Actually, I’ll probably never write that book. But I like to write these sometimes just to stay in practice, and for the feedback. If you’d like to check out books I’ve written there are links on my website.

Subscribe now

Read more

Subscribe now

Read more

Subscribe now

Read more

Subscribe now

Yesterday I got in a twitter argument with a kid I follow. I say kid because he's half my age, maybe younger, and I like him. He's a "good kid." There's a sweetness and decency about him, as far as I can tell (I don’t think he’s a Russian troll but do you ever really know?). He's smart and young people always know stuff. In fact, at the pace of my decreasing knowledge and his increasing wisdom it won't be too far before we pass each other in that long narrow hallway, traveling in opposite directions.

He had posted that REITs were a better investment than real estate. Of course I know, and he does too, that a REIT *is* a real estate investment. But really it's a type of stock and has nothing in common with owning a house.

A REIT, if you don't know, is a special type of stock issued by a large property owner where they're legally required to pass on 90% of the profits to shareholders. So whatever. Most of them are traded on the open market.

I crunched the numbers for what I considered a bad case real estate scenario. Not a worst case, since your house can be consumed by a fire before your insurance kicks in, your neighborhood can degenerate into a war zone, etc. But a not great case. Then I did the averages over the past 20 years for REITs and real estate. What it would look like if you put $100,000 in a REIT ETF vs. an average home purchase.

And I said, these are the numbers. You are wrong.

I didn't care about convincing him but I thought he was giving bad advice to other people.

I will say this in his defense, I wouldn't take financial advice from me. I'm not successful enough for someone my age (50), and I don't have enough of an attention span to read through all of the boring company documents you would need to read through to really make an informed investment decision if you were going to buy shares in an individual company.

On the other hand, as I mentioned last time, in 2018 I couldn't make a living as a writer anymore. Before that, for 25 years, I'd made my living writing and editing and teaching. Or running magazines and political organizations funded by literary and musical events. But all of a sudden I was on a tiny island in the middle of an ocean, surrounded by burning bridges. Or perhaps I was a mile off the coast, in the Gulf of Mexico, and they weren’t burning bridges rather they were oil derricks spitting fire and spilling their black mass until the sea resembled a newly paved parking lot.

Either way there was no going back, or anywhere. My friends, the bad ones, were all gone. Trouble is that was most of them. So I had to find a new way to make a living. I had no social capital at all. In fact, before that moment of fire and pavement I didn't understand the value of social capital. Social capital seemed like the kind of thing well raised people understood very well and the rest of us not at all, a glass ceiling overlaid with a smiling clown face. But when it's gone then you know. And well...

I had to find another way to make a living.

I had a house that I'd purchased a few years earlier and I'd never thought of the equity in that house as having value, as something I could use to make money. Because I’d never really thought about money. And I had $20,000 in the bank, or less. And a car. And a retirement account I didn't know I could access if I felt like it. Net worth was an entirely foreign concept.

Now it's a little more than 3.5 years later and I realize what my net worth was in early October 2018 on that island surrounded by fire melting the tips of my shoes. And I know what my net worth is now; it’s about 4 times what it was then. And I think I could at least triple (double?) my net worth every 4 years or so without doing anything particularly special, without any full time employees or partners or much help, so that's what this is about.

Yet… and I keep saying this, I don't really know anything. If I was trying to teach you anything, it would be that. This is what it looks like when you don't come from a bunch of money or possess any particular secrets or social capital. Granted, I was already in my mid 40s, and I owned a house, which makes it a hell of a lot easier. Better to be young though. Better to be young than smart or lucky or anything else. Obviously.

So yesterday I presented some number to “the kid,” who by the way, is going to be miles past where I am now when he’s my age. He said I wasn't taking into account vacancies in my numbers, though in fact I was. For some reason he was making an unforced assumption and that told me I wouldn’t get through to him. You can’t argue with assumptions.

And he said that maybe I had a system that worked for me because most people lost money in real estate. And I thought that was interesting, because I'm a very conservative real estate investor and my "systems" are not exotic or original. Nothing that wasn’t already spelled out in How I Turned $1,000 into Five Million in Real Estate in My Spare Time by William Nickerson, originally published in 1959.

It's a great source of frustration to me actually, how basic real estate investing is. How unimpressed I am by other real estate investors. When I meet another real estate investor it’s as if I’m meeting my ex-girlfriend’s new boyfriend, and he’s ugly and irritable and pathologically uninteresting and I’m thinking, oh, maybe that’s just what she’s into? And then I feel bad about myself.

I'm not particularly good at real estate for a couple of reasons. First, I'm not very handy. So I pay people to do things many landlords would do themselves. And I'm not comfortable with some of the more aggressive real estate strategies, like sending unsolicited mailers to people asking if they would like to sell their homes for cash on the spot, and hoping to reel in a fish.

My father once said if you do 10 deals you'll make one bad one, 8 not so bad, and one fantastic deal. I don't know why he thought that and he didn't say it to me. I left home at 13. It's something he said to a guy he met at some kind of meeting that he took under his wing and mentored instead of me, his wayward son. That guy has become a friend since my father died and is slowly passing me my father's wisdom, such as it was, all these years later.

But a thing my father and I had in common is he didn’t know anything either.

When I was 10 or 11 my father told me he could make much more money but he liked playing soccer, and hanging out with the guys. I think he liked some other things as well, but at the time I found his lack of ambition appalling. If it was so easy, why weren't we rich?

I have a much better understanding of why that actually was now. Part of it was that my father was lazy, which is not a crime. Or he wasn’t lazy, just motivated by other things. But that was a very small part, actually. If you're trying to make money in real estate the reality is you might just have to wait.

The real estate handbooks will often tell you some version of, "You make your money on the purchase." What they mean is you make money in real estate by paying below market for your properties. It's hard to argue with the logic but it's assuming the person purchasing the property (and reading the author's book) is smarter than the person selling it. I assume my readers are average; right at par, no offense.

When I'm teaching someone how to purchase real estate, or manage a property, I assume they’ll pay a median price for their purchase, maybe even a little bit too much. Especially if it's their first property. Because time also has a lot of value. If you set it up in a spreadsheet the money you save by shopping obsessively for 6 months is likely lost against the benefits of starting 6 months earlier.

Make spreadsheets, all the time. That’s what I do. Lots and lots of spreadsheets. I’m not sure if they’re helpful but I kind of think they are. You can never have too many, and it’s OK if you forget them all.

The more important consideration when purchasing your first property is, Can you afford it? This has nothing to do with how much money you have set aside for a down payment. Some people are able to get a house with 3% down, most people need 20%. Anything below 20% and you have to pay mortgage insurance. But the primary consideration has to be: Can you cover the monthly nut, and for how long?

Maybe you're purchasing a multi-unit, or you can take on a roommate. You can factor that in when figuring out what you can afford. And of course, you won't be paying rent anymore. If you can afford $2,000 a month in rent then you can certainly afford $2,000 in a month in house payments, seeing how your taxes will be lower. But you have to factor everything into that monthly number.

Everything means: 1. mortgage payments 2. taxes 3. insurance 4. maintenance 5. cap ex.

Cap ex is all that other shit. Like you need a new roof, or the refrigerator conks out. The stuff you can't plan for, except you can in fact plan for it. You list out everything that's likely to need replacing over 20 years, then you divide it by 240 months, and you add that number to your monthly nut. Can you afford it?

It’s not hard to create that kind of a spreadsheet, I promise you. And you don’t have to be exact. You can ballpark it, as long as you lean pessimistic. Optimism, as we all know, is deadly.

If you can, you should buy the house. Or a house. You should get the most house you can afford, but be sure you can afford it. If you buy a house you can't afford you might make a lot of money, but you might also find yourself in trouble. And it's not necessary. Nobody needs to lose money in real estate, because real estate isn't hard.

REITs vs. real estate isn’t actually an issue. REITs are just real estate stocks. The real question would be, should you purchase property or should you put your money in the market? And the answer is you should purchase property, but let’s continue to talk about it anyway. Let’s assume REITs continue to go up at an average of 9% for the next 20 years? Which I personally doubt. The secret is out about REITs. The incentives are different. The deals are fewer. And I don't know what I'm talking about. I don't really know anything about REITs. Maybe they'll be fine. But it's a small segment of the overall market. It's definitely not guaranteed. Do your diligence and see if you can figure it out. But if they did continue to compound at 9% you would likely do better purchasing an average house.

A house is a very simple investment. You can quickly figure out all of the numbers on a property and you'll usually be right.

And of course there are other advantages. You get to live in it, if you're into that. And you can take low interest loans against it. You can figure out novel ways to squeeze extra cash out of it.

But the main difference with a REIT is that a REIT is liquid. Essentially it's cash. Whereas a house, if you want to get your money out, it can take a long time. And real estate is work. Though it's not that much work. I know a guy who has a real estate portfolio he manages while traveling the world. But still, a REIT is just a stock. There is literally nothing for you to do. You'll never get a phone call in the middle of the night because someone is locked out of your REIT and the kitchen is flooding.

Anyway, it doesn't matter too much if you're lazy in real estate because most of what you're doing is waiting. My ex girlfriend's mom was a real estate multi-millionaire. She owned properties all over the Bay Area and she drove an old van and saved money working on properties herself. She was always working. But the work that took up most of her time made her the least amount of money.

For example. First you buy the property. Now most of your money is tied up in your first property so you have to wait until you have enough to buy another property. Maybe you fix up the property to sell it. But if you sell it within a year you'll have to pay very heavy taxes, unless you do a 1031, which I can't explain as I don't understand it myself beyond the basic concept. Anyway, after a year you put it on the market and it takes a couple of month's to sell. Then you have to find another property to buy with your new, larger down payment, and then it takes two months for your new loan to go through. So now you have your 2nd property a year and a half later. And if you did well you’re worth 50% more than you were 18 months ago. And this is moving very fast.

More often, you wait 3 years, or 5 years, and then you refinance your property and that's your down payment for your next property, etc.

Meanwhile, rents are going up steadily, but not quickly. Not in most places, most of the time. I want to just assume average here, all the way through. Average average average. Because as Malcolm Gladwell once said to me, if I'm remembering correctly, you can't learn anything from the exceptions. You learn from the rules.

Rents are going up, but your mortgage stays the same. Property taxes go up too, but not as quickly as rents, generally. And you can push back in a variety of ways. Anyway, do this for 20 years, with no particular aptitude, and you'll definitely be a millionaire. It's a get rich slow scheme.

Or push it. Refinance for every nickel as soon as possible. Stay on the look out for a good deal (the best deal is a good deal). My last purchase was a property that was more than I could afford so I did get a little creative that one time. I put together a bond in order to essentially loan money from my friends at 7% interest and, more significantly, I took out a lien against my first house, which is basically a mortgage on top of my mortgage, to make the down payment and purchase the property I wanted, which is obviously leveraged all to hell. If you’re taking out loans to get the down payment to take out a loan, you’re playing a little bit past the net and I don’t recommend it. But it worked out this time, and you get the point. Because even moving quickly, you're still moving slowly. And "burning the midnight oil" working nights and weekends won't get you there much faster so you should probably relax, homie.

That's what my father really meant when he said he didn't want to focus on being rich, he wanted to play more soccer. It might have been true, but he was probably already moving about as fast as he could.

That’s all I got right now. If you want individual consulting on getting into real estate I’ll do it for $100, or possibly for free if you ask nice, depending on my schedule.

stephen

p.s. As always, please share this substack on the social media feed of your choice. Also like and leave comments because that always makes me feel super happy. I mean, isn’t writing kind of the urge to communicate and be alone at the same time? The truth is we don’t have to pay writers (we should, we should) but we don’t have to. Writers would write for free, when the urge strikes them. It’s like a disease, or an expression of grace. So anyway, when you leave comments or link to my post on twitter or Facebook, I really like that, and it doesn’t cost you anything.

Share

Subscribe now

Subscribe now

Read more

Read more

Previously I wrote about how to buy your first house. But a lot of that letter was about why you should buy your first house and how the reasons people give for not buying their first house are often just lies; the kind we tell ourselves about all sorts of things, our entire lives, right up until the moment we die where, if we’re unlucky, there’s a brief moment of clarity before we slip into the ether and never return.

This is a little more nuts and bolts on the process. And will probably be very boring for anyone who is not interested in buying a home.

This isn't about why you should buy a house. The answer to whether you should buy a house is yes, as long as you can make the payments. And often even if you can’t. This is just how one goes about it.

You need 3 things to buy your first home, maybe only 2.

The 1st is a down payment. At least 5% of the purchase price. Because this is essentially a subsidized loan, in America you can purchase a house at a low interest rate with very little money up front. You'll never be able to do this again, with any other purchase. A commercial property, for example, requires 25% down.

I recommend you get the best possible house you can afford. This might seem counter-intuitive because you're nervous making the largest purchase you've ever made. Non-the-less, it's true. As long as you can make the monthly mortgage payments, buy the most house you can afford.

Side note, if you pay less than 20% down you'll also pay up to $200 a month in mortgage insurance. But after a few years you’ll probably be able to refinance and get rid of that expense.

The 2nd thing you need a good credit score. There are ways to buy a house with a lower credit score, government programs and so forth. But I'm not as familiar with the ins and outs. Protect your credit score with your life. It's possibly the most important thing you have. I'm not a big fan of scammy programs to improve your credit. You have to be careful with those. The main thing is to pay your bills, in full, on time. Never carry a credit card balance, ever.

If you have the down payment, and the credit score, the next thing you need is income. Even if you're doing a 5% FHA loan, you need to convince the bank you can make the monthly payments. If you have W-2 income (aka a job), especially if you've worked at the same place for over a year, then you're golden. There is nothing a residential mortgage broker likes more than W-2 income. When a lender sees a W-2 it’s like a werewolf looking at the moon, or Quentin Tarantino looking at Selma Hayek in Dusk Til Dawn.

Next you find the house you want to buy. Where do you find the house? Probably on Zillow, or Trulia, or Realtor.com. There are a bunch of these sites, and they're mostly listing the same places. Many of them have open houses. You can just stop by.

If you know where you want to live you can also drive around and look at for sale signs. Investors often want to find off market houses that need a little work, that they can purchase for less than market value and fix up. But that's probably not what you're looking for when buying your first home. You're looking for a place you can move into. You probably have a job; you're not trying to fix and flip.

Buying a first home has almost nothing in common with buying an investment property.

There's a lot of cost in not buying a home. Let's say you're paying $2,000 in monthly rent, and it takes you six months to find your house. Well that's $12,000 in lost rent while you were searching (not to mention 6 months of appreciation). So if you were holding out for a good deal, and you saved $10,000 on the purchase price, that would actually be a loss.

This is especially true in parts of the country where your mortgage payments are less than your rent payments. But even in places where the mortgage payments are more than rent, like Manhattan, the rents always catch up and eventually the mortgage is less than monthly rent for a similar home.

Figure out what houses cost in the area you want to live in. Remember, you might own this house for 30 years, so paying a little more or less probably doesn't matter as much as you think. Also, the price of the house is amortized over 30 years, the life of the loan. So say the owner wants $450,000, but you only want to pay $420,000 for the house. First, you can just offer whatever you want to pay. And in most situations you should offer less than the house is being marketed for, depending on the local environment. But the difference in monthly payments on a $420,000 home vs. $450,000 is about $130, not as much as you might have thought.

Of course, when you go to sell that house the $30,000 would make a big difference. Real estate investors will tell you you make your money on the purchase. But if you hold onto the house for 20 years the difference in price won't have much of an impact. And the other benefits of owning a home are cumulative. Saving $30,000 on an investment property is much more important than saving $30,000 on your first home that you intend to live in. There is significant benefit to buying your first home as soon as possible.

I'm not saying you shouldn't try to get the best price, you should. But you also need to stop paying rent, yesterday.

Imagine if 2/3 of your rent was tax deductible and 1/3 went into a long term savings account you could cash out in 10 years, that's what a mortgage is.

When you're buying the home you don't pay the real estate agent, the seller does. The agent doesn't matter very much to the buyer and are essentially interchangeable. If you have a friend of the family, or friend of a friend (no one is too far removed from a real estate agent) that person is fine.

Your agent should not ask you to sign anything exclusive. If they do they're either amateurs or scammers. Walk away and go to an agency. In a real estate agency all the agents work under a broker, so there is a layer of supervision. If you don't have an agent, the seller's agent, by law, has to treat you as a client. People think that's a conflict of interest but if your agent also represents the seller they have a strong motive to encourage the seller to choose you and will likely advocate for your interests if, for example, you request a price reduction. Not having your own agent can definitely be an advantage.

When you're selling a house who you choose as an agent, or whether you choose an agent, matters quite a bit. But that’s not what we’re talking about.

Now in the current environment, with interest rates extremely low, you can expect payments on a $340,000 loan to cost $1,900. That includes insurance and property tax which will be paid by the bank on your behalf. So if you put down $60,000 on a $400,000 house, $1,900 is your monthly nut.

You need to find the person who's going to loan you the money. That's most likely a bank. For a number of reasons (some of them mysterious) your best bet is to go with a small local bank. This is the primary reason why small local banks exist. But there are also mortgage brokers. It's mostly the same. Find out what the fee for the loan is, and the interest rate. It's OK to shop around.

Larger banks, like Wells Fargo, offer worse deals and don’t know your market.

Every lender is different. The most important thing to remember is that if you get turned down for a loan it doesn’t mean anything. I've been turned down 4 times. I was turned down on my very first attempt to purchase my first house (like water off a duck’s ass). You go to the next broker. They all use different metrics. You're communicating with a middle-man who is going to attempt to sell your financial story to an underwriter. They all look at different things, differently, and something is always lost in the telling. It means nothing at all if the first bank turned you down. Until you've been turned down 10 times, for the same reason, pay no attention.

It makes me crazy when I see people who are unwilling to query a second lender. It's like when you're trying to sell a book and you get rejected by an agent. Or your boyfriend breaks up with you. It doesn't matter what they tell you. There is very little to learn from rejection, and people who reject you more often than not lie about their reasons.

You can find a lender first or you can just start looking at houses. I recommend you just start looking at houses. Today. But if not today this weekend is also good. In a very hot market, like Miami, a realtor might not take you as seriously if you just show up to an open house without pre-approval from a lender. But in almost every situation they won't even ask. Because they all know that a pre-approval letter is meaningless. You could write your own pre-approval on a sheet of paper and it would have just as much value. It guarantees nothing, the lender is promising nothing. Any broker can write a pre-approval on company letterhead without talking to their boss. It's essentially bullshit. A small hoop to jump through that signals you’re a little more serious than you were yesterday.

So then you find the house and you make the offer. But the offer, if accepted by the seller, is contingent on the bank approving your loan. If the bank doesn't offer the loan you are off the hook and you get any money you included as earnest money refunded (usually $2000, or something like that). Since funding does fall through, and it takes two months to close a loan, sellers prefer buyers who are making all cash offers. But that only really matters in places like Los Angeles. And if you're offering all cash you can usually get a discount on the price of the home. Often a significant one.

But in most of the country this is a non-issue. Show up. Make the offer. Buy the house.

After you buy your first house you'll be amazed how simple it was. You'll shake your head remembering how intimidated you were and how complex the whole operation seemed. But buying a house is not complicated. Everyone in the process, the seller, the agent, the appraiser, the banker, the mortgage broker, is heavily incentivized to get you across the finish line. With all of them, you are the customer, and their job is customer service.

Don't over think it. You can do this.

Unless you don't have any downpayment, and a low credit score. In which case maybe you can't.

Thank you for reading. I hope this was a little helpful and not too boring.

Don’t forget to like and leave comments and if you share on social media that would make me super happy. The interaction is the only reason for writing really. That was always true. Even when I was a kid.

stephen elliott

p.s. I would love it if you would send questions. If I get enough questions I’ll make the next letter about answering them.

Share

You should always buy your first house. And you should buy it as soon as possible.

There are exceptions, but the exceptions are few and almost not worth thinking about. The main exception is if you can't afford it. And by not being able to afford it I mean you can't make the monthly payments on your mortgage and other expenses that might come up.

But if you can make the monthly payments, and the bank is willing to give you a loan, then you should buy your first house. Especially now, when the interest rates are low.

The considerations are different between an investment property and a first home. You should buy the home you want to live in, and you should get as much of it as you can afford. In other words, if you can buy a $400,000 home then you probably should buy that instead of a $300,000 home. And if you live in New York or Miami or the West Coast you should buy a $700,000 home instead of a $600,000 home.

In many markets if you purchase a home but lose your job and can no longer pay the mortgage you will be able to rent the home for more than your payments, while you're living somewhere else. Or you'll be able to take in roommates for a little while.

In more expensive markets, where the mortgage is more than the equivalent rent, the rents will catch up. So if you buy a house in New York and the mortgage is more than your rent, that's OK, because in a few years the rents will be higher than your mortgage. Properties are priced high in these places in large part because they're expected to appreciate. And appreciation is actually where you make the most money in real estate.

A house is a repository of wealth. In extremely poor societies you'll often see houses with unfinished additions. The owners work on the houses over years, purchasing bricks and concrete when they are able. The house, in these societies, exists like a bank.

It's not any different in America. And I'm only talking about America. I don't know anything about buying a house in Australia, though I still think you should.

I don't really know anything about buying a house in America either. These are just my opinions. And it's well documented how often I'm wrong. But stories are how we understand the world, so I'm trying to write one. Recently I've been reading a lot of Raymond Carver, though I'm hoping to switch back to Roberto Bolano soon.

You should put the minimum amount of your own money into purchasing a house, and pay it off as slowly as possible, as long as you can get a loan at around 3%, and certainly as long as inflation is more than that.

For many people, maybe you, you can purchase a house with only 5% down. This is only true of the house that you are going to live in and it's because the federal government is essentially guaranteeing your loan. A commercial property (say a six flat) will require 25% down and have a higher interest rate that is variable, resetting every 5 years. And you might only get a 20 year amortization. Your primary residence will have a 30 year amortization and the interest rate will be fixed.

You'll never get a loan like the loan you take on your first house again. Though if you put down less than 20% you'll have to buy mortgage insurance, so that adds an expense. But in the grand scheme it's negligible.

Poor people, and most middle class people, think of money in terms of what they're making every month. We think of what we're able to spend, and save. But rich people don't think of money like that. Rich people only think in terms of net worth, and that's how you should think of money as well, if you're operating above subsistence.

Keep a spreadsheet, and calculate your net worth on the first day of every month. Your net worth is the value of what you own, and your liquid assets like cash and stock, minus your debts.

If you owe a lot of money, and you are breaking even after making your payments, your net worth will still increase as the debt is paid down every month. That's why it's better to owe a million dollars with flat cash flow than $100,000.

A real estate investor told me her goal was to owe $5,000,000.

A common saying in real estate is that you make your money on the purchase. And this is basically true for an investment property. But for your primary residence if you wait six months trying to find the best deal on a house then that's six months of paying rent, which is wasted money.

If two thirds of your rent was tax deductible and one third of your rent was deposited into a savings account that you would have access to in the future, that's what a mortgage is.

If you're able to get a house with 5% down and it goes up in value 2.5% per year then in two years you have made 100% of your money back.

If a house goes down in value it doesn't matter unless you're trying to sell it. But if you are living in it, or renting it for more than your mortgage payments, you can keep it forever.

The founder of Robinhood likes to say that stocks are a better investment than real estate, but it's an obvious lie. If you put $5,000 down on a $100,000 house and the house goes up 5% you have made $5,000, which is 100% return on your money. If you put $5,000 in stock and it goes up 25% that's still only $1,250. The stocks have risen in value quicker, but the house has 20x leverage.

That's why you want to get the most house you can reasonably afford. And also nurture your relationships, because it's harder to meet people the older you get, and you can't make new old friends.

What you can afford is a calculation that should be different for different people. If you can rent the property for more than the mortgage payment then you can afford it. If you can afford payments for 3 years even if you lost your job, then you can afford it. If the mortgage payments are more than you make a month, then maybe you can't afford it.

Things do go wrong when you own a house. You might have to replace the refrigerator. And eventually every house needs a roof. But you'll have insurance for disasters (the bank will make sure).

Also, principals are more important than politics. Keep your side of the street clean. Be wary of advice about removing toxic people from your life; you might be the toxic one.

Tend your garden, as Voltaire would say.

Inflation makes every real estate investor look like a genius, eventually.

stephen

@s___elliott

p.s. If you are a paid subscriber and want advice on purchasing a home specific to your situation please send me an email.

p.s. 2 Please leave comments and also share on social media. Or just “like” this post. The like doesn’t really do anything but it makes me feel good. Comments and shares are the best though.

Today’s letter is based on an interview with a real estate investor in Chicago. Like all the investors and entrepreneurs I’ve been interviewing Ali doesn’t have any full time employees. Each of these investors seems, in a way, to live off the grid. When talking to them I always get the impression that they wouldn’t be very good at running a company. They’ve figured out how to make a good living, sometimes a great living, but their upside is capped by their fierce independence.

These single digit millionaires always say something that is relevant to artists and people who are not interested in investing at all. Which is not what I expected when I started doing these interviews but is probably the main reason I keep doing them.

Share

If you buy a property you want to live in, and it costs the same you were willing to pay in rent, there is very little in the way of potential downside.

If you purchase a property to use as a vacation rental, but it would cover costs if you had to convert to long term rentals, that's pretty good. And if you could imagine living in the place happily yourself then you have 3 possible outs which is, in real estate parlance, "a steal."

Ali, a real estate investor in Chicago, told me the best investments weren't based on cashflow, or cap rate, or putting yourself in the path of progress.

“Invest,” she said, “in inspiration.”

I've always followed inspiration, but as a writer and filmmaker. Ali didn’t even think of herself as a creative, the same way I didn’t think of myself as an investor, yet we thought about inspiration in the same way.

I always thought making art was more important than making money but I don’t think so anymore, or rather I have a broader definition of what I consider art. I see inspiration as the ultimate gift and treat it as something precious that may never come again. I'll do anything to put myself in inspiration’s path, which sometimes feels like sitting at a bus stop waiting for a bus that may or may not be in service.

I was once deeply ridiculously in love with someone. It was a terrible relationship but the passion more than made up for it. The first time I broke up with her (which was after the first time she broke up with me and before the second time I broke up with her and the second and third and final time she broke up with me) was because of Hurricane Katrina.

I wanted to go to New Orleans to write for Salon. She said I should just leave then (she was married, they were polyamorous, our time together was limited by calendars and schedules generally beyond my control). For the duration of our relationship I hadn’t thought of anything except her; now for the first time I was thinking of something else. She didn't want me to go travel with Maxine Waters and Jesse Jackson and think, and write, about other things. In response I broke up with her immediately. And she said, "Get out."

That's what I'll do for inspiration. Even passion is less important. Would I make the same decision today? Probably not. There was something about her skin, and the way she would look at me sometimes like I was the center of an imploding universe. But like every other explosion it was a look that could not last forever.

Non-the-less, this is a self-help column, and has nothing to do with intentionally making bad decisions.

So Ali explained why she bought the building near Wicker Park. It was because there was a loft unit in the front with a basement underneath that the entire building used for storage. The loft had been a tavern and the previous owner had it re-zoned as residential, "Which is a little bit crazy when you think about it," she said. I had no idea what she meant.

When she visited the building she imagined herself living in the loft apartment (she’d recently left her husband, who was a deadbeat and a therapist, and was living temporarily with her parents). The resident in the loft (all the other apartments were small 2-bedrooms) had been there 10 years and still had a year left on his lease and she had no intention of evicting anyone, but somehow it didn’t matter. She would eventually move into the loft, take the basement for herself, since there was a stairway directly down from the loft. It would no longer be storage for the rest of the building. It would be her guest room, or a screening room, she wasn't sure. But she loved the area. And the windows and high ceilings.

The pluses included a great neighborhood with easy tenants. Ali did not worry about evicting people. She considered herself fair. She used the courts appropriately and hired strong people to accompany her when necessary. That was something her former husband would never do.

“He wasn’t a strong person,” she said. “As you’d imagine.”

I had to admit “therapist” didn’t conjure the same kind of muscular image as, say, “roofer.” But now we’re dealing in stereotypes.

The tenants that lived in this area were the kind with credit scores. Evictions were unlikely. She thought she could raises the rents without doing anything and the tenants wouldn't even move because it would still be a good deal. She would rent the parking spots. The repairs were minor, and she could sell the building in a year for a reasonable profit, though not an absurd profit, not like the profit she was used to making in various places further from the city, when she took over distressed properties from landlords who had tricked themselves into thinking they could solve certain problems they didn’t have it in them to solve.

It was a good deal, but not a great deal. It was below market, she thought, while admitting she didn’t really know what the market was. “After all, a building is worth only what someone will pay for it, if your intention is to sell.” With less expensive properties a building buys and sells for a multiple of the rents. Nicer areas are less straightforward, more risky. Especially in a tenant friendly city like Chicago. But she was OK with not selling it, which was what made it such a good deal.

The downside was she didn’t have the money. The building was almost three times as expensive as anything she’d previously bought. It took her 5 years to acquire one million in debt. With the stroke of a pen that would more than double. (She considered debt a good thing, but also a scary thing, like an enormous dog with a very loud bark.) The building would barely cash flow, if at all. She needed to convince the bank to take equity in her other property for a down payment.

That building turned out to be the best investment she ever made. The building made her happy. She convinced herself that there was a link between her happiness and making money, though in a strictly logical sense there wasn’t.

"In a way," I said, "Everyone's an artist."

"What do you mean?" she asked. And I shrugged because if I were to answer I would have to say that I had not thought she was an artist. Anyway, the important thing is to be a good person; there are no bonus points for being an artist. In fact, the best artists tend to be horrible people. Horrible people frequently undone by the scolds jealous of their wicked lifestyle and the freedom of their thoughts. The scolds always come along eventually, if not sooner, in their pointy hats and pointy shoes, taking over the literary magazines and art foundations and demanding that you refer to them as poets. But fuck all of those people. I'd rather talk to a landlord, to tell you the truth.

I don't know that Ali had made her point about inspiration. The building increased in value more than expected, but she didn’t sell. She could not stop thinking about ways to improve the space. The building was like a canvas. New windows, new appliances, red fridges (red fridges?).

"There's a cost," she said, "To tying up your money. And it is much more than you think." As a former accountant she knew this as well as anyone. She knew the difference between cashflow and net worth (net worth is more important, if you’re able to cover your nut). But she couldn't bring herself to sell the building. And the building kept increasing in value. And so for fairly random, non-sensical reasons, she came to believe that the most important rule of investing was inspiration.

And it makes some sense. After all, you have to do so much paperwork if you want to buy a large commercial property. The loan officer wants to go through your laundry hamper and have sex with your spouse (I'm kidding about the laundry hamper). There is a lot of tedious stuff to do, so it’s very easy for most people to just not do it if they’re not inspired. Often there are spreadsheets, sometimes linked spreadsheets, and you might have to form a corporation, do you even know how to do that? There are tax implications.

Absent inspiration we have nothing but logic and necessity forcing us to finish our tasks, and that’s often not enough.

Something that I have always said, because I live according to pithy phrases, is that in everything I do I am in a race against my own enthusiasm. When I lose my enthusiasm it's not like getting a slow leak in my front tire, it's like having all four tires slashed and my house set on fire while I sleep.

Maybe that's an exaggeration.

Maybe it isn't.

One thing that is beyond any shadow of doubt is that every race is a race against time.

It was interesting and unexpected to learn that Ali thought so too.

stephen

twitter: @s___elliott

p.s. My movie, After Adderall, is screening at Cinema Village in New York this Saturday at 3pm as part of the New People’s Cinema Club. This is probably the last time this movie will play on a big screen. Please come to the screening. I’ll be there to talk about the movie. Also I’m naked in this film, which I realize might not be the best reason to come. Check out the trailer though!

Get tickets here.

p.s. 2: Please share this substack on the social media feed of your choice. Also like and leave comments because that always makes me feel super happy.

Subscribe now

It’s been a little while so I just thought I would bang out some quick thoughts on stocks, real estate, porn, family, and life. I don’t recommend taking my advice.

Share

You can't expect a 10% annual return from the stock market. 6% would be more realistic looking forward. You might think you're comfortable with more risk, and because you're willing to risk more you will make more. But that isn't what it means to be comfortable with more risk. That just means you're a gambler.

The smart money is in asymmetric betting. That is, having more information than other people. It's not about not having risk, it's about tilting the risk in your favor, or having less risk.

When you purchase a house that you want to live in, that's an asymmetric risk compared to someone who is purchasing the same house only as an investment purchase. The short term rental manager I spoke with for my earlier article told me that he purchased houses to use as short term rentals. But the criteria he used was that he had to be able to rent the houses to long term renters at a sustainable price if something changed in the short term market, or if the neighbors made trouble. So that's another way of thinking about risk, having a plan B.

Stocks go up and down, there's no plan B.

There's a difference between buying a house you want to live in and buying an investment property. Your first home is probably the best investment you'll ever make (unless you look at marriage as an investment, which is reasonable). Not that you won't make more money doing other things, but the risk is extremely low if you plan to live in the house and the payments are within your means, and especially if it's money you would have paid in rent anyway. On your first home you can get incredible leverage, sometimes 20x (ie. putting down only a 5% payment). You'll likely never get leverage like that again.

It may seem the same if you make $10,000 playing slot machines and you make the same amount of money with an extremely low risk investment, but it isn't.

When I think about purchasing stocks I wonder if I know more than Warren Buffett? If I don't, then I take the same money (if I have it) and I buy a share of Berkshire B (I think it's like $270). If buying oil stocks is a good investment I figure Buffett will do it for me. If I don't like Buffett I wonder if I am smarter than the market as a whole, or do I have some special information (do I work on infrastructure, or on an oil rig in the Gulf)? If not, I would just purchase a share of the S&P 500 or similar funds.

Over time the market beats just about everyone. Individual companies rise and fall. Relationships begin and people change. One of my regrets is not acting in porn throughout my 20s, when my sex drive was strong enough to power a city. I would have gotten 3 times the return on a visit to a dominatrix when I was 25, but I didn't have the money.

It would have been good to buy a house then, too. But that's further down the list.

The best investment is the house you're going to live in. After that, who knows. A conservative real estate investment is to purchase property that cash flows. If you purchase a $100,000 property that rents for $1,000 a month you should easily make a profit (1% of purchase price is a standard rent marker for investment property). In the first year you would take in $12,000, 12% of the purchase. But there will be maintenance, and property taxes, and insurance, and maybe you lose a tenant. You should still make 8%.

However, as rent goes up, so does your return.

The really savvy investors might buy a property that's losing money in anticipation of rents rapidly increasing along with property values. That's a riskier investment.

But in real estate you don't need to be particularly savvy. Even conservative investors make good money without big risks, generally. If a property rents for more than it costs to maintain then even if it loses value you’re not losing money.

If you want, you can take a loan against your $100,000 house and buy another house. Or, you can take a loan to purchase an investment property. So instead of buying a $100,000 home you purchase 4 $100,000 homes, using $25,000 of your own money in each.

Now you're collecting $4,000 in rent a month, but $1,400 of that goes toward the $300,000 loan (I'm approximating, and the actual bank payments will include the insurance and the property tax, which you would have to pay anyway). But let's say maintenance and payments and tenant turnover, etc. arrives at $2,500 monthly, leaving you $1,500. Now you're making an 18% return on your investment.

I'm sorry, I know this is boring. But I have to point out that you're also paying down the loan, which is your money ultimately when you sell the property or refinance, so that's another 5% annually, so you're actually making 23% return your first year. Rent goes up $200 ($50 on 4 properties) that's another 2.4% but your expenses haven't changed. In your 2nd year you're already making 25%.

That doesn't even take into account refinancing in year 3 and getting your money out and buying more property, or purchasing a property that rents at higher than 1% of the purchase price.

Basic real estate is boring, easy to do. The dumbest people in the richest neighborhoods are all real estate investors. Slowly you make your money. You have to keep applying for loans if you want to really increase your earnings, and they want to look through your underwear drawer. It doesn't move fast enough and you're not watching prices jump up and down every day on the market.

People say it's never too late, but it's always too late to do something yesterday. I think you should workout every day with weights, but you will still age. I think you should get vaccinated against Covid but wearing masks outside is dumb. I'm not a fan of anecdotes, but I misread data sometimes. I think you have to decide to trust certain people and institutions, and that's as big a decision as you will ever make. I think America for all its flaws is the greatest nation in the history of the world and that people will look back on us in 100 years shocked at our stupidity. I think that every story is a love story and there's a reason for that.

The reason people don't pay more attention to real estate is because we tell lies about money, and what it means. I think that money can buy happiness but only if you know how to spend it, which I don't.

In my late 20s I did a Stegner Fellowship for emerging writers at Stanford. It was 2 years, fully funded, all the resources you could ever need. People had been angling their entire lives for this fellowship, telling themselves that if they just had resources and time to write they would create that manuscript, fulfill their destiny. But when the barriers were removed most people chose to pick up teaching fellowships to earn extra money. Some people even dropped out (literally turned down free money). So it’s always worth questioning why we don’t do things and what we believe we would do if our circumstances were different. Usually when we come face to face with ourselves we see an abstract painting instead of a mirror.

Things I am better at than most people include pinball, cataloguing my mistakes, changing my mind. I'm good at admitting I'm wrong despite being argumentative. I read somewhere recently that romantic disagreements often come from expectations, like taking a road trip and agreeing on the car and the route, but not the destination. Chosen family is not as good as actual family, which is unfortunate. Solutions that don't take human nature into account are not solutions at all.

There are an extraordinary number of excellent books written by holocaust survivors.

So that's my advice. If you want me to show you how to buy property based on your particular circumstances let me know and we'll work something out.

stephen

p.s. This is a pretty vanilla example. If you find my earlier article with the out of state investor I interviewed you will see, if you crunch the numbers, that he made 40% on his investment in the first year purchasing $40,000 homes that rented for 2% of their purchase price. You can read through all of the articles here.

p.s. 2 Please like and leave a comment. Otherwise I won’t be inspired to write more of these. And it’s really thrilling when you share on social media, so please do that. My twitter is @s___elliott. I really hope you have a wonderful day.

Share

There are so many new subscribers to this newsletter. Where did you all come from? What the F is going on? I think most subscribers haven't read earlier posts so I'm going to pull out a few of my earlier points to make here, and think about them a little more.

The original inspiration for this substack came from a thread on a real estate discussion board. Someone posted the question, what was the quickest way to make $10,000 a month in passive income? The answers, as you would expect, were shockingly wrong. And there were so many of them!

The real answer is that the quickest way to make $10,000 a month in passive income is to have $1,200,000.

But even that is glib because $1,500,000 is more like it. So much depends on your risk tolerance, and, more importantly, your definition of passive income.

Actually, the answer to what is the quickest way to make $10,000 a month in passive income is to have a generous definition of passive income, which is deceptively similar to the quickest way to find love, which is to have a generous definition of love. People want to be loved for their authentic self, for someone they believe is inside of them. But actually there is no bad reason to love a person, even if you just love them for their car, or their physical appearance. At any rate if you worry too much about why someone loves you you might end up pushing your true love away, if there is such a thing.

Back to the point. $10,000 a month is $120,000 a year. It's reasonable to imagine making $120,000 with an $800,000 investment. A 15% return is doable with pretty basic real estate investments. You don't need some top secret knowledge to achieve that but it might be harder depending on the market you live in (New York, San Francisco). But if you're lucky enough to be close to Birmingham, or Indianapolis, you should have no problem. Real estate is not passive enough for many people. Especially in the beginning. But the federal government counts real estate income as investment income, and it makes sense to let the federal government decide what is passive income and what isn’t.

Which is like how we talked about being Jewish in my family. If Hitler would have killed you for being Jewish, then you’re Jewish. Don’t listen to people who say you aren’t Jewish because your mother wasn’t Jewish. After all, you can’t be half British and half nothing. And also, why is it the people saying you’re not really Jewish are never Jewish themselves?

At any rate, the question people didn't know they were asking on the discussion board was what is the quickest way to achieve a value of $1,000,000 (or $1,200,000)? They thought they were asking a cashflow question, but actually they were asking a net worth question.

It's also a different question than what is the best way to achieve serious wealth. Because if you want to achieve really serious wealth you need to start your own business, and that business needs to be successful. Lots of businesses fail. And if you're good at failing there's a strong chance you'll eventually succeed.

On the other hand, if you're good at working for other people, and you invest actively, you can get to a million dollars. It helps if you purchase your first home as early as possible. And it helps if you are a good employee. And it helps if you work extra jobs on the side and buy toilet paper in bulk from Costco and keep your extra income working for you by investing in the S&P 500, or purchasing income property when possible.

But actually, reading more into that particular thread, I realized the question being asked was not how do I make $10,000 a month in passive income? It also wasn’t how do I make a million dollars as quickly as possible? The question being asked was how do I get paid for doing work that is engaging and meaningful?

That's what people were talking about. They wanted to know how to have enough money so they could do the thing they loved full time. People want to be deeply engaged in whatever it is they spend the most time on. And they want to be compensated and appreciated for it.

So really the quickest way to make $10,000 a month in passive income is to love your job.

xox

stephen

p.s. Thank you for reading. It’s very helpful when you like posts or leave comments. Emotionally I mean. And maybe even better when you share on social media, which makes me feel great.

Share

I haven’t figured out how to make money on this substack, and probably never will. But if you purchase a full year subscription and send me your address I’ll send you a physical postcard. That’s an idea I just had. You have to send me your address though.

Subscribe now

I thought about sending out this letter early to paid subscribers then the next day to regular subscribers, but I didn’t want to. I do prefer paid subscriptions but in the end still believe the reader is always doing the writer a f…

Read more

Mostly I hope these letters are inspiring for you. I really do. But my standard disclaimer still applies; I don’t know what I’m talking about.

Subscribe now

If you put down $100k on a $500k house, and the house goes up in value 5%, you’ve made 25% of your investment back. Except a real estate broker will generally want 5% to list, so you’ve just broken even.

If you sell the property without a realtor, then you’ve turned your $100,000 into $125,000 ($500,000 x 5%=$25,000). But you no longer own the property. Now you have to find another property, which can take time. And the government will tax a third of your profit, so you’ve made $17,000.

If you buy a property for $100,000, and rent it for $1,000 a month, you should do pretty well. Let’s say the taxes and insurance come to $150 a month. And let’s say you average $100 per month in maintenance, things like a new refrigerator every 6 years, a new roof every 15. And every 3 years you lose your tenant, and that costs you $2,000 in lost rent and assorted expenses. Amortized that’s about $55 a month.

I’m using pretty standard numbers.

Anyway, you’re not using a property manager, you didn’t take a loan, and you’re averaging $650 (probably closer to $700) per month. Let’s say $8,000 a year.

That’s an 8% return on your money. Over the past 20 years you would have done better in the stock market. Except…

Except, your house likely goes up in value. And that increases your net worth.

And you can take a loan against your house. If you wait 18 months, and the house appraises well, you’ll get your entire $100,000 back. So for 18 months you were making 8% on your investment. But now you must service the loan on $100,000. Maybe that’s 5%. But you have all your money back. And you’re making $3,000 a year, forever, all profit.

Now do that 10 times.

Except, it’s better than that. Rents go up. So soon you’re making $4,000 a year, and then $5,000. It’s kind of a perpetual money machine. If your house really appreciates well 5 years down the line you can take another loan against it, and get more money out.

But back to the first loan. After 18 months you have $100,000 again. You buy another house. Etc. In this way, real estate will beat the stock market. Generally speaking. But it takes time.

Except, while taking time, it’s also moving faster, but you’re unlikely to notice the acceleration. You have two houses, and then four, and then eight. Without being particularly smart, or gifted. Just doing the basic stuff and not being terribly unlucky (which happens) you will get rich this way. 10 years down the line you’re a millionaire.

Except… You’re not a tech millionaire. You’re not crazy rich. You’re the millionaire next door. The less you spend, the more you can invest, the quicker you reach your goals, which somehow still manages to always stay 15% out of reach.

Your clothes are always wrinkled. People that do real estate full time, alone, tend to look homeless. Which is ironic. The more homes they acquire, the more homeless they appear. There’s just never a reason to dress up. There are not enough interactions to think much about appearance. Despite their vanity (the ones I’ve met all seem similarly sloppy and vain). It all goes the way of the dodo bird.

You are what you do. If you want to be a writer just write all the time, and show your writing to anyone who is willing to read it. Your odds of becoming a good writer eventually are very high if you do this.

But also remember what Socrates said about experts. And how he didn’t trust people to know a lot about more than one thing. And how the biggest mistake experts make is thinking because they know one thing well, they know many things well. And then they give advice outside of their expertise.

Which is kind of what this newsletter is. So never mind.

You will only ever make so much money practicing real estate alone. The real money is in starting your own company. But many companies fail. The thing about a company is you can’t really do it alone. At YCombinator, at least based on what I read in Chaos Monkeys, you were more likely to be accepted if you had an impressive team than if you had an impressive idea.

The problem with real estate is that life is only about relationships. But it sucks being poor.

What matters is having enough money. But enough for what?

Buying your first home and writing your first novel generally require the same thing: a job.

Creativity comes from interaction. You can build efficiencies, but creating art rarely happens without a muse.

This is how a great artist becomes. They work at something they have passion for. They show their work. Eventually they show some work and they get a different kind of response. They’ve found their path. They explore deep into the woods of that vertical dimension. But it wasn’t until they got the reaction that they knew.

Think of Jackson Pollock’s wife walking into the garage, in the movie, and seeing Ed Harris, playing Jackson Pollock, paint splattered across the canvas. And she says something like, “Oh, Jackson, you’ve really found it! You’ve broken right through!” Later he cheats on her and dies in a car accident with another woman in the car. His wife travels or something.

But the point is, that moment, the moment when Pollock’s wife recognizes his work, is his moment of becoming a great artist, and it wouldn’t have happened otherwise. Even if the movie is not portraying that moment accurately, that is literally how it works.

An outsider artist is an artist that finds their aesthetic without a muse. There are very few true outsider artists though. And they’re usually schizophrenic.

I could take it from my own life. I wrote compulsively when I was a teenager, notebook after notebook, all through high school. I didn’t study creative writing, but I would often ask my friends to read my poems, which became short stories, unfortunately.

It’s unfortunate, because I’m really a poet, but I left that path. Which is why I always make fun of poets. Or maybe they’re just easy targets and they have too much time on their hands. And what is a poet really but an unformed version of something else?

Really a poet is the root and the stump and branches are what the poet becomes. But you know what I mean.

The reason I didn’t become a poet is probably because I didn’t know any other poets and I never got a strong enough reaction to my poems (I was a teenager). And so the lines became paragraphs, etc.

One day I wrote a story that was very autobiographical. And it was more vulnerable than what I had written before. About the time my father caught me sleeping in his house and beat me and shaved my head.

I was teaching test prep at the time for Kaplan, and sleeping with the office manager, though I’m not really sure what we were doing. We probably weren’t doing anything. But I’m certain her bed was nicer than mine. I think I was living in a youth hostel.

I was embarrassed by the story and thought I probably wouldn’t want to write something like that again. But she loved it. It was a different kind of reaction than I had received before. I sent the story to Stanford and was awarded a Stegner Fellowship, and just like that I was a writer.

That story became the first chapter of my novel A Life Without Consequences. Which isn’t a perfect book but it has its moments.

My life as a writer was dramatically changed by a reaction to that one story. Without interaction you wouldn’t know which path to choose of all the dark trails bisecting and darting away from the work you’re drawn to do. It’s romantic to believe you’re drawn to create by an inner light, but without another person you could have all the light in the world and still be alone in your dark room, without even knowing it.

So that’s one thing about creativity. And about other people. And about what you wake up in the morning problem solving for.

Vaguely related, two people will pay much less, and live in a much nicer apartment, if they live together rather than apart.

The point is, you can make a million dollars, slowly, alone. And money can buy happiness, but probably not at that pace, and it’s transitory anyway. Or perhaps money can only buy a temporary reprieve, also known as pleasure. But you don’t want to have to worry too much about money (just enough, perhaps). Real estate and investing have little meaning outside of making money. They’re not spiritual activities.

It’s better to have fulfillment in the way you make your money. Loving your job is the ultimate Zen state. It’s just not attainable for everybody. Though it probably is, actually. What is the thing you wish you were paid to do? If you can answer that question, call bullshit; you’re probably lying to yourself. Then return to the question and ask it harder. And sit with the answer long enough to know it’s true.

I got way off topic here. As usual. But it seems that all of philosophy is dwarfed by the slogans taped on the wall of your local Alcoholics Anonymous meeting room. We know what makes us happy. But we want to be happier than that. We know the importance of community, spirituality, and service.

One of the many sayings from AA is that it’s a simple program for complicated people.

One of the main points of this newsletter is that you already know all of this stuff. Like in that side story in Flowers In The Attic, where the purple grass was under their feet the entire time? It’s so stupid, but basically true.

A simple newsletter for complicated people.

Another thing they say in AA is that the good news is, there’s help. The bad news is, we’re the help.

In other words, it’s all pretty simple, but we’re engineered to generally be unsatisfied with the solution. We’ll always want 15% more.

What do you do with that?

Xoxoxo

stephen

p.s. Was talking with someone last night about believing in humanity and loving people for what they can accomplish and the good inside of each of us, versus not believing in humanity, thinking people are essentially shit, but liking people anyway. Without having to believe any of the other stuff.

I thought that was pretty interesting. I was so happy to be around all these smart people. And then the band started playing and we danced. So that was good, and maybe vaguely relevant.

Please remember to like and leave comments. It makes me happy. And link on social media.

Share

Sometimes I think I know what I’m talking about. Other times I’m less sure. And sometimes I think about all the different exercise plans and how they all work and how. Mostly I hope these letters are inspiring for you. I really do.

I want to talk again about the difference between cash flow and appreciation. And I want to tell the story of Majid. Not the life story, because that’s not really what this newsletter is about. More like the financial story, a story that involves real estate (which is never interesting) but also philosophy (but I don’t know how, it’s just a feeling).

When interviewing investors and small business owners I come to this concept over and over again: cash flow vs. appreciation.

Cash flow is no different from a paycheck. For the average person the aim is to increase their cash flow, which is clearly a mistake. But cash flow is your walking around money. Almost any small pleasure you take (a vacation, a night of hookers and cocaine) comes from cash flow.

But when we talk about Jeff Bezos or Warren Buffett, we don’t talk about cash flow, we talk about what they are worth.

Yet for the average person it’s a meaningless metric. If you are worth $100,000 and imagine what your life would be like if you were worth $200,000, you probably can’t even think of a difference. But if you make $50,000 and think how your life would be different if you were making $70,000, you’ll come up with all kinds of ideas.

Some people think if they make more then they can save more. And if they save more they can worry less. And many people are deeply uncomfortable spending more than they make in a month. All of that is about cash flow.

In terms of investing, cash flow is when you buy a property and it generates more than the mortgage and expenses. Whatever that amount is, it’s cash flow. And if you own stocks maybe cash flow is dividend payouts.

Appreciation is how much the stock, or the property, goes up in value. It’s as simple as that. Appreciation is not the same as net worth, but it’s not far off. If you’re focusing on appreciation you’re focusing on increasing your net worth. You’re on the way to being rich.

If you want to be rich, net worth is the only thing that matters. If you want to make $10,000 a month in passive income, on the other hand, I’ve written about that here.

Which brings me to Majid.

Majid is the best representation of an individual trying to make his way in real estate with limited resources. He’s completely average, which I love. If you talk to the mega-wealthy you learn nothing, because you’re talking to the exception. If you want to know how the world works (and your likely place in it) you can’t focus on the exception. You have to focus on the rule.

Majid is the rule.

Majid bought his first house 8 years ago when he was working on oil rigs near Biloxi. He was making $65,000 a year at the time. The house was a double and, after a divorce, he built some walls and a door and turned it into a triple.

In 2018 he decided he didn’t want to work on the oil rig anymore.

“I didn’t have any money when I started,” Majid said. He had his house though, which had gone up in value. He moved into the studio he built and rented the two apartments.

“I was living in a box,” he said. “But my back didn’t hurt anymore, and I didn’t smell like rotten fish.”

After expenses, combined with driving Uber 20 hours a week, he was making $4,000 a month. $1,500 of that was from rents after expenses. But his house was worth $100k more than he paid for it. And he put $50,000 into the house originally.

This is not a rich guy. He was making $4,000 a month, he had $10,000 in the bank, but he was worth about $170k because of his house.

He took a loan against his house and bought another property. He did it again, fixing up the properties at the same time (though not rebuilding anything, he’s not particularly handy, he insists). Occasionally he sold a house for a profit. There was a little luck. Property prices have gone up, interest rates have gone down. But he was really just doing the basic stuff. He had no secrets, no deep insight into real estate. He didn’t know anything you couldn’t learn spending a day on a real estate discussion board or from reading William Nickerson’s book How I Turned $1,000 into Five Million in Real Estate in My Spare Time.

Less than 3 years after quitting the oil rig Majid still drives for Uber, but now he owns 5 houses. He makes $5,500 per month, after expenses, from the properties and the same $2,500 from driving. So now he’s making $8,000 a month whereas 3 years ago he was making $4,000. But that’s not the point at all.

After refinancing he owes $340,000 on his first house but the house is worth $470,000. He owes almost the same amount on a four flat that is worth $500,000. The other three properties are worth about a million dollars combined and he owes a total of $500,000 on them.

In other words, his monthly income has doubled but his net worth has quadrupled. He’s worth $800,000.

At this rate, in another 3 years, he’ll make $16,000 a month and be worth $3.2 million. He’ll be a multi-millionaire.

Majid said in real estate you make most of your money two ways. The first is buying a property for less than it’s worth. But everyone is trying to do that. The second is through appreciation, which you can accelerate with minor improvements.

“Inflation makes every real estate investor look like a genius eventually,” I said, which is something I heard or made up myself.

“Perhaps,” he agreed. “But it’s too soon to say.”

First you must hold on. If you collect more in rents than you pay in mortgage and maintenance, it doesn’t matter if the value of the property goes down. Of course, it matters, in that it slows you down. You won’t be able to refinance for a while. You’re stuck with the property. But you aren’t losing money. And eventually the property will go up in value, or you will die.

That’s the other thing. Everything happens in cycles, but sometimes the cycle outlasts you. Originally Majid thought things would happen faster. But he’s doubled his cashflow and quadrupled his net worth in 3 years.

“But I still drive an Uber,” he said. I wondered what he would do if he wasn’t driving. Soon the money from rents would make driving too absurd, but I felt certain he would continue to drive 20 hours a week anyway, unless he took up a hobby, which seemed unlikely.

He said he can’t move any faster in real estate than he already does because he always had to wait. He would buy a property, but then he had to fix it up. Then he had to rent it. Then he would go to the bank to take the loan, but he couldn’t take the loan until there was a long term lease in place. And the bank would take two months, generally.

That’s when I realized we were talking about the wrong thing.

When we read about finance we never read about the Majids. We always read about the finances of the extremely wealthy, or else home economics, or perhaps macro trends, small business opening and closings. It’s always geniuses telling us how smart they are, or advising us to buy toilet paper in bulk. Where was Majid in that discussion? Doing fine, I guess. Getting by.

If you have a house and hate your job you can likely do what Majid has done. If it appeals to you.

Majid is 40 years old and I asked if he could meet again. I’d been trying to write a newsletter for over a month but I was stuck. I thought maybe if we spoke one more time I would get some perspective. After all, creativity comes from interaction, even if it doesn’t occur to you until later, when you’re alone.

We met this time in Armstrong Park and sat near the duck pond.

I asked Majid all the worst questions. Where did he go to school? What advice would he give his younger self? Did he like his parents?

Eventually, in response to my prying (what was I really trying to find out, I didn’t know) Majid joked, “What is life?”

He sounded a little unhappy when he said it. Though he hadn’t said anything to indicate that otherwise.

And I said as if I was someone else working on an entirely different story, “We’re not talking about life. We’re just talking about money.”

Majid didn’t respond.

And that, I realized, was that.

stephen

p.s. Thank you for reading. Please like and leave comments and share on social media. It matters a lot.

Share

The purpose of this newsletter is always to be useful. Today’s letter is about the value of attention, and is exactly as authoritative as all other letters up to this point.

This is not actually about how to get attention, despite the title. A better title would be, How Much Is Attention Worth, though I don’t know the answer to that either, as it varies by person and changes over time. But I know this, attention is extremely valuable and it’s not monetary.

Of course you can monetize attention. There are many books already written on that subject (I presume) and people sound smart guest lecturing business school classes on the “attention economy.” But it misses the point, which is why people want attention, and why it’s worth so much.

People don’t seek attention in order to make money. After all, why add the extra step? It would be inefficient, even if wealth is sometimes a by-product.

We measure things in money because it makes things simple. A Southwest Airline Point is worth 1.6 cents. Bitcoin is worth $30,000, or $60,000, depending on Elon Musk’s bowel movement. But attention exists outside of banking. And some of the reasons the value of attention is so poorly understood1 is because not everyone wants it, so it’s worth less to some than others (power can be understood this way as well). The value of attention to someone who isn’t interested in attention can only be understood as a function of currency.

But that’s not how it works at all.

“Everybody needs money, that’s why they call it money.” – David Mamet

The problem with Mamet’s money quote, which I love, is that it’s not true, at least once you get past basic survival. It’s what my friend Nick calls an unstable declarative. Here are a couple more.

“Everything is about sex except sex. Sex is about power.” — Oscar Wilde

“We tell ourselves stories in order to live.” — Joan Didion

Unstable declaratives have power because they sound true. They’re helpful for framing an idea and provoking thought. But they’re not true in the literal sense. Thinking about sex as a function of power is interesting, until you believe it to the exclusion of all else. I could give you 100 examples of sex not being about power, but I think you can come up with your own.

To get the most from an unstable declarative you have to accept it as true and false at the same time. The joy comes from holding contrasting ideas simultaneously and moving forward through that slim doorway into deeper concepts. We do, in fact, tell ourselves stories in order to live.

Mark Maron once said that everyone he knew in college who was determined to become rich, became rich. He was talking about the people for whom money was the most important thing when they were 20 years old. And by rich he probably meant single-digit millionaires, though there were likely some well beyond that. It was a thing said in passing, when he was interviewing someone about something else, that has stayed with me for years.

When I was in college all I cared about was experience. The money thing, I was certain despite evidence to the contrary, would take care of itself. You could say it was because I was white and privileged but you’d be making assumptions. I don’t think any of the undergraduate history majors at the University of Illinois were truly obsessed with making money. I’d venture so far as to extend that generalization to theater majors.

An Uber driver said recently that anyone in America who wants to, can be rich. He had moved here from Egypt. His son was starting college. The money he made driving Uber and doing other work provided him with a lifestyle he considered lavish. Where he came from, he said, you couldn’t just work and make money. He sounded like the America I grew up in (which I’m not sure was a better version of itself). He said he’d voted for Donald Trump.

Malcolm Gladwell once told me, or said somewhere, or I’m just imagining this and he never said any such thing (our interview has been deleted so…), that young people want access and old people want power. I knew what he meant right away, and if I had been a little more thoughtful I would have immediately stopped writing. That’s a hard switch to make. One day all you care about is access and changing the world, the next day all you care about is the size of your house and providing for your children.

The joke is: When you’re in your 20s you worry about what people think about you. When you’re in your 30s you don’t care what people think about you. And when you’re in your 40s you realize that people weren’t thinking about you.

A joke can also be an unstable declarative. I think I made that joke up but I’m not certain.

In 2008 I was living with two other guys in a large one-bedroom apartment in San Francisco. In other words, I was poor. I didn’t have money but if I wanted to I could interview Malcolm Gladwell. If I wanted to go to a show I could request a press pass. I sort of dated Margaret Cho, depending on your definitions, and we watched Kanye West from backstage at South By Southwest. We hung out on porn sets at Kink.com. I raised half a million dollars that year for Obama by organizing fundraisers in rich people’s houses, and I didn’t steal any of the money, though in retrospect I should have. Despite not having money I clearly had wealth.

I’ve long been aware that when the writing is going well, when I enter into a flow state and I am most happy, I don’t worry about money at all. There is something primal about money, attention, and power, that transcends baseline survival. Because when the writing is not going well I tend to care about money quite a bit, independent of whatever my financial situation is at the time.

It’s hard for people who want access to appreciate money, and vice versa. And attention is a form or access, or access is a result of attention. Attention is a vertical that includes fame, and things like that. The same way money is a vertical that includes bitcoin, real estate, etc. The third vertical is power. Of course it’s all just a theory, and all theories of human nature, if they’re complicated enough, are wrong.

We’re not talking about survival here. This is about self-improvement and I’m assuming you already have survival pretty well figured out and what you’re thinking about is where to place your striving. And maybe you’re also thinking, What is striving? And you ask yourself, Why am I ambitious, or Why does art give life meaning? And when people tell you the answers to these questions you nod your head because you know they are lying. And then you ask, Why are there no good stories about loneliness? And you know it’s because loneliness is the absence of narrative, because we tell ourselves stories in order to live.

When you understand attention as an economy, cancel culture makes a lot more sense. Editors, directors, producers, are seen as people in positions of power. But, if you’re an editor at a small literary journal that pays $20 per essay, or nothing at all, why would you have any power? If value was only financial, no one would think of an editor as powerful. But we do think of editors as having power. And we do, at least recently, recognize a power imbalance between a writer and an editor. To make things simple we explain them in financial terms. For example, we say an editor is powerful because they can help, or hurt, a person as they move up their career ladder. But writing is almost never a career, at least not literary writing, or in the beginning when people start writing without even stopping to wonder why. Most literary writers end up teaching writing. In other words, they participate in the Ponzi scheme of aspirations. But why do so many people want to be writers? Why is there so much money to be made selling people their dreams back at a markup?

That’s the attention economy.

I can remember one particularly insipid person claiming they were abused while volunteering for a literary magazine (the claim was patently false, but that’s another story). They brought up their financial circumstances as a way of explaining why they had to volunteer (they were so poor that they had no choice but to volunteer for an online magazine). It made no sense, when thought of in financial terms, which was how it was presented. But if you imagined this person valuing attention over money everything slid easily into place.

“Show me the incentive and I will show you the outcome.” — Charlie Munger

Money can’t buy love, but fame can buy love easily, more than any normal person knows what to do with (some people will disagree, but only because they have a narrow definition of love, which I find misleading and counterproductive). It’s easier to make a living in real estate than it is to write a book, but you won’t get any attention for managing properties. The kind of money you would need to participate in the attention economy is staggering, but a couple of well received poetry collections should do the trick.

This is why the graduate students and employees worked so hard to remove the editor of The Believer Magazine not long ago. Nothing he did merited the utter destruction that was laid to his life (I’m not going to go into it in depth here, you can take my word for it or not). Not soon after he was seen walking around naked on a Zoom call he was fired from the University, removed from the masthead, and essays were written congratulating everyone on the hard work they had done to build the publication. It was as if the editor had never existed.

In reality, he brought the magazine to the University and gave it a second life (it was originally a McSweeney’s publication, but had been drifting into obscurity). He started a festival based around the publication that added to its cachet and stability. The magazine regained prominence among a certain set, though not economic prominence, obviously.

When The Believer was nominated for an award a few weeks later there was backslapping and congratulations all around. The editor was not even mentioned. But there was only one person whom the magazine, in its 2nd incarnation, could not have existed without, and that was the editor. Everyone rushing into the void to take credit had done comparatively little. The editor had become Trotsky, on the boat, next to Stalin. Erased from history.

The rights and wrongs of the editor’s cancellation are not what I’m talking about here, though I have opinions. But the lesson, I believe (I Believer), is the value of attention. How we undervalue attention when it is actually among the most precious things in the world. People will kill for it. They will destroy you and memory hole you and take over your little magazine which, in the grand scheme of things, means nothing at all. But also it means everything. They will despise you for having it. They will give you anything if you will help them get it. They will fight for that little magazine with knives and whatever else they can find. Once they’ve removed the editor, or the founder, or whoever they need to remove, they will claim ownership. I’ve seen the exact same thing happen over and again, at The Paris Review and The Rumpus to name a couple. I’ve seen people try to take over Facebook Groups, or The Women’s March. Why would people fight so hard for an online magazine that isn’t profitable? It costs nothing to start your own magazine. Or to start your own Facebook group. But while these tiny enterprises are poor in financial resources, they are rich in attention, and there are many many people for whom that is much more important than money.

You can, of course, monetize attention. And you certainly should. Think of it as diversifying your assets. Because one day you’ll likely decide that money is more important than attention, and by then it might be too late. Especially if you don’t realize the value of what you have.

Attention is similar to a stock option that way, losing value faster as the expiration date approaches. Having attention, and the ability to generate attention for others, is dangerous, whether you realize it or not. Like living in a house made out of gold.

stephen

p.s. You can follow me on twitter where I sometimes tweet ideas that become columns. Though usually I’m just liking pictures of dominatrixes.

p.s. 2 Thank you for reading. I’ve always known that the reader was doing the writer a favor. Writing this letter I think I finally understand why. Please like and comment :)

p.s. 3 The movie I directed, About Cherry, is available for free on Showtime.

p.s. 4 Oh! I keep forgetting to mention this. Speaking of money I’m available to speak at classes, meetings, conventions, corporate events, etc. Over Zoom or in person.

Share

The purpose of this newsletter is always to be useful.

I got such a great response to Sunday’s newsletter on being cancelled that I decided to write about something really boring today: cash on cash returns.

This is my 6th letter (out of 25) about real estate. Here are the others:

How To Buy A House

How To Invest In Real Estate for Appreciation

How To Invest In Real Estate for Cash Flow

How To Invest In Real Estate the BRRR Method (my most popular post)

How To Manage an AirBnB (subscribers only)

Most of this comes from interviewing small time owner/operators. Sometimes I refer to them as single-digit millionaires. They are the most unusual group of people I’ve ever spoken too. Individualistic to a fault. Often moody and incapable of working for others (or even with others). Loners, contrarians, and autodidacts. A fair amount of what they have to say is wrong.

Cash on cash returns is a common metric used in place of return on investment to buy and sell real estate. In simple terms it’s the annual profit you receive from your initial investment assuming average leverage.

For example, if you put a $100,000 down on a $400,000 property with a $300,000 loan and your profit after paying for everything including servicing the mortgage was $15,000 annually, that would be 15% cash on cash return.

Sometimes I think of it as the wish metric because it’s so frequently wrong. Sellers of real estate tweak the return by assuming the lowest rates for the buyer’s loan, and the lowest price for their insurance, ignoring altogether the very real possibility that the tax on the property might spike if based on the most recent purchase price.

The buyer wants to believe in a high return, and the bank does as well. Appraisers known for low valuations won’t find much work when everyone wants the value to come back as high as possible. To quote Cicero, “An optimistic appraiser is well fed.”1

Should you buy a property with 15% cash on cash return? Yes, almost certainly, but not because you make 15% on your money. An investment that decreases your liquidity and takes 6 years to return and 12 years to double is not the best investment. However, property prices generally increase. And even when prices are flat real estate usually keeps up with inflation. So if inflation is 1% (the central bank hopes it’s 2%) the value of the property will also rise 1%. But, and follow the math here, 1% of a $400,000 property is $4,000. That’s actually 4% of your initial investment. So now you can add 4% to your cash on cash giving a return of 19%. That’s pretty good.

But! You’re also paying down the loan. A percentage of every payment is going toward principal so you are owning more of the property every month. All of the money put into principal will eventually return to you, either when you sell or refinance. So if you’re paying $6,000 toward principal each year, a number that actually goes up because of the way loans are structured, that would be another 6% of your initial investment.

So in a very conservative case you’re returning 25% of your money. That’s a great investment. It’s not liquid, like cash or stocks, but real estate will generally sell. People have to live somewhere.

Rents go up as well. So often with real estate marketing, especially regarding commercial properties, you’ll see a chart with projected cash on cash returns rising every year. There is absolutely no need for this chart since the seller of the property is no better at predicting the future than the buyer, but we find comfort in shared delusions.

Optimism hides lies the way bushes hide stray cats.

One last thought before I put myself to sleep. If you are able to refinance the property, or if you purchased the property outright and then finance it for more than the cost of the property (people do this all the time) you can do much better. For example, the investor I wrote about who did a portfolio loan on 3 affordable properties in Jackson. It took him 5 months to put it together, and he’s only making maybe 8% (10%?) on the money now, except he got all of his money back in the loan. So maybe he’s making $900 a month but since the loan was as much as he paid for the properties it’s essentially free money. Which is much better than 25%. Though he’d have to work the same trick quite a few times for the income to be truly significant, and that’s unknown. How much is skill, how much is luck, and how much is just a bank flush with cash eager to approve any application?

I checked in with him the other day. Since refinancing his first 3 homes he’s only bought one more property which he can’t refinance because the property is too inexpensive to qualify. In order to work another portfolio loan he’ll have to add at least two more properties and he can’t find any right now. In the meantime, he’s paying interest on a big pile of cash.

“The prices are too high,” he told me. “There’s no compensation for the risk.”

The house he bought cost $30,000 and rents for $600 a month. The rent will go up, he says, when the tenant leaves, which could be imminent but he’s not comfortable evicting someone.

“I’m not a bad person,” he said. I believed him, but also, does anyone think they’re a bad person? It’s kind of beside the point.

The tax on the new house is over $1,000, which is a lot for a $30,000 home. And, in the 3rd month, the sewer line split and he had to dig the entire yard to replace the pipe, a process that cost $2,800.

Investing is about compensation for risk. Or that’s what I’ve been told. I don’t actually know anything about investing, and every investor I talk to has a different definition and a different way of going about it. Perhaps more accurately, every investor, with the exception of the truly great ones, of which there are very few, is telling themselves a different lie.

Still, the funny thing about real estate is that generally, thanks to inflation, every real estate investor looks like a genius eventually. But do you know any real estate investors? Do they strike you as geniuses?

“It just kills me that I’m not rich,” the investor told me, and I could tell from his voice he really meant it.

“Anyone who says that money can’t buy happiness has never been in love with a whore,” I replied.

I asked him what he was doing with the loan.

He said he has $120,000 sitting in the stock market. He’s made 10% on it in the last 5 months, but the stock market makes him nervous. He doesn’t like investing in other people.

In addition to interviewing small business owners and realtors I’ve been reading investment books to help me write these newsletters. Most investing advice boils down to “buy cheap.” It’s obvious, and also not very helpful. None of the other advice amounts to much if you don’t get a good purchase price. But from interviewing people it seems most of the best deals are happy accidents, like purchasing from a neighbor before the property hits the market.

It’s not hard to make money in real estate, but it’s slow, and stupefyingly dull. It’s not a lot of work but it occupies as much mental energy as a full time job. For most people it’s best done on the side. Purchase properties that cash flow as often as you can and forget about them while you run your life.

Howard Marks wrote about people trying to beat the stock market in The Most Important Thing. Full time traders will often buy a stock at 30, then sell it at 35, then buy the same stock later at 40, and sell it at 45. You can see the problem. If time is money then you want to buy and hold. Or as Warren Buffett once said, the best time to sell is never.

I find myself today, and most days, returning to the key to life, which I really think most people already know. Whenever I try to give advice, to myself or others, it winds down one way or another to the realization that all of life’s meaning comes from relationships. That’s all there is. Investing is really like life that way. Most of the time when we mess it up it’s because we’re thinking too hard.

xoxo

stephen

ps. As always, please like and comment. It makes me feel better. And please share on social media.

Share

Subscribe now

The purpose of this newsletter is always to be useful. Hopefully, if you or someone you love experiences cancellation this will be helpful.

Share

I just finished A Short History of Financial Euphoria by Kenneth Galbraith. It’s a beautiful little book that explains crypto and market crashes, but also witch trials, McCarthyism, and #Metoo.

Every financial collapse has a villain. We blame short sellers, banks, thieves, conmen, regulations, deregulation, and fraud. But we never blame ourselves. People that should know better join in the euphoria of the moment and lose everything in the crash that, seen from a distance, would appear obvious to a five-year-old child.

Mob activity determines all of human history and is surely written into our DNA. Something happens when we are standing inside of a mob, like standing in rushing water. It’s almost impossible to stay still, let alone move against the current.

I had a conversation with an old friend who told me they believed false murder accusations were common but false rape accusations were not.

I clarified, “You believe more people are falsely accused of murder than rape?” That was exactly what they believed, though it was obviously not true. People are more than capable of believing things that are obviously not true and abandoning principles they’ve held their entire life.

I should have just said they had joined a cult. We haven’t spoken since.

That’s how we explain a #MeToo mob destroying someone’s career over invented allegations, or, more often, allegations with a hint of truth. The crowd has to convince themselves that this time it’s necessary to put our principles aside because the cause is so great. This time it’s OK to make blacklists and assume guilt, despite everything we know about history. The same way we convince ourselves a market is invincible, despite numerous crashes in the not so distant past.

There are several types of cancellations and a lot of back and forth over the meaning of the term, but I’ll say that basically everybody knows what cancel culture is, whether they want to admit it or play word games.

If the mob comes after you and you lose your job, that’s one type of cancellation. Or perhaps you keep your job but have a harder time publishing or acquiring speaking engagements. Maybe the mob inspires people to vandalize your home.

By far the worst form of cancellation is when you are cast out of your own tribe. When we lose our tribe we often lose our identity.

I spoke yesterday with someone who has recently been cancelled. I’d never spoken to this person before but their story was no different from the others I’ve heard. He was shocked to realize how many people didn’t like him. I tried to explain that most of those people did like him and have only recently convinced themselves that they didn’t. I told him, don’t apologize. Don’t make excuses for people who want to destroy you. Don’t let them convince you you’re a bad person (truly bad people are rare). Don’t get bogged down in the details unless you’re talking to a journalist, because you’ll bore everybody.

Mobbings are predictable; all mobs behave the same. People who are mobbed think their circumstances are somehow unique.

What’s different now is a more interconnected world, but mobs and mob behavior are consistent and will always be with us. Because ultimately, we really are created equal, which means every group is capable of any atrocity perpetrated by any other group.

I told the person that reached out to me that eventually they would know how they felt about what happened. Their position would harden. And when someone tried to defend their cancellation they would dismiss that person as an idiot, or a moral coward. But it takes a while for most people. Most of us are not so sure of who we are. We know much more about outer space than the bottom of the ocean. We know more about the exterior world than we know about ourselves. But eventually a cancellation event comes into focus, and you have immunity. You can’t be cancelled twice.

That seemed the most helpful thing that I was able to tell this person, that eventually they would understand their own cancellation.

“Are you sure?” he asked.

“Stick around long enough,” I replied.

The best thing is to take a strong position right away and make it clear that you will publicly point out lies. This creates a disincentive to your attackers, but very few people are that strong. By the time you’re ready to push back your attackers will have moved on; they’ll likely have no idea what you’re talking about.

When your friends turn on you it’s normal to wonder if they’re right. Even when you know they’re not.

One of the first things that will happen in a well publicized cancellation campaign is the 2nd accusation. If you were accused of something very serious, and your case is getting a lot of attention, there will always be another accusation. There are no exceptions to this rule because there is an economy of attention and unclaimed attention is like a pile of money in the middle of the street. But also because people have bought into a position and they have to defend it (which explains a lot about market collapse as well). If you’re innocent of the rape charge and there isn’t anyone coming forward with something similar to rape (and the initial accusation is anonymous) then someone will say you made them uncomfortable. That will be reported as “multiple accusations of sexual misconduct” though of course nobody would care about the 2nd accusation if not for the first. Then someone else will join, encouraged by their tribe to participate. And soon it seems as if you’re such an awful person that maybe your case is not the hill to die on. Maybe your acquaintance doesn’t think you raped anyone, but if so many people are saying such awful things about you then you must be an awful human, they’ll wait for a better person to defend.

That better person will never come along.

Louis CK made a joke about being cancelled. People kept saying to him, “At least now you know who your friends are.” But you don’t want to know who your friends are. Because it’s not who you would choose.

No one with a large platform who hasn’t already been cancelled (and therefore has immunity) is going to publicly defend you. Some will reach out privately to say it’s terrible what’s happening. Some of the people who were afraid to defend you publicly will make jokes about how cancel culture doesn’t exist. Others will re-examine their past experiences with you in a much dimmer light and decide they never liked you. Small transgressions will become monstrous under the new microscope.

Here is the thing, in absolute terms, no one is a good judge of character. But everybody thinks they are.

The normal reaction to being cancelled is to retreat. Everybody I have spoken with who has been through it talks about suicidal ideation. There is something so horrific about being publicly humiliated, especially when your friends participate. That’s why public humiliation was outlawed as a form of punishment. But mobbing is human nature, so of course flogging in the public square made a comeback. We had good reasons for enshrining the principle of innocent until proven guilty, but we ignore that principle because that’s what human beings do. We make exceptions because we’re convinced we’re exceptional people living in exceptional times. And we are not.

Mob behavior emerged thousands or millions of years ago (who knows) and probably had an important evolutionary function. The emotional pain of being cancelled is likely so enormous for similar reasons. At one time being cast out of the tribe meant certain death.

It’s best to fight back but almost impossible for most people. The other thing you can do is nothing. Wait a while. Meditate. Wait until you understand what happened. Time is clarifying and most cancellation campaigns are very simple given the perspective distance of time. Just don’t apologize for something when you don’t know what you’re apologizing for. If people are telling lies about you, don’t focus on the grains of truth. Don’t make excuses for your enemies, because they will not give you the benefit of the doubt.

A friend who went through a vicious cancellation campaign in 2018 told me that multiple people reached out to him within 6 months asking for his help with something (he was known as a helpful person), forgetting altogether their participation in the mob that cost him his life’s work. When he reminded them they were surprised. They literally didn’t remember. They apologized though for not reaching out to see how he was doing in the midst of it all.

The people who seem to do best are the ones that continue to create. That can be hard to do when you lose your publisher and your editor and your agent and your income, but not impossible. After all, publishing a book or making a movie is always a miracle. It might not be fair but if you pulled off the impossible once perhaps you can do it again.

The benefits of being cancelled include insights into crowd behavior and the human condition. Ultimately, mob behavior is part of life, and in the end no one survives life.

Galbraith points out in A Short History of Financial Euphoria, we blame everyone except the responsible party, which is always the crowd. When predicting the next financial euphoria Galbraith said there were no answers, but the next great speculative episode was inevitable. He’d given up on trying to prevent financial bubbles.

Thus it has been for centuries; thus in the long future it will also be. - Kenneth Galbraith

stephen

p.s. Thank you for reading. Consider subscribing or making a donation if you can (but not if you aren’t doing well financially). You can send a paypal here. Venmo is @Stephen-Elliott-7.

p.s. 2 It’s very helpful when you like posts or leave comments. Emotionally I mean. And please share if you can.

Share

p.s. 3 If you’re interested in learning more about the social dynamics of cancellation campaigns I strong recommend Galileo’s Middle Finger and So You’ve Been Publicly Shamed.

Another title I thought of this week is Super Small Time.

The other day Andrew Sullivan tweeted that Dr. Fauci was wrong about delaying second vaccine doses. Sullivan is my favorite opinion columnist. I often disagree with him but I like the way he thinks, and writes. He (seems) to come to his opinions honestly. But when I clicked through his critique I found Fauci saying people were taking a big risk delaying their second dose.

Andrew thought Fauci was wrong because it turns out that if you delay your second shot of the Pfizer vaccine it’s even more effective. But that doesn’t mean he was wrong. At the time of the statement they didn’t know if the vaccine would be more, or less, effective with a delayed 2nd dose. Fauci was talking about risk.

In the perfect market risk is accurately priced. Risk should mean higher returns, and greater losses. I have strange memories of the 70s and 80s, when people believed in the market (though for at least 4 years of that time I was on heavy drugs). In the Bush years the perfect market was a political cry, but it was already obviously false to anyone who wasn’t a free market fundamentalist. Then Texas held California’s energy hostage. Then Enron. Then Bitcoin. Nobody believes in a perfect market anymore, but it wasn’t that long ago.

Daniel Kahneman and Amos Tversky invented Behavioral Economics, proving that people aren’t rational and markets aren’t rational as a result. A free market fundamentalist will always have a reason why a particular market was not actually a free market, like a modern day communist making excuses for Stalin by saying “Real communism has never been tried.” True free market capitalism has also never been tried. And it never will be. One reason for that is it hurts much more to lose $5 than it feels good to find $5.

Michael Lewis wrote an amazing book about Kahneman and Tversky, The Undoing Project. I forget the lessons of this book all the time. I remember The Big Short, though, which is about being smarter than everyone else.

Howard Marks, the founder of Oaktree Capital Management, wrote a book called The Most Important Thing (recommended to me by a reader of this newsletter). The point of investing, Marks says, is to beat the market. If you can’t beat the market you should just buy some index funds and forget about them. Most people can’t beat the market.

What’s hard to quantify, Marks says, is risk. If you made the same money, but took less risk doing it, that would also be beating the market.

When the market is hot, as it’s been since the beginning of our current plague, people pay less attention to risk. Warren Buffett explained why Berkshire sold their airline stock in 2020. They owned 10% of the airlines (or something like that). And the stocks crashed and, Buffett said, they were over exposed. But the government bailed out the airlines, the airlines recovered and then some. But it wasn’t a given.

When someone beats the odds we question the odds.

People blamed Buffett for being wrong, like Sullivan blames Fauci for being wrong. But he wasn’t necessarily wrong. Sometimes you do the right thing and it doesn’t work out, or you take an extraordinary risk and succeed. If it happens consistently you’re a genius, otherwise you’re barely a statistic.

This is why it’s enjoyable to play Bridge.

One of the short term rental operators I interviewed bought a house in Algiers, on the other side of the Mississippi River. The house was zoned for short term rentals but the neighbors didn’t like it; they didn’t want to live next door to a hotel. She bought the house at full price, because she didn’t want to miss the opportunity, so almost immediately she lost $20,000. It was new construction, with a view of downtown and the Bywater on a clear day. She bought the house in February of last year, just before Covid.

She couldn’t rent the house for enough to cover her expenses without short term rentals. When she described her situation she said she was “ratfucked” and “lacked a plan B” and felt like she’d been “rammed straight with a broken sewer pipe.” And then she got lucky. A long-term renter agreed to an enhanced price that covered her expenses, and the property rose in value, significantly.

“What a gift,” she said, “to learn from a mistake without paying for it.”

“First one’s on the house,” I replied, though I imagined she hadn’t learned from her mistake at all. Not if she’s like me. I only learn things the hard way, and sometimes not even then.

It’s possible, if you find a good REIT, to make a 10% passive return on your income, but it’s not exactly liquid. There are holding periods, penalties for early withdrawal. It’s not usually too difficult to purchase an income property and make 15%, or at least it hasn’t been since 2008. Single family homes were easily returning that much; it took no special skill. If you used leverage to purchase the home you would make even more, with the benefit of paying down the loan at the same time, which most people don’t count as return, but they should.

In the past year homes have gone up in price significantly, which makes it harder to rent at a price that covers your expenses. Home prices are up 17% but rents have only increased 2%. If you purchase a house and it declines in value you could be stuck for a while. Real estate is never liquid to begin with, though it does have the benefit of being an asset you can borrow against. If the rent covers the nut then you’re OK. You hold. You take your profit. Most people are looking for $400 a door. Sometimes less. But if you can’t rent for more than your expenses, and the value declines, you have a problem. It’s a problem of risk, risk that, in a perfect market, would be priced in. But that’s not how things are.

In the forward to a later edition of Kenneth Galbraith’s A Short History Of Financial Euphoria, Galbraith states that we will always have Tulip Crazes. It will happen again and again. The beautiful blue tulips dancing magically, their bright skirts spinning ever faster over their exposed bulbs, buoyed by higher and higher returns. Like a dream…

When the market goes down, profits are slow and scarce, then we price risk higher, though there is actually less risk. The market goes up, your neighbor doubled their money with Tesla stock. You missed the party and never got to wear your new dress. That’s when we price risk lower, though in fact this is exactly the time when we should be more cautious. In other words, we price risk high when we should price it low and price risk low when we should be most afraid because something inside us is sure the good times will last forever. Something primal.

Young people don’t believe as strongly in death, despite having much more to lose.

Everything is different this time, of course. Everything except human nature. Human nature does not change it just experiences new circumstances. Historically speaking there are a few things you can always count on. One is men paying for sex.

The other is mob mentality. Mob mentality is the most human trait and it is nearly impossible to avoid. We have glaring examples like the Nazis and the Rwandan Genocide. But also witch hunts, the McCarthy Lists, and #Metoo. Recovered Memory Syndrome was not long ago (Ethan Watters wrote a book about it). The truth is that all men really are created equal, as the saying goes. What it means is that all people, every identity group, is capable of the same foolishness and atrocities.

We will never stop forming mobs, believing that this time is somehow different. This time we don’t need to presume innocence. This time the market will keep going up. Once we slay Julius the people will embrace us as heroes.

I don’t know where you should put your money, that’s not really what this is about. If you want to be a millionaire you’ll likely need to start a business; passive investing won’t get you there.

But I want to think about investing. In almost every case investing is a percentage of your income. You invest the amount of money you can afford and the investments make a $100K salary into a $115K salary, or $105K if you’re cautious. The investments compound. Eventually, if you’re good at it, you will make more from your investments than your employment. But it will take 6 years (ish), if you’re aggressive and a little lucky. It doesn’t work very well without the employment part, (including self-employment).

There is no such thing as an active investment. An active investment is a business. If you’re managing short term rentals, that’s not investing in real estate, though there are investment benefits. There are ways you can work for yourself if that’s what you want, but you’ll have to figure out what they are based on your own strengths and, perhaps more importantly, weaknesses. There are some people who can take a not enormous sum of money, say $30,000, and make a living actively trading in the stock market. It’s both uncommon and lots of work.

Charles Bukowski said that anyone who could consistently beat the horses was underemployed. The kind of genius who beat the house with its 15% rake, he thought, should be a brain surgeon.

The most Bukowski ever made from the horses consistently was when he started taking other people’s bets, leaving the post office early to get to the track and place everyone’s wagers. Eventually he realized that he didn’t have to place their wagers, he just had to pay the winners. So he stopped placing his co-worker’s bets and enjoyed the house rake for the first time.

There was a kernel of something there. But Bukowski wasn’t the type who could really exploit it and start his own off track betting establishment. He was lucky enough to be a great writer, and to be discovered while still alive. He died rich. But it was very much against the odds.

stephen

Share

p.s. Thank you for reading. Please like and leave comments; it’s really helpful! And please share on social media.

p.s. 2 If you’d like to leave a tip (which would be great) you can send a paypal here.

Share

Read more

While I was making sure the bills of a pair of lovely elderly relatives were paid on time, I accidentally found over $10,000 for them. The money wasn’t even that hidden, they just didn’t know it was there or how to claim it.

I did. Here’s how to find money.

Unclaimed credit card rewards:

I’m not saying you should have a rewards cre…

Read more