14 Comments
Jun 3, 2022·edited Jun 3, 2022Liked by Stephen Elliott

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 😅

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author

That's so sweet of you Erin.

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Jun 7, 2022Liked by Stephen Elliott

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

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author

I'm rooting for you!

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Jun 3, 2022Liked by Stephen Elliott

It seems like so long since you put out an issue of this newsletter! It's great to get a new installment. I have to say that I am happy to be living in a funky old house that was renovated but never really completed on the inside, but the montage was paid off years ago, and that is the best part. The worst part are the neighbors. I doubt that I will do any other real estate investments, unless I move out of this town and go north where the air is just a bit cleaner. What I enjoy so much about your newsletter is your writing! It's telling that when you read a piece about something you have zero interest in and it captivates you, it is probably the writer's abilities that have snagged you (Duh!)!

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Thank you!

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Jun 3, 2022Liked by Stephen Elliott

How do you think about risk?

I enjoy reading these posts and want you to do well and really, really don't want this to turn into a tragedy. I have a nagging concern that you happened to start investing in real estate during the largest quantitative easing in history. Do you have a plan for when interest rates rise, when unemployment rises and people can't afford rents, and times get harder? How do you know you'll be able to ride it out?

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The real estate investors that make the most money are the speculators. They buy property that costs more to maintain than it brings in, hoping to flip it quickly in a rising environment. Conservative investors buy real estate that doesn't go up in value as fast but that brings in more than it costs to hold. If you take in more than you pay out each month it doesn't matter if the property goes down in value, you can hold it forever. My investments will never cost me more than they bring in. But I might have to hold them forever if they go down enough in value. Does that make sense?

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I also make most of the money I live off managing property for other people. My net worth is based in real estate but not the income I live on.

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"If you take in more than you pay out each month it doesn't matter if the property goes down in value, you can hold it forever."

This assumes rents won't go down and will also rise enough to cover increases in costs. This is probably a good bet, but it's not riskless. If the economy tanks and at the same time there's high inflation, they could not be generating enough cash to pay the mortgages.

How do you think about this kind of long tail risk? How do you decide how much of a "margin of safety" needs to be built into each property and across the portfolio?

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Nothing is riskless. The margin of safety has a lot to do with the type of property. However, the idea that property prices will go down, and rents, but interest rates will go up (along with property taxes), doesn't make a lot of sense to me. If home prices decrease, and rents decrease, you are not in an inflationary environment. Rents going down with interest rates going up is counter intuitive.

Property values going down at the same time with rents going up and interest rates going up is much easier to understand. That's the situation that forces you to hold property long term that you were hoping to only own for a year or two. I've seen that happen to investors before. But I haven't seen rents going down simultaneously.

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"the idea that property prices will go down, and rents, but interest rates will go up (along with property taxes), doesn't make a lot of sense to me."

Stagflation is when there's high inflation, slow economic growth, and high unemployment. During these times, rents can go down, particularly in high cost geos, while inflation and interest rates go up. It last happened during the 1970s. There are a lot of parallels with then and the time we're in right now, so some economists think there's a chance of it happening this or next year.

Stagflation could mean a period of it being harder to find tenants, rents going down, and inflation causing maintenance costs to go up. If your mortgages are fixed rate and you already have increased rents across a few of them, maybe there's already enough cash flow that it's not an issue? I ask to understand if you've modeled this and how much of a buffer of cash makes sense for a given portfolio. Seems like someone who had bought a lot of properties recently would be most at risk.

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I enjoy reading your posts. Thanks.

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Thank you!

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