This newsletter is my process of writing a self-help book, tentatively titled How To Make Money: Financial Advice For Poets.
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.
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.
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.
Stephen, I read every one of these for the ride through those last six paragraphs, but the pitch is nothing without the windup. I don't get news or self-help here either, but I really do like the letters.
To really see how the stock market always comes out on top, take a look at Ibbotson's STOCKS, BONDS, BILLS AND INFLATION chart. (You can google it.)