SELF HELP 38

How To Find A Good Deal On An Investment Property

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

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I've been thinking about this list and what would be helpful to readers and I thought one thing I will not do is write about process. No poems about poems. No making fun of poets, even when they build houses on the side.

On the other hand, if you can’t make fun of poets who is left?

My Trump loving friend in the south called yesterday and told me to be prepared. He believes in things I don’t believe in. He said he might sell his house before the crash. When giving advice I try not to be too explicit. But I told him, because even though I don't know anything I know more than he does: Your house might go down in value, but not more than 10%. Not in the current environment. And you'll spend that much selling it. Don't try to predict the market.

I laugh because he doesn't understand market forces and he laughs because I don't know how to build a wall or lay foundation.

My point was, with rates going up (and they will likely go up more, for a while, before one day coming down, and you will probably never be eligible for a 2.75% mortgage again) some housing stock is dropping in price, because it costs more to buy a house. But... there is no credit crunch. The people in their homes, in general (in America), don't need to sell. They are not locked into wild loan packages like they were in 2008, so there is no flood of inventory. They have low mortgage and the cost of moving has gotten very high. People have to live somewhere so they’ll just stay where they are and their homes will not enter the market.

The builders slow down building because of supply bottlenecks and in anticipation of longer lead times associated with higher mortgage rates, and so we still have very low housing supply. And that means housing prices don't fall too much, in most places (the exception being particularly overheated markets). And nationally housing prices are still rising, and will continue until there is enough supply on the market (about 1.6 million units I’ve read, currently we’re about 1.2 million). Which will happen (if rates stay high). But probably not this year. And we won't have a massive dumping of inventory.

Meanwhile rents are going up. A lot. I had a tenant contact me and ask how much I planned to raise her rent when her lease expired. That's never happened before. Rents are going up faster than the cost of money, so unless you were speculating and bought a property that doesn't cash flow you'll just hold onto the investment property and accept a higher return and sell it when housing prices start to rise again. Or never. Never is a great time to sell a house too. The best.

But it would be very unusual for property values and rents to fall significantly at the same time.

The point I wanted to share with you is that I was out with a professional stunt woman earlier this week and she said she was waiting for housing prices to come down before purchasing an investment property. I told her she didn't know that housing prices would come down. And, when they did, the cost of money might have risen to the point that it was break even anyway. She said at least of the places she knew, Vancouver, Seattle, you could never buy property and rent it for a profit after expenses and I explained that wouldn't change.¹

What I said was: The best deal is a good deal.

I've had two good deals come along in the almost four years I've been working in real estate/construction full time. I've had other deals turn out how I predicted they would, and one deal turn out not so well but I got lucky anyway and the market bailed me out. And my first house turned out to be a fantastically good deal in retrospect. But a truly good deal is a property that you could sell the next day for a large profit.

The first came to me because I was renting the entire building and it started to fall down. I mean, the living room was suddenly sloped, the floor tilted. The temporary retaining walls had turned to dust at their base in the 9 years they'd been sitting in a puddle of water below the owner's unit. The roof was holding itself up like some modern miracle only attributable to Jesus, or physics. And the owner, who had said he didn't believe in selling, looked at me, and the tilted floor, and said: Why don't you just buy the building?

He was ready to retire anyway. He and his wife wanted to move to Malaysia. And he wrote down a number. We liked each other and I’d always paid my rent on time. We signed a page in my notebook. And six months later the property was mine.

Two years after that my *****'s friend was ready to move to her new condo and didn't want to paint her place, or fix the holes in the ceiling. I told her I would give her $***, but she could get at least 20% more (40% if she did a little work). She didn't want to. I told her explicitly she was making a mistake, but I could only give her what the property was worth to me, not what it might be worth to someone else, and she decided to take it. The property was in her husband’s name so I don’t really know what might have been involved in that decision, but I have my suspicions.

So in my experience every two years a good deal comes along. Though actually once people know you're buying real estate they start bringing deals to you, so it does pay to stop referring to yourself as a writer. Especially if that's not really how you identify anymore anyway. It's a little sad, and liberating, to tell people you're managing property. Telling people you’re a writer is so romantic, especially when you’re younger. There’s nothing romantic about being in real estate. Though I do find the math interesting.

But I couldn’t make a living as a writer anymore after I was cancelled so I had to figure out another way. I didn’t have a choice in the matter.

Anyway, later maybe they find out that you wrote some books and made some movies and it's like, oh, maybe this old guy is kind of interesting, or he used to be, so maybe that's enough. This might be why I enjoy watching The Old Man on Hulu. Ironically, the younger version of Jeff Bridges in The Old Man is played by Bill Heck, who also once played me in a movie. So it’s all a circle of sorts.

It doesn't matter. As they say in football, You are exactly what your record says you are. Or, as they say in business school, Sharks swim forward or die.

My point is simply never turn down a good deal. Good deals are rare. Don't think you'll wait for the market to change, especially when literally every other person who thinks they understand the market is also waiting for the market to change. A good deal can come along at any time, in any environment. And you just have to take it. Find the way, somehow. Maybe sometimes you can't. For me, having no children and no one who depends on me for anything, when it's happened I have walked out a little far onto the drawbridge of leverage and taken some risks. But it's because I know how unusual a good deal is. Especially a good deal that I can recognize. After all, I'm not a genius. I'm not like Warren Buffett who can read a stack of papers about a company and know what it's worth. For me to recognize a truly good deal it has to be obvious.

I told the stunt woman cash is great. If you have cash, and a good deal comes along, you'll be ready.

xox

stephen elliott

p.s. Thank you for reading, 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, I write these for free, and nothing in life is free. When you leave comments or link to my post on twitter or Facebook, I really like that, and it doesn’t cost you anything.

p.s. 2 If you want some straight forward advice on purchasing a property John Champaign sent me his book on getting started as a landlord. I thought it was really informative.

1. More desirable markets tend to be risky and speculative. Poorer cities, and neighborhoods, tend to contain properties that rent for significantly more than the mortgage. For example, it costs $50,000 for a house that rents for $1,000 a month in a poor neighborhood in Jackson, Mississippi. But it costs $500,000 for a house that rents for $1,000 a month in Oakland (roughly).