless, it is interesting to see Buffett's views on the subject and the case study of his actions. As we now know, Buffett has lived in the same house all of his life, so it seems as if it was worth him waiting to find the right opportunity, rather than jumping at the first property he saw when he could afford a home.
Disclosure: The author owns shares in Berkshire Hathaway.
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This article first appeared on GuruFocus.
