SELF HELP 37
How to Triple Your Net Worth Without Knowing Anything About Investing. AKA, The Handmaiden's REIT
This newsletter is my process of writing a self-help book, tentatively titled How To Make Money: Financial Advice For Poets.
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.
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.
Reading this reminded me how much I missed your rumpus emails. I wish you made that coffee table book, instead I'm left with the few I've managed to keep in an old email archive that I don't even use anymore. Your voice feels so familiar it's just a pleasure to read your writing. Sorry for being corny 😅
I can’t afford to buy anything yet but your posts give me hope that one day I will get there and be able to make a success of investing so thank you