In the Berkshire Hathaway 2011 letter, Buffett said:

My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate.

I fail to see how real estate produce periodic profit like farms or business. Isn't real estate's price increase only driven by other people's demand? How does it differ from gold, which he considers as unproductive?

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    I've seen questions like this closed for not directly relating to personal finance (it's more like a general economics question). Commented Feb 7, 2018 at 15:15
  • Comments are not for extended discussion; this conversation has been moved to chat. Commented Feb 7, 2018 at 21:45

7 Answers 7


Real estate can be rented out (or otherwise "used"), so it "produces" income. He's not solely investing in real estate in the hopes the value increases, he's saying it's a better investment because it produces income whether or not the value increases.

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    Adding to it: A piece of real estate which can't be rented out (or used yourself to produce stuff) would not be counted as productive. Commented Feb 6, 2018 at 22:42
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    @Nelson There's lots of real estate that can't be rented out. Most real estate can't be rented out - it's rather useless forest or shrubs or swamp or mountains or taiga or ... you get the idea. Did you mean urban buildings? Yes, it's hard to find a useless urban building. Not all real estate is an urban building, though.
    – corsiKa
    Commented Feb 7, 2018 at 2:12
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    In Australia as an example, there is a fund made up of office buildings managed by Charter Hall. That has been producing a fairly reliable 5.8% return, in addition to any capital gain.
    – Peter K.
    Commented Feb 7, 2018 at 2:30
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    @corsiKa: Even in urban settings, there is a surprising amount of impractical-to-rent real estate. For example: unused churches and other specialized buildings, buildings designed for some use which is now illegal (zoning) or impractical (factory in a service economy), unlivable residences, any situation in which necessary renovations are not worth it (e.g. the building contains asbestos and the projected rent won't pay for it within a reasonable time period), etc. It's quite possible to have "bad" real estate; it's not like an index fund where you just throw money in and forget it.
    – Kevin
    Commented Feb 7, 2018 at 7:19
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    Hope this helps: Whether land is/not real estate may vary. In my understanding: in the US there can be a distinction between "real estate" and "real property" especially if you are talking to a land lawyer - and I am not one, nor am I any other kind of lawyer. Commented Feb 7, 2018 at 17:08

Gold is a commodity. If I have some gold, my gold is exactly the same as someone else’s gold. I have absolutely no control over the value, and when I go to sell it, my price is completely dependent on what everyone else in the market is doing. I compete with every other seller on price alone; there is no other way to differentiate my product.

For real estate, there are no two parcels alike. For starters, location, which is a huge factor in the value, is different for every piece of land. Real estate can be developed to increase the value, and developments on land affect the value of others nearby. Real estate can be used for many things to generate income, such as running a business or renting to someone else.

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    @jwg The question explicitly asks how real estate is different from gold. The entire answer addresses that. Commented Feb 7, 2018 at 13:17
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    @jwg The question explicitly asks how gold and real estate are different. This answer discusses economic and investment differences, which seem completely relevant to me. It’s not like it’s saying things like “You can make jewellery from gold but not from real estate” or something. Really, I don’t see what your problem is. Commented Feb 7, 2018 at 14:06
  • IOW, commodity gold (as opposed to gold jewelry) is fungible, whereas real estate isn't.
    – RonJohn
    Commented Feb 7, 2018 at 15:03
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    Being fungible has absolutely nothing to do with being nonproductive. Gold is nonproductive and fungible. Real estate is productive but not fungible. Art is nonproductive but not fungible. Treasury bonds are fungible but productive.
    – jwg
    Commented Feb 7, 2018 at 15:31

Isn't real estate's price increase only driven by other people's demand

Yes, that's what makes it productive. Productive assets, in general, have prices that are largely based on their ability to produce income. If you are putting money into real estate hoping to make money from price increases, you aren't treating real estate as a productive asset, but instead as a speculative asset. If you aren't expecting to make money from price increases, but are instead expecting to make money from rent or other value produced, then you are treating it as a productive asset.

I fail to see how real estate produce periodic profit like farms or business.

I fail to see how you could fail to see that. Real estate generally produces rent. It can also produce income from economic activity taking place on it. A farm is itself partially real estate; you can't have a farm without land.


Simplified calcualtion: If you buy a flat for $100k and rent it out for $500/Month:

$500*12 / $100,000 = 6% ROI

Try that with Gold ....

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    I'm assuming this apartment is on mars and in a temporal stasis chamber considering you're not paying any tax or upkeep on it?
    – Cubic
    Commented Feb 7, 2018 at 15:46
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    Simplified calculation. Sure I could include cost factor etc, but the question was not how to calculate ROI on property investments so it serves not means to go into detail
    – Daniel
    Commented Feb 7, 2018 at 15:49
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    You're using concrete numbers as if they mean anything. It's not just the calculation of ROI that's wrong, your starting numbers are also questionable. The meaningful context of the answer is You can collect rent, the rest is fluff.
    – Cubic
    Commented Feb 7, 2018 at 15:55
  • If you put € in front of it, I could actually pull it off like that where I live. I am sorry if you don´t find that example helpful. To others who are not immediately jumping on the economic implications of productive assets, it might be - why do you care?
    – Daniel
    Commented Feb 7, 2018 at 15:59
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    @BenMiller to sell it (short selling)
    – DavePhD
    Commented Feb 7, 2018 at 18:29

You have an idea to manufacture and sell widgets. At first, you and your partner, let's call him Woz, make widgets in the garage at your home. Eventually, the demand for your widgets grows and you need more space for widget making machines, raw materials and new employees. You find and rent a small building in a nearby industrial park. The owner of the land collects rent from his productive asset.

Eventually, you need even more space and, after making a cost-benefit analysis, decide that it is more efficient to buy your own land and build your own building. It is a wonderful day when the doors open below the sign, "Patrix Widget Company."

In this way, the land, the building, the machinery, the raw materials, the invested capital and the employees are all part of the process to build and sell widgets. Remove the land and building from the equation and there are no widgets produced. Real estate, in this way, is a productive asset.


"Income properties" is an euphemism for base rent-seeking in real estate, yes.

The confusion of land with actual capital is long-standing in economics. See Mason Gaffney's The Corruption of Economics for a detailed review of how this came to be.

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    You seem to be confused by the multiple meaning of "rent". While purchasers of real estate do indeed expect to get rent, this is not "rent seeking" as economists mean the term. People who buy real estate are providing what the market has determined is fair value for future rents, and are therefore not seeking "rent" in the sense of income without contributing to the economy. Commented Feb 7, 2018 at 16:34
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    This sounds like it is coming from someone who has never managed a rental property. I have two rental properties, and it is nowhere near "rent-seeking". You have to find good renters, manage those renters, and manager repairs and maintenance.
    – Mike Vonn
    Commented Feb 7, 2018 at 17:29
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    @Mauser and possibly deal with tenant improvements. Deal with possible delinquent accounts. Deal with damages between renters. Etc.
    – user62427
    Commented Feb 8, 2018 at 15:38
  1. House market is one of the commodity futures markets.

    People do not understand how much big money they're borrowing and don't know that real estate companies can easily build more houses. Therefore, if you want to sell in the future, basically no one will purchase your old house (need more teenagers to buy).

  2. The price is decided by builders and banks (like the Fed)

    If you want to sell higher, these companies will take more advantages than the buyers. Besides, global real estate market value is the highest of all markets, does it still have more potential?

  • I don't see how this actually answers the question about the justification for Warren Buffet to consider real estate a productive asset. Commented Nov 5, 2018 at 23:11
  • It seems to be really hard for you to see the price control is not only by demand but also supply. Houses are not only productive asset but also consumables. Face it. Commented Nov 6, 2018 at 16:45
  • I don't have any trouble understanding what you are saying. The question asked is "why does Warren Buffet think...", not "is Warren Buffet wrong about...". You are welcome to ask and answer the question you wanted to answer. This particular answer doesn't fit the question. Commented Nov 6, 2018 at 17:16

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