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Why Warren Buffett doesn’t buy real estate and most other investors don’t either?

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Warren Buffett’s long-term investment strategy has proved successful in virtually all market conditions over the past few decades: recession, high inflation, and deflation. If there’s one thing that has made Buffett one of the most successful investors in history, it’s his dedication to his strategy.

Numerous new investment techniques and algorithms have come and gone over the years, but Buffett has kept his relatively simple strategy of choosing solid companies and focusing on long-term growth while somehow avoiding the noise. ignores that panics most investors.

It may seem strange that someone with such a disciplined, long-term approach to investing wouldn’t have bought real estate — save a 40-acre farm and his personal home — especially since Berkshire Hathaway Vice President Charles Munger built his fortune on real estate.

There is a difference between buying real estate and investing in real estate

Buffett is not against real estate investment and has in several real estate investment trusts (REITs) over the years. However, he knows that it makes little sense to start working as a landlord.

Buy and manage real estate is more of a business than an investment, and Buffett knows he can spend his time choosing companies to invest in rather than running a real estate business.

Real estate is a tricky business and often needs to be scaled up to encompass multiple properties in order to build significant wealth. Many individual investors enter real estate under the misconception that it is a passive investment, and most end up abandoning those properties once they realize what they’re getting into.

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Invest in real estate is a different story. Passive real estate investments allow investors to reap the benefits of this profitable asset class without taking on management responsibilities.

The FTSE Nareit All Equity REITs index has outperformed the S&P 500 in total returns for 13 of the past 20 years, with an average total annual return of 13.1% versus 11.1% for the S&P 500.

Many investors who have turned to the private markets for passive real estate investments have seen even higher returns on average. For example, the crowdfunding platform for real estate RealtyMogul has yielded an average internal rate of return (IRR) of 17.2% for investors on fully realized deals since 2014.

Related: Real Estate Crowdfunding Returns Compared

Passive investors now even have the option to buy shares of individual rental properties for as little as $100. The Jeff Bezossupported real estate investment platform has fully funded more than 150 rental properties worth more than $60 million since its launch last year.

Buying and managing real estate is a business with incredible earning potential, but it’s important to realize that it’s a… company and not a passive investment.

The returns earned from owning real estate are a direct result of the time, energy and money invested in it. While that company has been the source of many large fortunes over the years, it just isn’t a business that makes sense to most people.

You can visit Benzinga’s Private Markets Offering Screener to find passive real estate investments for accredited and unaccredited investors, with minimum investments starting at $100.

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Photo: Courtesy of Fortune Live Media on flickr

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