Real Estate Investing – Learning from My Mistakes

by FI Fighter on July 23, 2018

in Real Estate Thoughts, Real Estate Updates

Real life is all about learning from our mistakes, growing/improving, and if we are lucky enough to be able to do so (which I am) share our insights/wisdom/knowledge gained with others. Unfortunately, the problem with the above approach, right off the bat, is admitting to ourselves (and to the world) that we even made a mistake to begin with…

I’ve been blogging since 2012, so you don’t have to tell me twice, and I know full well by now that attempting to be upfront and honest with people is not gonna win you many fans/followers…

For the most part, people aren’t interested in the truth when it comes to early FI… Instead, they want you to feed them a happy fairytale where the entire ride is smooth sailing and there are never any major bumps in the road…

I hate to break it to you, but sometimes, it is very necessary to dwell on and reflect on the bad stuff… With the benefit of hindsight, once we learn what we did that worked well and what worked umm not-so-well, if we really want to move forward and get better, it’s necessary that we analyze the past.

With all the missteps that I’ve taken this year, well, I’m going to attempt to do all that for you, as unappealing as it may be to deep-dive into the “bad” stuff…

So, here we go…

As long-time readers of this blog may recall, around 2013-2014 I got a little bit gungho with real estate… Well, that’s putting it lightly, I suppose… I mean, when I step back and try and recollect on those days, if I’m being truthful and honest with myself, I’ll tell you straight up — I was obsessed/addicted/enamored with Real Estate Investing (REI).

Point blank, real estate was on my mind 24/7, and that’s all I ever really thought about night and day… In my mind, REI was the best path to early FI and I was gonna go full-steam ahead with it, despite what anyone else had to say…

And as you all know, I pretty much did…

By the beginning of 2015, I had racked up an ownership stake in 8 rental properties…

Looking back, you know it’s really crazy to observe, but damn, I was just so lucky when I first got started! I won my first rental property in 2012, and I was fortunate enough to “steal” another gem in early 2013…

Even as a newbie who really didn’t know what they were doing, I nailed it… I was dabbling in the right sector and buying up inventory at the exact right time, when there was no doubt “blood in the streets.”

How do I know this?

Easy (with the benefit of hindsight).

All around me, there were foreclosures, short-sales, REOs, etc. Many of my co-workers were scared shitless to invest in rental properties, and I was lectured repeatedly by my peers as being an idiot for being so eager to buy at a time when most everyone was terrified prices would drop lower still…

Little did I know then, I made all the right moves because I was gobbling up Class A/Tier 1 assets (buying in the best locations) for pennies on the dollar…

Really, I should have just kept on doing what I was originally doing, because what wasn’t broke definitely didn’t need any fixing!

But like the newb that I was, I got a little too curious, and started doing a little too much “research”… That is, I joined real estate forums, networked with the wrong people, and got suckered into drinking the Kool Aid and believing that “cash flow is king.”

Some of the more prominent online personas were all preaching “cash flow is the ONLY thing that matters and investing for price appreciation is dangerous” and blah blah blah…

And I fell for it!

I started questioning everything that I was doing, and long story kinda short, I think subconsciously I tried to make “amends” for my initial Bay Area purchases by focusing the bulk of my later buys on targeting after “cash flow rich” properties…

Buying in Indianapolis (all things considered a good real estate market for locals and so-so for out-of-state investors) and South Chicago (a most horrible real estate market for non-locals).

I like pretty much initiated a complete 180 degree turn in my REI strategy and was now focused solely on out-of-state/turnkey investing…

By mid-2014, I more or less was so deceived (and brainwashed) into thinking that it was all about “cash flow baby” that I had convinced myself I had FINALLY figured things out for good with REI, when in reality, I was actually digging myself my own grave and making all the wrong moves… without realizing it.

That’s how deadly this Kool Aid can be!

Listen, I’m doing my best to be forthcoming and genuine here as I write this “diary entry”, but it’s very frustrating for me to pen this, because I already know that despite making my best efforts to speak the truth to you readers, so many people are gonna dismiss the things that I’m saying… People will likely think:

  • I’m a total idiot (as usual)…
  • Someone who doesn’t know what they are talking about, obviously, because I’m challenging and opposing some very popular and accepted “universal truths” out there…
  • I’m diving off the deep-end again… because I’m not only an idiot but I’m also totally insane…

It’s tough…

But part of the reason I’m so adamant with all this is because unlike a lot of folks out there, when I experience a major fuck-up (especially when it comes to investing/speculating), I am wired in such a way that I just want to run to the rooftops and shout as loud as I can for all to hear… especially the newbies… For whatever reason, it just pains me to see other people making the same mistakes that I’ve made… and I just don’t want to see anyone go down the wrong path that I did…

Again, not popular…

I’m sure some people out there appreciate it, but again, I’m not new to this game of blogging, and when you are going against the mainstream narrative, it’s an uphill battle… and you’re going to piss off a lot of people with your ranting ways…

What’s popular isn’t always right, though…

And people really need to wake up and realize this!

Anyway…

It’s been a few years now since I screwed up MASSIVELY going the out-of-state/turnkey/cash flow route, and here are just some datapoints I want to share with you all.

When I purchased Rental Property #4, here were the terms:

  • Year Purchased: 2013
  • Location: Indianapolis
  • Purchase Price: $95,000
  • Market Rent: $1,075/month

Fast-Forward to today, here’s what we got now:

The property is worth $5,000 more (which is next to nothing), and the rent is more or less flat…

 

You really believe that owning assets like Rental Property #4 is the way to turbocharge the path to early FI?!?

 

The newbs do…

The people who drink the Kool Aid certainly do…

I sure as hell would beg to differ…

 

The above property, sure it cash flows ok (especially since I own it free and clear), but if I’m open and honest about everything, I know deep-down without a shadow of a doubt that the above results are mediocre (at best)…

Zero price appreciation and zero rent appreciation is never a good thing when it comes to real estate!

I don’t care if you cash flow on a regular basis… That doesn’t tell the whole story! All that deferred maintenance/CapEx, etc. will all come due at some point or another… The risk vs. reward is heavily skewed more towards the side of risk.

 

With real estate, you need to be creating a larger and larger profit margin each and every year! That’s the only way to succeed long-term!

 

I mean, in comparison, let’s look at Rental Property #1.

  • Year Purchased: 2012
  • Location: Bay Area
  • Purchase Price: ~$320,000
  • Market Rent: $2,090/month

I mean, the above results are night and day compared to Rental Property #4

 

Rent has shot up by more than $1,000/month, so all the idiots who preach “cash flow is king and the ONLY thing that matters” need to shut up… and realize that price appreciation + cash flow go hand-in-hand… It is extremely difficult to get one without the other…

So, I am 1,000% convinced you can’t just ignore price appreciation… but sure, if you toss that in as well, whoever was buying Class A/Tier 1 property back in 2012-2013 has pretty much achieved early FI… I mean those numbers don’t lie, that’s some life-changing gains right there! When you compute total leveraged returns, we are talking about in excess of 500%600%? 700%? Maybe… I don’t even count anymore b/c it doesn’t matter… I mean, it’s a total game changer, regardless!

Stuff like the 1% Rule are catered to real estate newbs who don’t know any better… The only time the 1% Rule has any merit is after a market crash when EVERYTHING meets the 1% Rule (and beyond)!

 

I hate to be so riled up about certain things, but I just can’t help it…

 

And here’s why…

 

I deal with and talk to a lot of different investors in private… I still recall many heated conversations I had with investors back in the day, let’s say around the 2012-2015 timeframe… and many of my peers were just so passionate and convinced that cash flow was the ONLY name of the game… Lots of folks living in the Bay Area were even forsaking local properties so they could try their hand at out-of-state cash flow investing… And the thing that breaks my heart is knowing how many of these “hardcore cash flow believers” ended up doing things like a 1031-exchange, flipping their Bay Area gems for dogshit elsewhere…

Well, as readers may or may not know, many of these same people, later learned the hard way… and experienced a slew of headaches/issues out-of-state, and I know more than a few who have later went on to regret their decisions (majorly), and reached a point of dire straits with their properties…

I have to be so adamant and opinionated because a lot of these “untold stories” will never see the light of day…

I really don’t know anyone personally who has gone the route of buying turnkey properties out-of-state and not regretted it…

But not surprisingly, these type of datapoints fall off the radar… Leave it to a “buzzkill” like myself to bring em up to your attention…

It’s human nature, after all, to want to blend in with the shadows and be forgotten when we do something so WRONG and damaging to ourselves… that well, you’re just quite frankly way too embarrassed and ashamed of to ever want to admit in public…

It’s far, far, far easier to just sweep something under the rug and hope everyone forgets that it even happened…

 

But I have to ask myself, “If I really want to help other people out there achieve early FI, how can I not tell the whole story? How can I just simply focus on all the good stuff and never dwell on the bad?

 

If it was really all about me, than none of this fucking matters at all… I could very easily just say, “Well, I’m in early FI now and I’m set for life, so whatever… Who cares if newbies who are trying to get there know the truth or not… It doesn’t matter… If anything, maybe I should try and exploit them so I can make even more money for myself?

 

Don’t think people out there don’t think and do these type of things…

 

Real estate is a high-stakes game that can be extremely lucrative… and even more cutthroat (you don’t need integrity to make a killing playing this game). There are more than a few people who are just in it for the money and themselves… They couldn’t care less about your own individual success… You’re just a number to them, another sucker to exploit and take advantage of…

 

Nobody gives a fuck about the little guy/gal (newbie retail investor)…

 

Not cool…

 

Sad.

Sad.

Sad.

 

Anyway…

 

Going back and reflecting on my own situation, I mean what’s done is done… Do I regret buying Rental Property #4? Absolutely! That capital would have been way better invested in buying another Bay Area rental or Class A/Tier 1 property elsewhere, even out-of-state… Look at the delta between “cash flow investing” and going for Class A/Tier 1 instead…

 

For a lot of people, what appears to be such a “minor” or “trivial” decision made along the way on the journey to early FI can indeed be the difference in actually getting there and having to work many more years…

 

Lots of Bay Area folks tried to get too clever, chasing after cash flow ONLY, and well, a lot of people blew themselves up in the process… myself included (with my Chicago rental properties)…

 

But sadly for you readers, a lot of the real “horror stories” will never surface, and people will never really know the full story… The turnkey/out-of-state marketing machine will go on duping more and more people suckers each and every single day, and the early FI dream will be just that, an unobtainable dream, for the ones who make the wrong decisions…

 

I fucked up, and I’m not afraid/ashamed to admit it…

 

But genuinely and sincerely, I write and do what I do b/c I don’t want anyone else to have to make the same mistakes that I made.

 

I want everyone who is fighting so hard for early FI to be able to get there and achieve that glorious dream.

 

That’s the truth.

 

Now go ahead and feel free to rip me apart…

{ 4 comments… read them below or add one }

1 JimNo Gravatar July 24, 2018 at 4:59 am

I always appreciate the honesty in your writing Jay, no complaints coming from my way 🙂

Reply

2 Eric BowlinNo Gravatar July 24, 2018 at 5:06 am

I appreciate your experience. Thank you for sharing.

I think I took a different lesson from those “cash flow is king” speeches than you did.

The idea is that if you invested in say…Las Vegas in 2005 because of appreciation. Looking at the previous 10 years it had appreciated a ton and made sense. I many places the appreciation was so great but the cash flow was so bad you could lose money every month, dip into your savings to keep it afloat, and just sell when you were out of cash and make a ton.

Until it all crashed and all the appreciation evaporated. Those who invested and had positive cash flow kept their properties and the rest lost them.

The ultimate point of “cash flow is king” is it doesn’t matter if it appreciates 1000% if you can’t cover the costs to keep it, you’ll still lose it to the bank. In general, this doesn’t mean invest in crappy neighborhoods in cities with declining populations, bad public amenities, high crime, etc. Turnkey companies sell this but they are selling a product so they aren’t great places to get advice from.

Given the choice between a cashflow negative property in the bay area and a really “good” cash flow positive property in detroit or chicago….I’d choose neither. The risk/return ratio on both is bad. I’d rather pick a slightly lower cash flow property in a core but developing market such as in Atlanta, Orlando, Dallas/Fortworth, San Antonio, etc. But still positive and still in solid core markets.

To get me into a tiny market, I’d add several percentage points to my expectations to compensate me for the risk. I’d also never invest in a cashflow negative property regardless of the potential appreciation (unless it’s a short-term play like <12 months).

But you do bring up a great point that I've harped on for years. Capex absolutely must be accounted for in your cash flow projections even if the bill isn't due for 5 years. That's really a residential real estate problem because in commercial, it's almost always accounted for.

Thanks again for sharing your experience. Thanks for reading my long comment.

Reply

3 JoeNo Gravatar July 25, 2018 at 9:24 am

Hi Jay, will you be getting into more detail about the losses? Were they caused by lawsuits, code violations, deferred maintenance that was not accounted for, vandalism, eviction, non payment of rent, drug dealing or manufacturing tenants, dishonest property managers, or what? I still have no idea, and it may be helpful to potential real estate investors. Thanks for your candidness!

Reply

4 FI FighterNo Gravatar July 25, 2018 at 1:45 pm

Joe,

Yes, absolutely I plan on getting into the details. Just due to on-going issues some people in my own personal circle are having to go through as well, I have decided it’s better I hold off from getting into specifics just yet.

For anyone going through similar situations to what I experienced, I empathize, and am doing my best to support/help out however I can. When it comes to blogging, this means keeping things more hush hush until the time is right.

Thanks for understanding.

Cheers!

Reply

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