This newsletter is my process of writing a self-help book, tentatively titled How To Make Money: Financial Advice For Poets.
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.
p.s. Thank you for reading. Please like and leave comments and share on social media. It matters a lot.