How To Invest In Real Estate For Cash Flow

This newsletter is my process of writing a self-help book, tentatively titled How To Make Money: Financial Advice For Poets.

“But why would you take advice from me?” — Aristotle

There are three primary ways people make money in real estate: cash flow, appreciation, and leverage.

What does cash flow have to do with the sharks drifting lazily a half mile off Miami Beach? Almost nothing. Not anymore. Cash flow is the money a property generates after expenses. A shark must swim forward or die.

People looking for cash flow are purchasing properties in Ohio, Indiana, and Mississippi, where you can buy a house for $40,000 and rent it for $850, or a more expensive house for $100,000 that you can only rent for $1,100. Either way, if your rent is 1% of the purchase price your numbers will probably work. And if it’s 2% of your purchase price you’ll do really well until the roof caves in.

Sometimes you get lucky. You buy for cash flow and property appreciates anyway. But properties tend to have good cash flow, high rent vs. low purchase price, because people don’t believe in them. They don’t believe in the area. They’ve walked away, and left well built houses behind.

Everybody has to live somewhere, that’s why it’s called real estate. At one point every real estate play was cash flow. Manhattan: cash flow. San Francisco: cash flow. But when it heats up the cash flow gives way to speculation. A house in San Francisco will cost you more every month than you could possibly rent it for.

When the real estate market gets hot, people buy for appreciation. The average temperature in the water off Miami is 79 degrees. Even in December it’s 73 degrees. In Miami Beach you can swim in your underwear all year round, while straining to see someone you used to love laying naked on the hotel patio not far away.

Love is negative cash flow. Dead sharks bumping their heads into the scalding sand under the purview of million dollar condos. A holocaust of Great Whites, wretched and rotting, stinking up the shorelines.

In Miami you’re too late for cash flow but probably early still on appreciation. In Miami everybody is dancing with an old argument playing in their heads. The Cubans still want their rum factories and hotels back. Old friends are still hoping for apologies, or forgot what they did wrong. The rich Venezuelans are waiting on the coup which will surely come tomorrow, or the day after. The mayor is inviting Elon Musk and his friends to fantastic orgies. Between lines of coke Elon says he’s going to build tunnels under the city. Everybody is perfect and pinched and drinking to forget. Nobody remembers anything. The last recession was different. Some bubbles never pop. In the next climate catastrophe Miami will disappear forever.

There are still places outside of Dayton where you can buy a single family home with good cash flow. Places where you can own a little something and make 15% on your nut easy, year after year, as rents slowly rise, like the oceans. Cash flow is a boring investment. Elon Musk’s company is called Boring Company. Cash flow is conservative. Elon Musk has no time for cash flow. Cash flow is safe. Appreciation is where the real money is at. High risk high reward, and enough in the tank to withstand years of losses before cashing your chips.

If you’re in a hurry, like any sane person I know, you’ll leverage that equity. Borrow against what you have, juice your margins. Refinance your refinances. Once you’re swimming with the sharks what’s the difference between $100,000 and a million? Drowning is drowning. It’s the same as $100 if it’s more than you can afford. Borrow while the money’s cheap, as the saying always goes.

Diversification is a good strategy. Buy some houses for cashflow. Live in a house you hope will appreciate. Pray to the short term rental gods that vacation rentals aren’t banned until your home’s value has risen to the point you can strap a fat dead shark on your back and swim away.



Share Stephen Elliott's Self Help Newsletter