Where the Money Is Made

September 30, 2026

Before buying real estate or a business, I want to understand two things: exactly how I will make money, and how much of that outcome is within my control.

That seems obvious to me today. But I have made purchases that departed from this principle, even though I already knew it from experience.

In California, my father and I bought properties with a specific plan. We could see what we could build, where we could add square footage, and how we could create additional living space and income. Every purchase came with an understanding of the next step. We considered the cost of the work and what the property could earn afterward.

A house could be expensive. The rent it could earn in its existing condition might not justify the purchase. But we were interested in the opportunity to change those economics.

For example, we could create an additional apartment at the garage level. That gave us rentable space that had not existed before. Permits, costs, and demand still had to be worked out. But we understood where the money could be made.

When I bought houses in Fulshear, TX, I did not have that plan.

I remember a thought crossing my mind: What exactly are we buying?

A new house at the going price. No obvious discount. No additional space I planned to create. No clear change that could substantially improve the return. The house was already finished.

The thought came, but I did not follow it through to an answer. I went ahead with the purchase.

Now I can see that I had stepped away from my own way of evaluating a deal.

I find it useful to think about two sides of a purchase.

On the left are the economics of the acquisition: the quality of the asset, the price, the financing terms, and the income it already produces.

On the right is what ownership allows me to do afterward: put the asset to better use, increase net income, reduce unnecessary costs, or create additional value.

Ideally, I want to see opportunity on both sides.

Without it, the existing income needs to justify the investment on its own.

An asset that needs no improvement can still be a very good purchase. If it already produces enough net income, that money can be invested elsewhere. There is nothing wrong with leaving a good asset alone.

But when the current income is weak and there is no specific plan to improve it, the hope of a higher future price begins to carry too much of the investment case.

That is a much weaker proposition.

It is especially easy to lose sight of this distinction when hearing about someone else’s success.

“She made money in real estate.”

Fine.

But what did she pay? How did she finance it? Who rents it? What did she change? How much additional money did she put into it? How much of her own work was required?

Those questions matter because the asset alone does not explain the result.

I know someone who sees opportunities in properties other people walk away from. She understands that a problem making a property difficult to sell may not prevent her from earning income from it. Sometimes she fixes the problem. Sometimes she finds a profitable use for the property with the problem still there.

She has both an instinct for buying and an understanding of what to do afterward.

Neither one alone explains her results.

I think about public-market investments the same way. Consider Berkshire Hathaway and its exposure to a homebuilder such as Lennar. An investment like that may make sense given Berkshire’s capital, knowledge, time horizon, and ability to wait through a difficult housing cycle.

That does not mean the same investment makes sense for me.

Another owner’s advantages do not come with the asset when I buy it.

So before my next purchase, I want to see the actual economics.

Who pays, and for what?

What remains after expenses, debt payments, and necessary reinvestment?

What am I getting for the price I am paying?

What can I improve after I own it?

And what happens if the market does not help me for several years?

Show me the money.

Show me where it comes from and how it is made.

If I cannot answer those questions yet, I want to stop there—before buying.

In California, my father and I started with a plan.

That is the order I want to keep.