The fundamental proposition of real estate investing is beautifully simple: buy a house and rent it for more money than its mortgage and expenses. To many, including myself, this simple formula makes real estate investing more appealing than stocks, bonds, ETFs, and other complicated investment vehicles.

Lately, however, I’ve found myself overcomplicating the formula to the point of paralysis. Instead of doing research on local market rents, I listened to podcasts and read articles that convinced me that the stock market was going to crash soon.

Instead of going on the MLS to look for deals, I studied momentum investing, looked at charts about yield curve inversions, and tried to calculate how outstanding corporate debt would affect real estate prices so that I could predict when this crash would happen. I don’t even know how to find outstanding corporate debt, so this didn’t go well.

Instead of making offers and snagging a deal, I tried to predict the Fed’s next rate hike, researched Mercantilism to try to understand tariffs and how they might affect the price of copper which would then affect the net present value for my CAPEX projection for a rental that will need its plumbing replaced in ten years. Even after falling down this last rabbit hole, I still couldn’t predict the next crash!

For months, neurotic internal dialogue and wasteful contemplations about market conditions that I could not control and barely understood consumed my thoughts. After my third email to a friend swearing off all investments except deposits underneath my mattress, I tried to temper my apocalyptic ramblings by re-reading the Intelligent Investor by Benjamin Graham, Warren Buffet’s mentor.

Be Intelligent Like Warren Buffett

In the Intelligent Investor, Benjamin Graham codifies the principles of value investing. Put simply, a value investor purchases stocks for less than their intrinsic value and then holds them forever, collecting income in the form of dividends and growing the value of their holdings through appreciation.

While reviewing Graham’s sage advice, I was hit like Saul on the road to Damascus: real estate investing is based on the same principles as stock value investing.

Graham bought stocks with a “margin of safety” – a discount of at least 10%; I bought houses for 70% of their ARV (after repair value). Graham found good companies he wanted to hold forever; I bought houses that I wanted to hold forever. Graham collected income in the form of dividends, and watched the value of his holdings grow over time; I collected rent and watched my debt get paid off and my houses appreciate.

Let’s look at some of Graham’s advice and how it applies to investing in the current high-interest rate market.

Winter is Coming

Weeks ago, before communing anew with my guru and shaman Benjamin Graham, I posted an article about the inverted yield curve and how its appearance was certainly forecasting a crash. A friend replied, “You, of course, are correct, but the question is timing. When will it happen?” I thought hard for an answer. Two years ago I would have said definitely in the next year. One year ago I would have said definitely in the next six months. Here we are. No crash.

I read Graham and he set me straight. From Chapter 8 of The Intelligent Investor: “It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities.”

Oh Benjamin! So shrewd, insightful, intelligent! The first two parts of Graham’s point are pretty obvious: you never know how long you have to wait, and by waiting you’re losing the additional income you would receive by purchasing something.

Let’s dig deeper into his last point, “the possible missing of investment opportunities.” If my criteria for purchasing a rental property is that it produces $100 cash flow after PITI, CAPEX, maintenance, and utilities, under what market conditions should I purchase a house that meets those criteria?

The answer is all market conditions.

So, if I can find a house that meets those criteria even in the most overheated real estate market, I should purchase it. If I can find a house that meets those criteria when others are forecasting doom in the next three months, I should purchase it.

What if real estate prices just doubled in the last 6 months? This question is outside the scope of my concern as an Intelligent Real Estate Investor. I just laid out my criteria: $100 cash flow. I don’t care if somebody else bought the house yesterday for half the price they are selling it today. It meets my criteria.

It’s Season Two and, uh, Winter is Coming

Months ago, before consuming the palliative tonic of Benjamin Graham’s wisdom, I would constantly email deals to my business partner, then say “man we could’ve bought this for half the price in 2010! We’re so dumb!” Yes, we are dumb, and I was even dumber in 2010 when I was buying $300 pairs of shoes instead of cash-flowing duplexes for half their 2019 market value. My relative stupidity in 2010, however, had no bearing on the fact that the houses I emailed were still deals in 2023.

A pleasing nugget of wisdom from Mr. Benjamin Graham helped cure me of my wasteful regrets. He states, “As long as the earning power of [the investor’s] holdings remains satisfactory, he can give as little attention as he pleases to the vagaries of the stock market.”

Again, for real estate we can simply replace “stock market” with “housing market.” “Earning power of his holdings” simply refers to “cash flow” in real estate. In a nutshell, if my house cash flows $200 per month, do I care what arbitrary price the market assigns to it? Can I buy more with my $200 cash flow if the Zestimate changes from $58,000 to $78,000? Even if the market assigns a ludicrous, impossible value of $1 to my house, and I can still rent it and get $200 cash flow per month, do I care about the value? The answer is no. 

(For all you smarty pantses out there, I understand that if my house has a value of $1 there are probably some bad things happening in the neighborhood that I should be worried about, and if the market assigned an equally ludicrous value of $1,000,000 to my house, I should probably refinance or sell. This is a thought exercise for the true long-term buy and hold value investor).

My advice to myself after reading Graham: stop worrying about what you could have done 10 years ago when what you can do today will still produce cash flow and build your wealth.

It’s Season Three, and Seriously, We Promise Winter is Really Coming This Time

A few months back, while reading an article about how much cash Warren Buffet was sitting on, I erupted in an outlandish Twitter storm that demanded everybody else stop investing and hoard as well because the crash was about to happen.

From the white sandy beaches of Intelligent Investor Isle where I currently reside, my friend Benjamin and I laugh at what crazy notions I had.

On when to invest, Benjamin advises, “On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value.”

This is perhaps the most meaningful sentence in the whole chapter, maybe the book, for real estate investors. Whenever you have excess cash, invest it in houses. Period. If you follow this one rule, you will not worry about the market and it won’t matter when winter is coming. When winter does come, you will participate more fully in the market because there will be more deals that are better deals. In the months leading up to winter, you can expect to be stingier, to do fewer deals, but to still do deals. By continuing to participate, the mega deals that show up during winter will be easier to identify as deals.

Graham’s advice to always be investing puts the locus of control on you and your bank account. If you have spare cash, invest it. In my opening paragraphs, I tried to demonstrate how I put the locus of control on many external forces: the Fed, the President, my local market, the likelihood of a recession in the next 3-6 months. I can’t control any of those things, and trying to run my investment calendar on uncontrollable external forces is a recipe for frustration, agony, paralysis, and lost income.

Real Estate Investing, Simplified

To again put into perspective the simple beauty of real estate investing, let’s examine Graham’s term “well-established standards of value.” 1,000 hedge fund managers with staffs of dozens of analysts would all give you a different “standard of value” for the stock market. In real estate investing, this “standard of value” is the simple proposition I mentioned at the beginning: buy a house that rents for more than its mortgage and expenses.

If you examine every house in your market over the last 180 days and not a single one meets your criteria of $100 cash flow, it could be a sign that house prices are above a reasonable standard of value and you should wait to purchase. It may also mean that prices in your area are up, but they may be down in a different city or state. If that’s the case, consult David Greene to employ geographical arbitrage so you can still invest.

If, over the course of 5-10 years, you “do [your house] buying whenever [you have] money to put in [houses],” it would be hard NOT to accumulate a small fortune. If you extended the same habits and pattern over a 15-year investment career, you’d have to start calling up jewelers and asking them how to spend all the money you’d be making.

It’s Season 8, and Winter Finally Showed Up…8 Seasons Later

This has been a very short summary of only a few of Graham’s points. There is much more wisdom in his book, The Intelligent Investor, and I’m sure there are many other points intended for stock investors that apply equally to real estate investing.

Lately, I’m not focused much on the news or the markets. Instead, I’m working on building up my bankroll until I have enough cash to purchase another rental property. If the market finally takes the dump I’ve been expecting over these last few years, maybe those same dollars will buy me two.