Real Estate Is a Terrible Way to Make Money

Mailbox money.

That is the pitch in a thousand hotel seminars by would-be gurus. You buy a property, paint the cabinets, and tenants pay your bills. Do this, times ten, and you replace your income. You don’t even need money. Banks will lend all that. You, a little land baron, can drink coffee waving to your worker bee neighbors as they drive off to work.

To this point, I had been impervious to such pitches. I knew most of this stuff wasn’t real. Besides, I liked my day job.

Two things changed. First, along the way I drank a lot of coffee with investors. Amidst the frauds and hucksters, I met a good many genuine multi-millionaires next door. The second was that I was building a dad bod and due a good midlife crisis. I decided to skip the Corvette and try landlording.

I’ve found three myths of real estate investing in America, all very old. From the boosters selling new lands in I-ow-a, to house-flipping television, you will hear these “truths”: real estate always goes up, investing in it is passive, and this is how really wealthy people got rich.

No, it doesn’t. No, it isn’t. No, they didn’t.

* * *

Land isn’t naturally worth anything. Value is created.

Johnny Appleseed was America’s first flipper.¹ That wonderful story of an eccentric loner spreading the apple-a-day gospel for American families is ridiculous. First of all, his apples tasted gross. They were for making hard apple cider. Second, though he genuinely was a weirdo wanderer, Johnny was also a smart solo-preneur. He planted those trees to rig the real estate game.

Johnny Appleseed (not his real name) became famous when the speculators buying up eastern Ohio offered 100 acres of free land. The conditions were: 1) move there, and 2) harvest fifty apple trees and twenty peach trees to prove you were staying. Like all “free” offers, it was a gimmick. It takes years to clear land, plant trees, and bear fruit. This “free” offer was really a multi-year waiting period and a way to enrich the speculators once interested settlers drove up the value of surrounding land.

Johnny saw an opportunity. He would move ahead and plant the trees himself—thousands. When settlers came, he sold his claims at a slight up-charge, saving frontier families years of time. When lots sold out, he moved on and did it again. Staying one step ahead of settlers from western Pennsylvania to Illinois, he generated huge returns. Plant, tend, wait, sell, repeat. He made a small fortune as America’s first flipper. He created value.

That sounds like a lot of work, which begs the question, why do so many people think the value of land goes up, even if we don’t do anything to it?

Take the moon. In 1936, a man walked into a notary public’s office and successfully certified ownership over “all extraterrestrial objects.”² His competition has grown. The Lunar Registry has a website³ for those who wish to invest in moon land. Competitor websites explain why their claims are more valid. The Sea of Tranquility commands top dollar, while budget conscious investors can consider the Sea of Vapors. Over 300,000 such acres have sold to date. There is no oxygen add-on feature.

Legalities aside, if you owned the moon, what would you do with it? How would you make it more valuable than the price you paid? I’m asking for a friend.

Okay, I’m the friend. I own an acre in the Sea of Serenity, near the landing site of Apollo 17 and offering “phenomenal Earth views.” I’m not just any investor, I’m an Astropreneur.

To make this gambit pay off, I need to get value from or add value to my investment. Getting value out is pretty easy: my cocktail party story runs orbits around your cocktail party story. But to make it profitable, I must add value. The land has “proposed zoning” for tourism or light industry, presumably because heavy industry would ruin the phenomenal Earth views. I lack expertise in either, so now I must sell to some fool who is also out of good stories, or spend billions to oxygenate it.

For land to be valuable it must sit inside a valuable economy. Moon land does not. If jobs are thriving and housing is in demand, values go up. If the plant closes and jobs move to South America, they go down. There is a lot of land in America, and a lot of it is cheap for a reason. It’s only valuable if crops or people can put down roots. Thirty percent of the United States is forest, and 45 percent more is labeled wilderness. Most Americans live on just 5 percent of the United States. You could give every U.S. household nearly half an acre of property and we would all fit in Oregon. I call downtown Bend.

Real estate doesn’t naturally go up in value.⁴ It goes up when the local economy does, and even then, only when demand outpaces supply. Adjusted for inflation, homes in cities like Atlanta, Dallas, and Pittsburgh cost the same in 1997 as they had a century before, in 1897. Home values in St. Louis did not recover their 1890s values until 2003. Nationwide, American home prices stayed roughly the same until the end of World War II, and even then grew only marginally until the late 1970s. Prices occasionally went down. Real home price declines happened at least one year of almost every decade of the twentieth century. Between when I was two and six years old, house prices decreased nearly 10 percent in real terms, and another 6 percent while I was learning to drive. “Home values always go up” only works when the word always is defined as starting sixty years ago in California. For most of American history, no one assumed houses had to get more expensive.

Locally, things get more dramatic. In nearly every period of history at least one city has seen values completely collapse. New York City land dropped 50 percent in the Revolutionary era. Philadelphia houses dropped 40 percent in the 1830s. In fledgling Chicago they once went down over 80 percent. In 1982, the bottom dropped out of Houston’s housing market after the energy economy lost 200,000 jobs as developers continued to build over 100,000 more homes. House prices went down 30 percent and stayed depressed for fifteen years.⁵

Sometimes it goes the other way and prices rise without effort. If your sleepy village strikes gold, populations move in faster than housing builds up. San Francisco’s flood of gold rush residents sent land values to mind-boggling levels. Demand grew so high that lots sold when they were, literally, underwater. The land was still in the ocean and hadn’t been drained behind seawalls yet. Prices rose fifty times in two years while the ground was still wet. This has happened all over the country. When people tell you “They aren’t making any more land,” remind them that much of modern day Miami Beach was manmade by dredging up Biscayne Bay.

Investors call this the “path of progress,” a real estate term meaning you don’t have to add value. You simply buy where all the people are going and wait. That sounds simple enough, except the path of progress can take its sweet time, and occasionally turns the other way.

You’ve heard of Las Vegas, Nevada, but what about Bath, New York,⁶ founded during the Washington administration as a getaway resort town? To “hurry civilization” investors built a theater, racetrack, hotel, and a hothouse all surrounding their land office where you, too, could buy a piece of Bath. They hosted horse races, dances, fairs, and theater productions to sell tomorrow’s big vacation city.

It took 100 years to sell all of Bath. Investors died without profits. Today, what happens in Bath stays in Bath because there is nothing to do there. It’s a sleepy hamlet still surrounded by forest.

To create value, you must do something that others will not do or see something others cannot see. Even then, it has risks. Sometimes you build Vegas, other times Bath. The only guarantee, on Earth or off, is that this won’t be easy.

* * *

If you must add value, then real estate is an active, not a passive, investment. The real money is made doing something.

Renovating and expanding houses is an expensive, time-consuming process fraught with fraud and frustration. It always was. When George Washington renovated Mount Vernon,⁷ contractors double-booked jobs, painters billed him for other people’s paint, and absolutely nothing got done on time. Someone forgot to put the banister up a staircase, leaving anyone going upstairs liable to fall off. A good worker died. His replacement was, according to the president, “an intolerable sot” who showed up drunk.

No worries. You’re going to be a landlord, right? The tenants will pay for all this temporary hassle while you live your best life on Insta.

When news broke that the new American government would put a temporary capital in Philadelphia, one entrepreneurial woman knew how to cash in. She bought lots in Philadelphia⁸ near the site for the U.S. presidential residence, built rentals near the heart of American politics, and waited for the money to roll in.

The expenses got there first. Her contractor walked off the job. Fired workers broke in and stole materials. Renters failed to pay. Tenants illegally sublet units. Another died and his widow refused to leave. Someone took the front door off and just walked away with it. “Mailbox money” this was not.

What so many would-be investors forget is that they are buying a very tiny housing business, and the tenant is their customer. Good landlords know they must keep the customer happy. This often involved drinking and ritual merriment with renters, listening to grievances, and occasionally upgrading properties to meet their needs. Both then and now, not everyone learned the lesson.

“Rioting tenants” is not in the dropdown menu of any real estate investment software I’ve seen. But angry renters have a long American history. The Anti-Rent Movement involved 300,000 tenants across over 2 million acres and spread to New York City. It had everything: mass meetings, mob violence, even tarring and feathering of landlords. The “down-rent” men signed a Declaration of Independence on July 4, 1839. They dressed up like Indians and elected a war chief named Big Thunder. There was an actual battle. Big Thunder won. It was called “The Anti-Rent War.”⁹

Many famous Americans ran headlong into the harsh realities of real estate investing. If there were a Mt. Rushmore of black history, W. E. B. Du Bois would be on it. The first man of color to earn a doctorate at Harvard, co-founder of the NAACP, he was the most prominent African American leader in the nation before Martin Luther King, Jr. His writings are still regularly assigned in college classes today, in no small part because Du Bois was a fierce critic of capitalism (as are most of the professors doing the assigning).

But he tried his hand at it, too.¹⁰ We know this from his failed stint at real estate investing in the Roaring Twenties. The icon borrowed nearly $20,000 (about $400,000 today) to buy an apartment building in Harlem. He put just 10 percent down. Du Bois was one of his generation’s smartest men. He could do the math on paper. But in real life, repairs come in waves, tenants behave badly, and the attempt to keep quality, affordable housing runs into the inevitable dilemma between quality and affordability.

Tenants refused inspections. The fourth floor rotted out. Fire escape ladders went missing. And delays, delays, delays. Nothing is ever fixed on time. They never put this in the investment manuals.

Rent parties were thrown where tenants charged admission to apartment-sized mini-concerts that birthed the music and dancing that became Jazz Age Harlem. They were also very loud, filled with drugs and booze, and went deep into the night. “The men urinate out of the windows” was just one of many complaints the Du Bois family heard, including the sudden influx of prostitutes.

When Du Bois couldn’t meet payment for repairs (which mount even when rents don’t), he borrowed again. He had three mortgages on the building at once. At one point, he had to borrow money from his mistress. After taxes, utilities, the janitor, and repairs, the rents just couldn’t keep up. Not once did Du Bois turn a profit. He paid for the big mess out of pocket.

Landlording is hard and the margins are slim. Even the most brilliant people find this out the hard way. As a way to make money in the present, real estate mostly stinks.