Richard

Liberty McCoy was out Saturday urging voters to pass a Nov. 8 ballot measure to limit rent increases in Pasadena, California, because she’s afraid she’ll be priced out of the city where she grew up and where her aging parents live.

The librarian and her husband, a freelance consultant, received notice of a $100 monthly rent increase last year and another for $150 this year, bringing the rent on their home outside Los Angeles to $2,350 a month. They can absorb the increases for now — but not forever.

“A lot of times people are like, ‘Well, just try and pick up and move to someplace cheaper,’” the 44-year-old said. “But I have a job locally, my family, my friends. It would be a big challenge to uproot my entire life chasing cheaper rent.”

With rental prices skyrocketing and affordable housing in short supply, inflation-weary tenants in cities and counties across the country are turning to the ballot box for relief. Supporters say rent control policies on the Nov. 8 ballot are the best short-term option to dampen rising rents and ensure vulnerable residents remain housed.

Opponents, led by the real estate industry, say rent control will lead to higher prices for tenants in housing not covered by rent caps, harm mom-and-pop landlords relying on rental income for retirement, and discourage the construction of badly needed affordable housing. They have spent heavily to stop ballot initiatives, even going to court to halt them.

In Orange County, Florida, home to Disney World and other theme parks, voters will consider a ballot initiative to limit rent increases to the annual increase in the Consumer Price Index. But a court ruling last week means that even if it passes, it could be nullified.

Proponents in Orlando and other Orange County cities point to a population that has increased 25% since 2010 and rents that jumped 25% between 2020 and 2021 — and experienced another double-digit increase this year. The housing shortage was magnified by Hurricane Ian, with an estimated 1,140 rental properties suffering $44.5 million in damage.

“I’ve had a lot of constituents reach out to me, and they are fearful of becoming homeless. They don’t know what to do,” said Orange County Commissioner Emily Bonilla, who authored the ballot initiative ordinance after hearing from tenants facing rent increases upward of 100%.

Last year, voters in St. Paul, Minnesota, passed a ballot measure capping rent increases at 3% a year while residents across the river in Minneapolis backed a measure allowing the City Council to enact a rent control ordinance.

This summer, Kingston, New York, became the first upstate city to enact rent control. The measure means around 1,200 units — buildings built before 1974 with six or more units — must limit rents to a percentage set by a rent guidelines board.

Boston’s Mayor Michelle Wu was elected last year and made bringing back rent control to the city part of her campaign. The biggest hurdle to that proposal is that Massachusetts voters narrowly approved a 1994 ballot question banning rent control statewide.

“Rent stabilization can provide protections for everyone, but do so in a way that really targets benefits to low-income renters, renters of color, renters who are most desperately impacted by housing instability,” said Tram Hoang, a housing policy expert who was involved in the St. Paul campaign.

The fight over rent control has been most intense out West, where in 2019, lawmakers in California and Oregon approved statewide caps on annual rent increases. California’s annual cap cannot exceed 10% and Oregon’s is set at 7%, plus the consumer price index.

Both laws exempt new construction for 15 years, a compromise to encourage developers to keep building, and apply only to certain units.

But that hasn’t quelled tenant activism in California, where nearly half the state’s 40 million residents are renters. Advocates say the statewide law — which expires in 2030 — does not go far enough.

Voters in the San Francisco suburb of Richmond and Southern California beachside city of Santa Monica will consider measures to further tighten existing rent caps to a maximum of 3%.

In the city of Pasadena — home to the annual Rose Parade and Rose Bowl college football game — voters will consider a measure to create a rent oversight board and limit rent increases to 75% of the Consumer Price Index, which supporters say translates to 2% to 3% a year.

Rent stabilization advocates failed to collect enough signatures to qualify for the 2018 ballot, and they thought it would be hard this time around because the state had enacted protections. But campaign field director Bee Rooney said tenants financially wrecked by the pandemic were eager to back the initiative.

“Any amount when you’re not expecting it is a lot,” Rooney said. “Some people, their rent doubled or went up by 50%.”

Pasadena retiree Paulette Brown received the state-allowed increase of 10% in July, bringing the rent on her two-bedroom apartment to $1,175 a month. Budgeting will be tighter.

“I really can’t afford any mishaps, because I’m not able to save anything,” said the 64-year-old Brown, who lives with her daughter and grandson.

Opponents of the measure, which include the national and state Realtors associations, say curtailing rent increases to a fraction of inflation will result in property owners taking rentals off the market and doing minimal maintenance.

“What’s being proposed here is draconian and for the most part landlords who have good tenants aren’t trying to get rid of them,” said Paul Little, president and CEO of the Pasadena Chamber of Commerce.

Michael Wilkerson, senior economist at Portland, Oregon-based ECONorthwest, describes both the California and Oregon state laws as “anti-price gouging” measures aimed at protecting the most vulnerable tenants from exorbitant increases, while encouraging new housing development.

Rent-control policies have been around for decades, put in place after World War II in New York City and elsewhere to combat rising housing prices and again in the 1970s in the Northeast and California. However, the real estate industry has since succeeded in passing state laws that made it difficult, if not impossible, for many local municipalities to cap rents.

The data on rent control has been mixed. The policy, according to an Urban Institute report, was found to have reduced rent on covered units in Cambridge, Massachusetts, San Francisco and New York but resulted in no significant decreases in New Jersey cities.

Some studies, however, have shown that rent control can reduce the number of housing units available and discourage landlords from maintaining them.

Opponents also say rent regulation can scare off developers. St. Paul’s original ordinance, for example, applied to almost all housing and mandated landlords stick to the 3% cap even with new tenants.

Within weeks, council members were hearing from developers who blamed the new law for scuttling housing projects because they lost funding. Building permits issued for new housing through August plummeted 31% from the four-year average.

In response, the City Council approved amendments in September to exempt low-income housing as well as new construction for 20 years. It also allows landlords to raise rents 8% plus the Consumer Price Index after a tenant moves out.

Orange County’s ballot measure is up in the air after an appeals court rejected the proposal last week and suggested it won’t be certified even if voters approve it.

The court, which acknowledged the state law “set an extremely high bar” for local governments to pass rent control ordinances, said a consultant hired by the county didn’t identify a housing emergency — a requirement under a 1977 state law preempting local rent control.

The county plans to file a motion for a rehearing and with ballots already out, the Orange County supervisor of elections said it has no plans to issue new ones. Supporters of the measure said they will keep campaigning.

For tenants like Jessy Correa, the setback means she faces a 20% rent increase on her three-bedroom apartment in Orlando come January. The 44-year-old mother of six is already struggling to afford the current rent of $2,300.

A recruiter at a faith-based nonprofit, she was hoping the ballot initiative would “bring stability, give us a moment to breathe.” Instead, she is now forced to make difficult choices, like getting another job.

“Where is the American dream of being able to live, to enjoy?” she asked tearfully after learning of the court ruling. “What are we doing? It’s frustrating.”

A recession is a normal (some might argue), inevitable part of the economic cycle. Many factors influence the dynamics of one, such as decreased consumer spending, a rise in unemployment rates, lower wages, and declining GDP.  

With the economic instability and uncertainty that comes with a recession, one may question whether or not investing during such a time is a good idea. It is fair to assume that holding on to every dollar earned would be the wiser choice. However, with a well-measured and sensible approach, investing during an economic downturn can provide an excellent opportunity for long-term gains.

If you’re interested in keeping your portfolio alive amid a recession, here are a few things to consider before investing and some of the best assets to protect your money.

What to Consider Before Investing During a Recession

When facing a declining economy, investors should act cautiously but also remain vigilant by monitoring the marketplace for potential opportunities. There are a few key questions that you should ask yourself before deciding to invest. 

What is your current financial position? 

Don’t compromise your current financial security for long-term gain. In other words, only invest what you can comfortably afford.

Are you able to take a long-term approach to investing? 

Investing during a recession does come with more challenges and risks. Be prepared to let your investments sit for at least 5-10 years before selling them. 

What is your risk tolerance? 

During a recession, frequent fluctuations in a portfolio are common. When the market takes a nose dive, will you be able to keep your cool and wait it out? 

The Best Investment Options During a Recession

Deciding what to invest in during a recession depends on your goals. What do you wish to accomplish with your investments? Whether you want to minimize the risk of loss, create a fixed income, capitalize on low-cost stock options, or maximize long-term returns—a clear understanding of your goals will help you choose an optimal investment option.

If real estate is your preferred investment vehicle, you’ll need to know how to play safe during a recession. The real estate market has been considered an attractive investment during past recessions, but it can be tricky to navigate. The pandemic greatly impacted the real estate market, causing supply issues, rising home values, and super-high buyer demand. Now, interest rate hikes have started to lower the price of homes but increase the cost of borrowing. This turn of events has had a negative impact on affordability, which has made many buyers pause on purchasing at this time. With the seller’s market ending, it is an ideal time for real estate investors to pick up properties as prices and competition come down. Here are a few of the best options to invest in during a recession.

Commercial real estate

While some industries are highly susceptible to economic cycles, other industries fare well regardless of the economy’s performance. Investing in commercial real estate using strategies such as triple net leases (NNN) is an excellent way to decrease the chance of taking a loss. Although no industry is entirely recession-proof, these commercial properties tend to maintain success even during economic downturns. 

Grocery Stores and Discount Retailers – People will always need to buy staple household items such as toothpaste, toilet paper & soap, even during a recession. Grocery stores and supermarkets such as Walmart, Costco, and Kroger are dependable investment options, especially when using a NNN lease. 

Healthcare – There will always be a need for health services. People with chronic conditions will still need their medication, and people will still get sick. Properties that are a good bet in a recession are medical offices (doctor’s offices, dentists, etc.) and pharmacies such as CVS Health and Walgreens.  

Death and Funeral Services – Death is an unavoidable part of life. As the popular saying goes, only two things are certain in life: death and taxes. Funeral homes, companies that provide caskets, and funeral-related services are relatively safe recession-proof investment properties.

Manufacturing – Industrial properties such as alcohol manufacturing, wholesale distribution, construction, etc., are another recession-proof investment. Companies such as Anheuser Busch InBev SA, Heineken, and SouthernCarlson are all examples of single-tenant flex industrial properties. 

Residential real estate

In general, residential properties will begin to fall, and as sellers become more worried about not being able to sell their properties, the more leverage you have to negotiate. Single-family, multifamily, and other pieces of property will all be opportunities for you to take advantage of during a recession. However, it’s still best to keep these assets in the long term, as it’s likely you’ll need to ride out the recession. Therefore, flipping might not be your best bet.

Stocks/bonds

In most recessions, you can buy stocks at a lower price. Generally, the best way to approach stocks is with a buy-and-hold strategy and then dollar-cost average over time. Recessions offer the opportunity to lower your dollar-cost average and acquire more shares for less.

Bonds, on the other hand, are considered the safest investments in the world because the U.S. Treasury guarantees them. You need to be careful with bonds since the best ones have maturity dates that tend to be long-term, such as 10-30 years, but will offer predictable returns. You also need to be aware of the inflationary pressures that can affect the strength of your bond yields. During recessions, bond yields rise, so be sure to take advantage of them.

Investment Strategies to Avoid During a Recession

While picking the right opportunities to invest during a recession is important, avoiding certain behaviors can be just as important.  

Timing dips in the market 

Trying to time the lowest dip in the market is like trying to predict tomorrow’s lottery numbers. It’s important to keep an eye on the market, but don’t wait around hoping prices will substantially drop before you make a move, or you may miss out on prime real estate.

Don’t try to do a quick, cheap flip

Flipping houses as an investment strategy is risky, especially if you don’t have the cash flow to flip the house properly. Cutting corners won’t get you as much ROI as you think, especially during a recession. Investing long-term is a much more reliable way to earn a greater return. 

Ditching assets too soon 

The market typically becomes volatile during a recession. Unloading your investments when the market dips could ultimately hurt your long-term growth by selling at a loss instead of waiting for the market to recover. 

Not focusing on business trends 

It is common to see a few business closures during a recession, especially with smaller companies that were struggling beforehand. However, even prominent brand names and anchor corporations can face bankruptcy and closures. Make sure to keep an eye on business trends when investing in property. If you see a company struggling, it would be wise to hold off until they are in a more stable place. 

Failing to diversify

We’ve all heard the term, “don’t put all your eggs in one basket,” and this is especially true in the case of a recession. Diversifying your portfolio can help increase your ROI or at least mitigate losses in your portfolio. If you’ve previously stuck with single-family homes, branch out to multifamily and commercial properties. If you take a loss in one area, you still have the others to help keep your cash flow afloat. 

Don’t Let a Recession Scare You From Investing

Recessions can be nerve-racking because we’ve all heard the horror stories. However, understanding your options and making wise decisions during a recession can help you avoid major losses and potentially lead to significant gains.

Prepare for a market shift

Modify your investing tactics—not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with Recession-Proof Real Estate Investing.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

There is no doubt that the real estate market has been a wild ride since the pandemic changed the normal course of our lives over two years ago. Lending did not escape the effects of Covid-19, and many active investors have learned more about the loan process than they ever did before the pandemic.  

In the spring of 2020, some lenders left active investors in a bind, closing their doors or halting lending while they evaluated the new risks in the marketplace. Over two years later, the market is changing again, and investors need to know how to pivot to keep their pipeline flowing. While everyone is watching rates increase, they are taking their eyes off the real question right now: Can they close this loan?

Realizing a preapproval and rate and term sheet are not set in stone will go a long way in the current lending environment. Lenders are changing underwriting criteria, not making as many or any exceptions to lending guidelines, and lowering loan-to-value midstream in the escrow process. Most investors never thought about the source of their capital before March 2020. The most concerning part of the lending process was getting through underwriting and receiving the message that you were approved and cleared to close. Whatever happened behind the scenes inside the lending machine wasn’t a concern to an active investor. As long as money made it to the closing table, they were happy. This strategy worked until the capital never made it to the closing table. 

When lenders suddenly turned off the spigot to cheap capital, investors scrambled to save deals any way they could. This pushed private lenders with their own capital to lend to the forefront in the hunt for leverage. Active investors scrambled to find funding or negotiate contract extensions to restart the lending process.

Private lenders who lend their own capital have more control. Large nationwide or even regional lenders have significant strings attached to the capital they lend out, and those strings are pulled by forces outside the lender’s control. 

For example, large institutional lenders are often funded by lines of credit from banks or even selling their loans on the secondary market. In both of those cases, there is another entity establishing what they can lend out, where they can lend it, and the pricing of those loans. These lenders require the line of credit to stay open or the capital markets to continue purchasing loans so they have enough liquidity to keep new loans coming into the pipeline. 

What does that mean for you as a borrower? It means that the rates and terms you are quoted may suddenly change, or funding, in general, may be halted at a moment’s notice. So how can you protect your real estate investing business in this period of turbulence? 

Start asking questions about how the lender acquires their capital and diversify lending sources based on where they get their capital.

Need a lender for your next deal? Find one here!

The Four Types of Lenders

For the sake of simplicity, you can think of capital in one of four buckets for alternative lending: national lenders, regional lenders, local lenders, and private loans from a lender who lends their own capital, including seller financing. While there are many flavors and options within each bucket, knowing the general purpose of each can help you decide what type of financing to use for which project. 

Alternative lending automatically means it is not going to be the conforming conventional loans you may have used to purchase your own home. Since they are non-conforming loans, the variables offered are numerous and vary greatly. Having a conversation with your lender about the types of projects they fund and general guidelines for their loan products can go a long way to choosing the right lender for the right project. 

National Lenders

National lenders are pretty easy to locate. Their brand and names are spoken widely across online platforms, forums, and even REI meetings. Their business model has the borrower and decision maker for the loan the furthest removed from each other. To these lenders, every application and, ultimately, file on their desk is a series of numbers and check marks. A business model like this shows up to the active investor (borrower) with high single-digit interest rates and lower fees, but those come at the cost of higher documentation requirements, full third-party appraisals, and a longer closing time. This group of lenders is often very sensitive to changes in the capital markets or economic outlooks. If you need a deal to close super quickly with minimal documentation, this may not be the best tool to use. On the other hand, if you have time for the closing such as a refinance into permanent debt, this may be a great option to pursue.

Regional Lenders

Regional lenders may not have the brand recognition of “the big guys,” but within their markets, they can be relatively well known. Their mid-range interest rates and somewhat higher fees often come with lower requirements for documentation and longer financing timeframes than national lenders. Depending on the lender, they may require a full appraisal or may opt to do an online valuation through a third party. These regional lenders can be a great option for borrowers that have some unique borrowing challenges, such as new employment or acquiring financing as a new business entity. 

Local Lenders

Local lenders tend to be smaller asset-backed lenders or smaller bank/credit unions in the market. They tend to lend in just a certain area of a state or the entire state if it’s small enough (such as Delaware or Rhode Island). These local lenders usually have higher rates, especially if they are asset-backed, but also usually have low or no documentation requirements. This translates through to a borrower with higher rates and usually higher fees. These asset-based lenders can often close quicker and use some sort of in-house valuation methods for the real estate securing the loan. Credit unions may also use the same valuation tools but often want a higher level of documentation to understand the lending opportunity. For investors operating in one particular market, this classification of lender tends to be the most helpful since they are local. This class of lenders understands the market they are lending in and has experience with other lending opportunities in the same area.

Individuals

Lastly, we will look at loans that come from individuals, or what we term “private lenders .”These loans come from capital that an individual or their business entity has. These individuals are often seeking to have passive income or put their retirement funds to work in real estate versus the stock market. Depending on the amount of capital they have available to them, they may not always have the liquidity to fund a loan when the capital is needed. Many of these lenders work with established networks of borrowers, sometimes rolling capital from one deal to the next with the same borrower. These lenders may have very low documentation requirements, flexibility on the type of properties they are willing to lend on, and vary in terms of interest rates, fees, and length of the loan. They also can generally close very quickly, sometimes within a few days if needed. While they won’t be the cheapest or longest-term loan out there, the flexibility this type of lender offers more than makes up for it. 

The Type of Lender Determines the Variables

As you can see, there is somewhat of a correlation between the documentation and underwriting guidelines and the rate being charged. When you, as a borrower, can show the standards a lender believes are lower risk, you can then be rewarded with a lower rate. In addition, other value-add components can also increase annualized interest rates and fees being charged. If a lender can get a deal closed in three days with minimal documentation, that can be a more expensive loan because the borrower needs to move quickly or is unable or unwilling to go through a more thorough vetting process for the loan. 

Conclusion

Understanding what your needs are for financing each property really allows you to find not just a lender but the right lender for the job. The lender’s ability to close the loan is more important than rates and terms right now. Ask questions about the lender’s access to capital and if that access is likely to change in the next several weeks. Depending on the size of the lender you are speaking with, they may not be able to answer that question, but thinking about this as a borrower can never hurt to consider. Keeping another lender in your back pocket that may be able to close quickly, even if it is a higher rate, may be the difference between closing or not.

Find a Lender in Minutes

A great deal doesn’t just sit around. Quickly find a lender who specializes in investor-friendly loans that are right for you and your investment strategy.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

M. Ryan Gorman, Coldwell Banker CEO, joins ‘The Exchange’ to discuss the housing market as sales slow amidst rising mortgage rates.

Buck Horne, director of equity research, homebuilding, and residential REITS at Raymond James, joins ‘Power Lunch’ to discuss opportunity in the home building space, cost-to-own and cost-to-buy spread differentials and dramatic drops in lumber prices.

The Sunshine State is hot, both in temperature and in its housing market. Siesta Key Beach on Florida’s west coast is consistently ranked one of the best beaches in the world. The area has an obvious draw that brings new residents in droves—it’s been one of the fastest growing parts of the country over the last decade—along with travelers willing to pay an average of $248/night in popular destinations like Sarasota. But Hurricane Ian is estimated to have caused $67 billion in privately insured losses and an additional $10 billion in losses from the National Flood Insurance Program (NFIP), according to risk modeling company RMS. 

What will happen to the area’s real estate, rental, and insurance costs after this catastrophic event? That remains to be seen, but Florida’s coastal homes may become even more out of reach for everyday homebuyers, shifting the market into the hands of wealthy investors who can still make a killing on vacation rentals. 

What Happens to Real Estate Prices After Hurricanes?

After each of the most expensive hurricanes over the last 32 years, the areas impacted saw greater home value appreciation in the year following the event than the year before. For example, Miami’s appreciation before Hurricane Andrew was 3.5%, but it grew to 8.7% in the year following. The trend was the same even when the appreciation was taken as a percentage of overall appreciation for the nation, which helped to remove other factors affecting home values. 

A separate study looking at zip code-level data found a temporary dip in home values in the immediate areas directly hit by a hurricane but a strong recovery in the long run. Eventually, growth in areas hit by a hurricane outpaced growth in similar unaffected areas. That’s consistent with the Federal Housing Finance Agency’s data, which found that the hardest-hit area of Florida after Hurricane Andrew experienced a decline in transactions and stable appreciation immediately following the hurricane, with accelerated growth later on. 

A National Association of Realtors case study looked at hurricanes that made landfall in Florida in 2004 and 2005 and found that even five months after the 2005 hurricanes hit, affected regions were seeing a reduction in home sales, which the authors attributed to rising insurance costs. But the area eventually rebounded as well. 

Supply and demand explain the phenomenon. When homes are destroyed, people seek new places to live. The shortage of homes and increased building costs raise the prices of available homes in the surrounding areas. What’s surprising is that people are increasingly moving into hurricane-prone areas. It’s not just the locals relocating.

Will Florida’s real estate market accelerate as historical data suggests? Or will this be a different crisis? To answer this, it’s important to understand what was happening with homebuilding and insurance rates before the storm struck. 

Development and Insurance Before Ian

When the demand for housing in a coastal state is high, real estate developers will build. Even if it means building on top of a natural wetland marsh that would leave inland areas even more vulnerable to a storm surge. The dredge-and-fill technique, which involves piling up land taken from underwater, was used to increase the availability of waterfront housing in Florida through much of the 20th century, despite the environmental fallout. 

Then, in 2011, Florida’s former governor, Rick Scott, eliminated the state agency responsible for evaluating the risk of development and limiting new construction in vulnerable areas. Rampant development went unchecked, potentially causing more destruction when Ian made landfall and angering reinsurers. 

After Hurricane Andrew devastated Miami in 1992, most major national property insurance companies stopped doing business in Florida or began writing fewer policies. All that was left were smaller insurance providers that heavily relied on reinsurance companies, along with Citizens, a state-mandated insurer that is designed to provide last resort coverage to homeowners who lack options for private insurance. It’s a nonprofit funded mainly by homeowner premiums and special assessments. 

Before Ian, reinsurers were already raising their prices for coverage, and Citizens could only get half of what the company needed in reinsurance. Overall, Florida’s property insurers have been losing money for the past five years. Insurance costs in the state were already becoming unaffordable before Ian struck. 

What Will Happen to Florida’s Real Estate Market as a Result?

For many real estate agents selling homes near Ian’s path, demand hasn’t slowed. Some housing experts predict a temporary downturn followed by a return to the pre-hurricane, overheated market. But others say the rising cost of insurance premiums and building materials coupled with high-interest rates will eventually cause home values to decline in the area, putting an end to southwest Florida’s real estate boom. Analysts say real estate recovery from Ian may look different from past disasters because the effect of weather events is typically transient, but Florida homeowners are looking at ongoing high costs of ownership due to unaffordable insurance premiums.

More insurers in Florida may face bankruptcy. Those that stick around will raise premiums significantly. People were already paying $20,000 per year or more for modest homes, and Ian will only make costs more dramatic, says a Miami agent. Some people may not be able to get property insurance at all—and without insurance, financial institutions will not issue a mortgage. Most prospective homebuyers rely on financing, so this would greatly reduce the number of buyers, causing the value of homes in the area to fall. 

Investors may see this as an opportunity. After all, Florida’s coast won’t cease to be a beautiful place to live and vacation. Historically, homebuyers haven’t seemed deterred by disasters—the dream of owning oceanfront property remains for many. If the insurance market collapses, some experts say hurricane-prone areas of Florida could become neighborhoods for homeowners wealthy enough to buy and rebuild with cash, along with rental buildings owned by companies with plenty of reserves. The home affordability crisis will mean those building owners can charge high rents. 

But natural disasters are getting more costly and more destructive, leading some experts to wonder if we should be moving away from these vulnerable places—and whether the availability of flood insurance through the NFIP is hurting more than it’s helping. 

The Problem With Subsidized Insurance and Climate Change

Most flood insurance is provided to homeowners through NFIP policies, which are underwritten by FEMA. The program is funded by insurance premiums and by money from Congress. But after each natural disaster, the NFIP borrows from the Treasury. And the program’s borrowing authority keeps increasing as storms get more severe. 

The premiums homeowners pay for flood insurance from the NFIP reflect less than half the level of risk. The median value of properties in the program is about double the value of a typical home, so the benefits of the subsidies are going to more affluent homeowners. Some say the program incentivizes development in flood-prone areas: People choose to live in places they know are at risk of flooding because they know they can get flood insurance. When their homes are eventually destroyed, the burden falls on taxpayers. If coastal homeowners were forced to deal with the cost of their risky decisions, we might see a different migration trend. At the very least, builders might be encouraged to use more weather-resistant construction materials. 

FEMA’s new Risk Rating 2.0 is designed to make pricing for premiums more transparent and equitable, reflecting the actual risk of a specific home to flooding. But the fact remains that affordable flood insurance premiums won’t cover the damage from new hurricanes. Stronger building codes could lessen the cost next time around. But some experts say we should rethink rebuilding in dangerous areas altogether and that policy decisions going forward should discourage people from living in flood zones, not the reverse. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

David:
This is the Bigger Pockets podcast, show 681.
And this was a big one. Because we put the insurance carrier on notice the day before we got in line before everybody else. If you have a fire at your property, okay, you’re probably the only one making a claim. But if you’re in a situation where a hurricane devastates a hundred miles of coastline, can you just imagine the volume of claims the insurance carriers are processing? We saw properties that sat untouched, unrepaired for two to three years because they didn’t get their claim in fast enough.
What’s going on everyone? I am David Green, your host of the Bigger Pockets Real Estate podcast here today with a special Halloween episode, brought to you by me and some of my good friends, including today’s co-host Jamil Damji. Jamil, Happy Halloween.

Jamil:
Happy Halloween, man. I’m super happy to be here. And it’s a scary, scary, scary show.

David:
Yeah, it’s a scary and fun show. In today’s show, we are telling real estate horror stories in the spirit of Halloween. We are going to be joined by my friends Andrew Cushman and Matt Faircloth as we all share things, basically deals gone wrong and what we did to try to survive them. Jamil, what were some of your favorite parts of the show?

Jamil:
Oh, man. Just how prepared Andrew is, first and foremost. Secondly, Matt’s hat? Get out of here. And third, you are the best Sergeant Slaughter I have ever, ever seen.

David:
Flattery will get you nowhere, Jamil.

Jamil:
Yeah.

David:
But that’s probably not true. This is my first time ever dressing up for Halloween and it’s here with you guys today. Before we bring in the show content, let’s get to today’s quick tip. And it is, it’s very tempting to want to skimp on insurance and when nothing goes wrong, that can feel like a good idea. But reconsider that after listening to today’s show, you may never want to skip on insurance again. Make sure that you are underwriting thoroughly and preparing for what could go wrong, not assuming everything goes right. All right. Without any further ado, let’s get to the show.

Jamil:
And today we are going to be sharing our multi-family horror stories. Andrew, I hear you’ve got something to share with us.

Andrew:
Yes. I’m Andrew Cushman. I’m addicted to multi-family and I have some horror stories.

David:
Hi, Andrew.

Jamil:
Hi, Andrew.

Andrew:
Hi, guys.

Jamil:
You’re in a safe place, Andrew.

Andrew:
Thank you.

Jamil:
Tell us about it. What happened, Andrew?

Andrew:
Well, this was back in the early part of my career, 2013, so we were two years in. This was Dallas, Fort Worth, Texas, and this was our maybe third or fourth deals. And it was one of those situations where the broker tells you it’s a C property, but that’s because no broker or seller will ever actually tell you that it’s a D. It’s always just a C. It’s like a Dove bar. If you bite into a Dove chocolate bar, it’s pretty sweet. But if you bite into a Dove soap bar, it’s kind of bitter. And we were sold chocolate and we got soap.
And so on the day of closing, I’m sitting there in the office and it’s getting in the afternoon like, “Man, what is that smell?” And it just kept getting worse. And a couple hours before the end of the day, we found out that the sewer pipes underneath the building… It had crawl spaces and this was built in the ’60s, that means plywood floor and then there’s two to three feet of space under there. The sewer line had broke and spilled the entire crawl space with about two feet of sewage water and all the stuff that floats in that. And not only affected the office, it affected every other unit in the building.
That was Friday afternoon of closing. That was a great start. Saturday, the first weekend that we owned it, one little red flag that we missed at the time was that there is a convenience store right next to our property where let’s just say unsavory transactions would occur. And on that Saturday evening a transaction went bad, started a little scuffle, which somehow ended up over our fence and onto our property. And we ended up that night with a quadruple homicide plus four stabbings. I was like, “All right, probably can’t get a whole lot worse from here.”
And then at the other property that we bought, basically at the same time, five o’clock in the afternoon, somebody climbed up on top of the leasing office, busted out the skylight and threw Molotov cocktails down through the skylights into the office in an attempt to burn it down. That was my intro to Dallas, Fort Worth. It was very exciting. Needless to say I figured, “well, it can’t get a whole lot worse from here.” We did eventually sell those properties and get out of them and everything turned out. But what came out of it and what changed is way back in episode 279, we talked about the screening process for properties. Those two nightmares are a big part of where that came from.
The mistake we made is we did go to the market in person to check them out, but one of the things we do now is we do Google Street View, we take the little yellow man and make him walk around the neighborhood and see if he gets robbed. What we missed is that convenience store, because it’s in a low income neighborhood, is going to be a real problem. The median income there was too low to support the rents, and then crime was high. When you take low income, high crime and then unsavory neighbors and put those together, you’ve got a very rough property that has been extremely difficult to turn around because you can turn around a property but you can’t turn around the neighborhood.
Now what we do is we screen. We won’t buy a property that doesn’t sit in a median income area that’s high, and that’s going to vary by market, but for us it’s 40 to 50,000 at least. We only buy in low crime areas. We do a thorough street view and then we send somebody in person if it looks good. And for us, we don’t buy 1960s properties anymore because the physical decay, it can be overwhelming, especially if you haven’t budgeted for it. Yeah, that was some of our early horror stories and it framed what we did for every deal after that. And fortunately we haven’t had anything like that after that. But yeah, it was quite the fun introduction to multi-family.

Jamil:
Wow. I mean, that’s obviously a nightmare, but it gave you a lot of tools that will keep you out of a nightmarish situation in the future. And I think that that’s the whole purpose of waking up in a nightmare, is to not have them over and over and over and over again.

Andrew:
Exactly. I mean, we don’t regret it because it made us that much better for the… I don’t know, whatever, seven or eight years afterwards. And we also did things like hire Mr. Slaughter here to come live at the property and patrol it for every night and every day. I think we had two or three officers on there. We let the police practice with their canine units on the property, try to help tamp things down. Yeah, we learned a lot and it heavily affected our process going forward. And again, fortunately we have not had to deal with that any further since then.

Jamil:
Incredible. I’ve been accused of being an unsavory character myself as Hugh Hefner, and I would have to say that I take pause and a little bit offense to you wanting to stay away from unsavory characters. I think everybody deserves a place to rest their head and wear a bath robe. But thank you so much for sharing that horror story with us, Andrew. It was enlightening to say the least. Matt.

Matt:
Howdie partner.

Jamil:
Howdie to you. I also hear you’ve got quite an interesting horror story that you’d like to share with us. Hopefully, you’ll be able to tie in how this horror story and that hat came to be.

Matt:
The hat, brother, is just sometimes you got to be the sheriff on a property as a property owner and you got to knock heads, whether that’s on a C class property, B class property, whatever it is. There’s going to be things that an owner needs to police and remove, whether that’s improper management, bad books, theft, which is what my story is about my friend, or whatever that may be. Or tenants that are bad actors and making bad choices or having bad deals go down at the convenience store across the street. Almost called it a drug store. No, convenience store. Probably was a drug store as well. But yeah, we are kind of cops and bringing multi-family to the next level.
This story is that. This involves probably my first triple digit multi-family property; it was 198 units. This is the first time that we had bought something anywhere near that large. And it was in Fayetteville, North Carolina and Fayetteville’s all one syllable, Fayetteville. And we had bought it and the property manager that we had hired was new to North Carolina and they had a regional manager, which is property managers are structured with a regional manager that’s over typically a bunch of properties that have site managers that work and that sit at the property and have maintenance teams and that.
But the regional sits over the whole thing and it’s really their job to grow and manage the existing portfolio. Regional was really solid and she put a great site team in place and a week after we closed, she quits. And so the property management company had a change of heart and decided, “Well she quit. We don’t really want to hire a new person right now, so we’re going to try and manage this property in Fayetteville, North Carolina from Atlanta.” And so they tried to manage it way remote. And so what that equated to was the site team was really left to run the property by themselves. And so you got somebody that’s hours and hours away that’s responsible for keeping their eyes on the property.
And when the cat’s away, the mice will play, my friend. And that’s just how it goes. Nobody with this hat was watching the property aside from us. What happened, very quickly, two things. We had identified to the property manager, to the site team that “Hey, we want to renovate all these apartments because they’re all very circa 1970 with lovely wood paneling on the walls and 1970s stock kitchens and whatnot. And we knew that the tenants were paying $500, $600 a month in rent for ones and two bedrooms, whereas the market was 800 $900 a month. And we were going to make major investments in the property to bring those units up to new condition.
The site manager took it upon themself to write a letter to all 198 tenants, telling them, “Hey, new manager is going to make some major investments in this site. And just so you know, when your lease renews, you’re going to go from 500 to $800, just be on notice.” They put that on every tenant’s door. We went from 80%, we went from 80% occupancy to 30% occupancy in two months after that notice was posted. Again, without a little bit of tact and that kind of thing, and then when the cats away, the mice will play. That was obvious nightmare number one is just occupancy falls way off and that. Fast forward, we ended up having to remove that property manager, not just because of that, because a lot of egregious issues that we had had.
And the second issue, horror story that came up had to do with yet again, not having a regional sitting over this property. The maintenance technician was there and I still remember his name, still remember his face. Every time I came on site, man, he’d be outside picking up trash with this little long stick with the claw on the end of it that they use and with a little bucket. And he’d plant new flowers. I was told by other site team members that a couple days before I would come down, he would plant some new plants just to show off a little bit, the property and all. He [inaudible 00:12:12] call me sir. Yes sir, no sir, the whole time. And very respectful, got my cell phone number, would call me every here and again to tell me how things were going. And yes sir, no sir, the whole time.
And he had a bunch of vendors lined up to do work on the property and people that he knew from the neighborhood were renovating apartments and stuff like that. And he was the best and he was my best friend and I thought that he was the one that was going to bring that property around. And I defended him when other people started to tell me, “Hey, that guy’s not doing his job sometimes and this and that.” “No, you know what? He’s great. And not just because he calls me sir, he’s amazing and I love the way he shows up.”
We terminated the PM company and my business partner, Justin, goes to the site a week later and a guy in a beat up pickup truck… Any real estate investor knows what the truck of a local scrapper looks like. The guy who’s there, whose job is to collect scrap metal and take it to the scrap yard and they get dollars per pound for it. Local scrapper truck pulls up with a truck full of metal that he’s found around the neighborhood and he says, “Hey man, you got any appliances to sell me today?” And I’m like, “What are you talking about appliances?” And my partner Justin was like, “Well no, we don’t sell you guys appliances.” And he says, “Well no, the guy that works here, the maintenance tech, he’s been selling me appliances that you guys pull out of these turned apartments. He’s been selling them to me for $300 for a full set of appliances.” And I’m like, “What?” “Oh yeah, yeah.”
And so in a business, when you’re in multi-family when you’re turning apartments, the appliances that you pull out of one apartment when you renovate and upgrade, those appliances could be used for parts and spares and maybe a tenant loses their refrigerator where you can give him the refrigerator you just pulled out of the apartment after it’s been cleaned and use it until it’s soon enough to buy a new one. This guy was selling all of our appliances to the guy in the beat up pickup truck.
Then it turns out, did a little bit of digging, that there was a homeless guy living on site. And we approached him and we said, “You’re living in one of these apartments?” And it was furnished. He had taken furniture he had found in the neighborhood and had a furnished apartment that he was living in, with a key. Guy had a key. And we were like, “How did this happen? How are you living here?” “Oh, the maintenance guy has been renting me an apartment. I just pay him in cash, $400 a month in cash, then he’s been letting me live here.” And I was like, “Where are you getting the money from?” “Oh, well, I do work orders for him and some of the other guys and I do some odd jobs around the site and they pay me and I just pretty much give the money back to him in rent.” This maintenance tech was selling used appliances to a local scrapper guy and had a homeless guy live in one of our apartments who was also doing his work orders.
And the third, again, it keeps going. The third time, the thing that came up, on that same site visit, the guys that were turning the apartment… When you’ve got a multi-family property like this, you tend to find a local contractor, a couple guys in a truck or a bigger outfit or whatever to go and replace cabinets and clean out the apartments and put in new flooring and you end up spending somewhere between four to 7,000 a unit to turn these apartments around.
Well they said to us, “Well, okay, who are we paying our commission to?” And we said, “What do you mean, your commission?” And they said, “Well, every time we turn an apartment we had to give a $500 commission to the maintenance technician as his fee for him referring us to this job. Do we have to give that to you guys now?” And we’re like, “No, no, no, no.” There was more, but it was just one of these lessons, Jamil, that you’ve got to have oversight and you can’t just trust a yes sir, no sir kind of person who’s going to tell you what you want to hear. And by the way, the fact that he was planting flowers two days before I came should have been a sign. You should be planting flowers period, not just when the owner’s going to come to town to put your best foot forward when the owner’s in town to make yourself look good.
Just bottom line is oversight, oversight, oversight. People watching, watching staff. Because again, can’t say it enough, you need people wearing this hat here and when the cats away, the mice certainly do play.

Andrew:
Sounds like you had yourself quite the entrepreneur there.

Matt:
He did well.

David:
I would think so, yeah.

Matt:
Yeah. You can’t slight him for trying and that, but he certainly did try very hard. But unfortunately he was an entrepreneur with our money in that. I’m glad to have gotten him on down the road to whatever his next venture was.

Andrew:
You moved him into the business development role, right?

Matt:
We hired him. Yeah. Let me use your superpowers for good.

Jamil:
Ever had a moment like that, David, where the cat was away and a mouse came out to play.

David:
First off, let’s get something clear right now. This is my podcast and I still run it and you’re welcome in my ring. But Matt Faircloth, the next time you show up for a Halloween episode dressed in your three year old’s cowboy hat, think that that kind of effort is going to fly here. You got another think coming? Okay, brother? Now I’m going to let it slide because that was a really good story. You bring me some good content, but I expect more and I’m going to see more in the future.

Matt:
I promised to get a full sized cowboy hat next time. Well said.

Jamil:
Speaking of the future? Why don’t you tell us about your multi-family horror story, David, because I’m sure with all the experience you have in the business, there’s got to be some spooky things that have happened.

David:
You asked me a question before I went onto that ridiculous tirade right there. What was it about?

Jamil:
I asked you if you had ever had an opportunity to see the mice come out to play when the cat went away?

David:
That happens more I’d say with employees in my businesses than it has with any actual investment property. I haven’t had a situation like that yet, but oh my goodness, have I had some horror stories. By the way, I think Andrew might have one that we’re invested together on one of those properties, the hurricane one, so he’ll probably get into that. But I just had a big 1031 that I didn’t really want to do. Long story short, somebody had stolen title to my properties. We’re a bit of a target, we’re in a platform like this, so I had to sell them very quickly, which forced me into a 1031 that I didn’t want to be in. And then I learned in the middle of the 1031, there’s a rule that no one had told me the entire time.
And that is when you sell your property, you have 45 days to identify your next properties and 180 days to close. We all know that. No one told me that you can only identify twice as much real estate as you sold. If you sold $5 million of real estate, you are only allowed to identify 10 million, which is the ones that you can pick from. Now, normally that is not an issue because most people don’t have that much capital to deploy. In my case, my portfolio was almost free and clear. I sold about $4 million worth of real estate and I could only identify $8 million worth of real estate. However, I had to reinvest almost $4 million, which is very difficult to do if you can only identify 8 million. What makes it worse? I did not know that this was a problem until day 44 of my 45 day identification period, which created a very interesting 24 hour period where I had to identify properties and basically if I identified anything that I didn’t have in contract, it wasn’t going to close.
It was too risky to put a house on there that I didn’t know I could put in contract. I had to go out and put properties in contract in one day that then I had to close. There’s no way, I couldn’t not close on these properties. A lot of your inspection strategies, they’re not going to work in that scenario. First story, that set me up for some of these horror stories that are going to come, as if that wasn’t a horror story enough.
During this period of time, one of these properties, we had a survey conducted and it turned out that there was a 30 foot encroachment of the neighbor’s lot onto my property. Basically, 30 feet of the property I’m trying to buy, the survey reported was hanging over the neighbor’s lot, meaning if they wanted they could just come take a chainsaw and cut 30 feet off of my house. Now, it’s not that uncommon to have some form of an encroachment. Boundary lines don’t always get drawn super clear. It’s very odd that you have 30 feet of a house. It’s usually like a gutter hanging over or something like the fence didn’t get put in the right place.
This was very significant. And this was a house, it was more than a million dollar house, it was like 1.2 million and it appraised at 1.35 million, so I was excited about buying it. It was coming with a lot. This is what’s funny is I bought this property and I got the lot next to it. And even though they had all that space, they still chose to build their house as close to this other lot as they possibly could get. I’m in this position now where if I don’t close on this thing, my whole 1031’s going to blow up. We had to tell them that we were in a 1031 to get them to go into contract in one day. So the seller was actually a pilot. He’s flying his plane and we’re desperately trying to find houses that we could put into contract.
What we did was we had his agent look… The seller’s wife looked up who the flight attendants were on the flight, sent them a text message via the plane’s wifi. They go knock on the cockpit door and they’re like, “Hey, I got to read you the terms of this deal to know if you want to put in a contract.” And he’s like, “I’m flying a plane, I don’t want to deal with this, I’ll deal with it later.” And they’re like, “No, no, no. We’ve got four hours and you’re not going to land for three and a half. You have to make the decision right now.”
He already wasn’t super happy with how this whole thing went down and I don’t think he got the price he wanted. He got the price he was willing to get. He didn’t know about the foreclosure, but basically the seller’s like, “I’m not fixing it. You can just go to HE double hockey sticks here.” And I’m like, “I don’t want him to know that I have to close, but I also don’t want to buy a property that’s 30 feet hanging over the neighbor’s lot.” I’m in a bit of a horror story here. We went back and forth for probably three weeks on this. I tried to buy the portion of the lot that my house was hanging over into from the other guy. He didn’t want to do it. I tried to make the seller buy it. He didn’t want to pay any extra money.
Long story short, it turned out that it was just the surveyor was an idiot. Didn’t know how to do their job, it wasn’t a problem. We had a second survey order that showed there was nothing here, so there was this three weeks of sphincter tightening that did not have to happen. I suppose that muscle doesn’t get worked out very much. It definitely got worked out during that period of time. That horror story ended up being just a haunted house that didn’t have real ghosts.
But during that same 1031, I did run into a cabin that I bought in the Smoky Mountains that came with a pool. Now, pools out there tend to be inside of a structure. They’re not just built out in the open because they would freeze during the wintertime. The pool was awesome and it would almost double how much I could rent this cabin out for. It’s very hard to find those. They rent for a lot more. It’s a really big pool in a huge structure. The problem is the pool is leaking. The pool is being redone. When I put it in contract, I wrote into the contract I, the pool has to be evaluated by a licensed professional to the buyer’s satisfaction. And if I don’t like it, I can back out, get my earnest money back.
However, this 1031 disaster could stop me from being able to back out of the deal. Now I’m locked into it and I don’t want the seller to know that I’m locked into it. I want them to fix the pool. And the work that was done, basically, they plastered it. It was still leaking afterwards, so you don’t know how bad the problem is. I don’t know a ton about pools and no one out there could really give me the answer of, “Is this an issue where we’re just going to fix some leaks and plaster, or is this the plumbing itself is leaking and it’s not going to hold water?”
I’d already negotiated about $25,000 in closing cost credits when I put it under contract. The seller wanted an early close. I wanted a delayed closing. He was threatening to just basically not close at all if I went past the close of escrow. That forced me, like I can’t bluff anymore if he threatens to not do it. I was able to negotiate an additional $30,000 credit in order to fix that pool from the seller, not knowing how bad it was going to be. It was kind of like, well I don’t know if that’s enough, but it’s better than losing the entire 1031 here, so I went forward with it and we get done, we go fill up the pool, it’s leaking again. We send out another pool specialist, they say, I think you need to redo the whole pool.
It’s probably going to be like 55 to $65,000 I would guess, just because it’s hard to get people out there. I’m kind of working with traveling contractors now to go out there and rebuild an entire pool, which technically I got most of the closing costs put towards the pool. It just made the deal not quite as good because I was intending on using those for furnishing the property. It was a new construction cabin even though the pool had been built by some terrible builder. That was a bit of a horror story that we’re still trying to work out.
There’s another cabin that I have under contract right now. Funny story, Did you guys know there was a Nashville, Indiana?

Jamil:
No.

Andrew:
No.

Matt:
No.

David:
Freaking south man. They’ve got the same names for cities in all kinds of different states. I didn’t know that either. What I thought I was doing was going under contract on a cabin with an appraisal of 1.365 in Nashville, Tennessee, and I’m getting it for 1,000,050, so I feel really good about this. And then [inaudible 00:25:36]

Jamil:
There’s a book you should read, Long Distance Real Estate Investing.

David:
Yeah, that’s exactly right.

Matt:
I want David Green money where I can just buy houses wherever they are and whenever they are, just because I don’t want to pay taxes.

David:
I hadn’t closed on it yet, but I’d realize about two weeks in, “Oh, this is not Nashville, TN. This is Nashville, IN.” That T and the I is a very big difference in [inaudible 00:25:57]

Matt:
One more dash across that I.

Andrew:
Talk about cross your T’s and dot your I’s.

David:
Very nice there, thank you. The good news is the fundamentals of the deal don’t change. It’s underwritten with the same information the seller has. Previous guests that are booking. We have a very good understanding. Right now it’s bringing in about $160,000 a year in revenue. There’s ways that we can bring that up higher. But I just was shocked like, “Oh, this is not even in the same state that I thought I was buying this property, but it was still almost $300,000 of equity. I’m going to move forward with it.” Well it turns out it’s in a very rural area.
Now, we’re having a hard time finding a lender that wants to lend on it because they haven’t heard of Nashville, Indiana either. It’s in a very remote location. It is making good revenue, but that still makes a lender nervous. And it’s also on six acres of property, which is another thing that lenders don’t like. They like the actual improvements to have more value than the land. Luckily the seller has extended escrow like three times on this because we have to go find different lenders and then we have to order a new appraisal. That hasn’t turned into a horror story yet, but it was very, very close to one when I realized I was buying a house in a completely different state than when I had looked at the contract and looked at the numbers and said, “Sounds good. Sign me up.” Didn’t notice that it was in Indiana and not Tennessee.
I barely averted a horror story in Jacksonville. I had a property that was leaking sewage similar to what Andrew was saying from underneath the house. And the property manager came and said, “Hey, it’s going to be about $26,000 to fix this.” And I’m like, “The whole house is only worth like 110,” it might be worth it to just let the house go. “What on earth are you talking about? $26,000.” “We’ve sent three plumbers. This was the cheapest bid we could find.” And I was like, “Well, what’s going to cost that much money?” Of course, crickets, they can’t ever tell you what the person’s doing, they’re just relaying this information.
The plumbers were saying, we basically got to rip apart the entire foundation of your home to try to figure out where the leak is coming. I sent a couple other plumbers out that I made a phone call and I found one that said, “Oh no, I can tell you it’s coming from either this bathtub or that one. If it’s that one, I don’t even need to dig into the foundation. If it’s the other one, I’m just going to cut right down through the bathroom, figure out where it is, I can fix it.” And then long story short, that was a $4,500 problem, not a $26,000 problem.
One of the things you got to learn is when you get the first piece of information, don’t freak out. It’s usually coming from someone who’s not very interested in saving you money. They’re interested in saving themselves time, which is frequently the case with property managers. And then the last example I have came from a house that I closed on in the Smoky Mountains. This is before the market shifted. It was listed at 1.6, I think that we ended up getting it for 1.64. But with a $65,000 closing cost credit. Very, very big number, which we were basically going to have set up where the seller, rather than running the money through escrow, was going to put it towards a contractor that was going to go and make the repairs that needed to be made on the house. And I gave it up to them. You could make the repairs before we close or you could do it this way and you could make it after. I believe that was the details.
Well, they ended up, once they realized the deal’s going to close and we had waved our financing contingency, they just turned off the air conditioning to the entire cabin. And this was a cabin with a pool inside of it where there’s a lot of mildew, so you can imagine in a couple days, it’s amazing how fast that mold spreads. It’s like a peach redition there. Super humid, middle of summer. The entire pool room is mold everywhere. Basically, the agent was like, “Well there’s nothing you can do, you got to close.” I was like, “No, no, no, no, no.” “There’s nothing you could do. You’ve got to close on this.” They still have to deliver the property in the condition that it was in when we put it into contract, even without a contingency, that’s part of the contract.
The sellers didn’t want to budge. They were like, “Nope, you have to buy.” We ended up at a standoff and I was like, “Well, good luck trying to keep our earnest money with this and you’re going to be taking back a cabin with a ton of mold in it. You’re not going to be able to sell it for a couple months as you try to get that fixed.” We negotiated an extra maybe 10 or $15,000 of credits to get the mold closed. We closed and then we had to go in there as soon as it was closed and fix all the mold, which actually worked out well because we also needed time to get furniture ordered and get some tweaks made so the property could be ready to be rented out to other tenants and get pictures taken.
We didn’t actually lose any time of having that house on the market because we just fixed the mold at the same time we were doing other things. But those are all situations that could have easily blown up a deal and cost a ton of money and just made someone not want to invest in real estate at all.

Andrew:
Sergeant sir, may I make two comments?

David:
I’ll allow it.

Andrew:
All right, two things. Number one, I love all these stories because we all get on this podcast and we talk about these deals and these successes and it sounds so easy. And the reality is, that even someone like you who’s been doing this for a long time, tons of deals, tons of knowledge, still has challenges and real world problems. And so everyone listening, you go out and do this, expect problems. And if you get problems, it doesn’t mean you’re necessarily doing it wrong or you’re not going to succeed. We’re all still having problems even today.
The second thing is, I love the story of you hunting down the flight attendants and getting them to message the pilot. One of the things you ask at the end of most podcasts is what is the one thing that separates successful investors from those? That right there, the relentless persistence and creativity. Who would’ve thought to, “Well, let’s see, I can figure out who the flight attendants are, get through the plane’s wifi, message them and have them interrupt the pilot.” One out of a hundred people would do that. But that’s what separates us. I love those stories you told.

David:
I appreciate that. Everyone in your world will typically tell you it can’t be done. It’s not hard to get a lawyer, a CPA, an agent, and anyone like, “Oh we can’t do it. He’s flying right now.” Rather than asking the question, “Well how could we do it? How could this work?” And so I appreciate what you’re saying there, Andrew, but I think if we just ask different questions, how could this happen? A lot of the time the answer isn’t that wild.

Andrew:
That’s true.

Matt:
Before you get there, I wanted to compliment you on something because I’ve seen a lot of newer real estate investors think that no matter what happens, the seller’s in control and they’re going to tell me, “Oh you got to close and oh, too bad with the mold. Yours.” There’s like this three pages deep in the contract that says that the buyer agrees to take the property as is. But I think that it took some strength to come forward and say, “No realtor, I’m not going to close. They have to give me a credit,” because you underscored something that most contracts say and that the seller has to deliver the property pretty much in the condition that it was when I saw it.
If the conditions changed, if I’m buying a house and a storm comes through and a tree splits that house down the middle, guess what? That’s not the same house that I looked at. And that mold story should get underscored to anybody listening that you are in control. You don’t have to close. You do have the right to raise a flag and say, this is not the condition that I was aware of and I want some consideration or something because conditions have changed.

David:
Well thank you, Cowboy.

Jamil:
I experienced something very similar to that David, when I was trying to sell the Playboy mansion and they did an inspection of the grotto. A lot of things happened at the grotto.

David:
You could imagine what would show up in that inspection. How did the conditions change?

Jamil:
That was wild David. Incredible, incredible story. But it absolutely shows just how seasoned of an investor you are and the fact like we’ve heard from Andrew and Matt that you can remain in control and with the right mind and the right knowledge, you can absolutely take control of the deal and put yourself in a better situation. Thank you for sharing that with us. I think we all became a little bit smarter and wiser for it.

David:
Well, before I throw it to you, Jamil, I think Andrew also made a point that’s worth mentioning. When you listen to a podcast, there’s this concept called survivor bias, which means you typically only hear the stories of the people that survived and did well. We hear about Elon Musk, we hear about Bill Gates, we hear about their empires. We don’t hear about the hundred of thousands of entrepreneurs that failed because no one wants to interview them on a podcast. And if they did, nobody would listen to it. We’re like, “What did you do that made you suck? I want to be like you.” It’s always the opposite.
What happens is you only hear the people sharing their best stories because not only are they the ones on the podcast, but they don’t want to come and show you their warts. They want to put the filter on their portfolio that makes it look as good as possible. And we were kind of joking around earlier that you ask an investor how many properties they have and they tell you how many doors they have. They’re like, “Well technically it’s got a garage door, a side door, a screen door, a bathroom door, a front door. Yeah, I got 12 doors.” Maybe they have one house. That is just how investors, especially when they’re at meetups and they feel the pressure to look cool, they want to talk.
And it creates this air that mistakes never happen. Nothing goes wrong. People don’t lose money. And that the baseline expectation is that and if you get anything less than the baseline, you’re not good at this and you should feel bad and you shouldn’t invest. But if you actually sat and watched some of your heroes at work, you would find that it’s complete chaos. In fact, I’ll even tell you this, in the military, it’s not much different.
I had this impression of the military my whole life that it was like this disciplined, orderly place because you always hear about discipline, discipline, discipline. And then I met friends that were in the military and they said, “No, it’s complete chaos. It’s madness, it’s logistical nightmares. It’s frantically trying to figure out why this thing got delivered to the wrong place and how we’re going to get these people this thing. And there isn’t enough shoes of this size for this area,’ and the reason that they value discipline so much is it’s so necessary in the chaos.
And then I started to notice as it became more successful and I started to meet other successful people, man, the pretty buttoned up version that you see on Instagram of any of these guys walking through their flip is never what their business looks like. They have employees doing dumb things. They have maintenance people running side hustles off of their own properties and selling their appliances. They don’t even know what’s happening in their CRM. They probably don’t know what’s happening on their tax bill. It’s absolute madness for every single successful person that you see, they just don’t share that. Nobody wants to get up there and say, I don’t know what my numbers are, I just know that I’m making money because I still have capital in the bank.
That’s a much more realistic picture of what this is than this super tight, perfect edited video that you get where someone says, “Here’s how you analyze a deal.” As everyone knows, you cannot control for everything that goes wrong in a deal. I’m going to wrap this up by just saying, if you’re making success, if you’re staying somewhat profitable, if you’re acquiring properties, you’re probably doing better than 90% of the people that are out there. It’s not perfection that you’re striving for, and don’t let that become your baseline.

Matt:
David, can I add to that? Because I just want to, first of all, high five you and I think it’s brilliant and I think that what really creates success is trying again after failure. Like the property I talked about in Fayetteville that got down to 30% occupancy. We brought in a new manager, we refinanced the property, we renovated it, we got it up to 95% occupancy. Had you accepted, “Oh, moldy pool room, guess I got to just take it. No, I’m going to put my boxing gloves on and fight and stay in the ring. I’m not going to lay down.” And I think that that’s really what failure is. Quitting at a setback.
The real success is trying again at a setback, because it’s funny, I just listened to Ray Kroc’s personal story called Grinding It Out. Two of my gut buddies in GoBundance referred it to me, so I just listened to it. Ray failed a ton of times, but he tried again. He grinded it out and he tried again after failure. And I think that that’s what really underscores success as a real estate investor as well. As you said, you’re going to have stuff stolen, you’re going to have a broker try and push it to close on a deal where you’re getting duped on or something like that. It’s really being willing to fight again and try again and then that’s really what defines success. Not no failures, certainly not.

David:
That’s a great point. Yeah. Jamil, I want to ask you, you’re sitting there in a bathrobe, you’re obviously in a posh hotel, you’re looking fantastic. It would appear that everything in your world is working out about as perfect as it could be. I mean, your beard is symmetrically perfection. I can’t imagine that you could have any horror stories. Am I wrong?

Jamil:
You are absolutely wrong. In fact, you spoke of warts and I’ve got a wart juicier than the end of any witches nose that we would see on Halloween.

Andrew:
I hoped I would never hear the words wart and juicy used in the same sentence again.

Jamil:
Well, let’s get into it. Let’s get into it. As you all know, I’m on a Bigger Pockets podcast called On the Market and had an opportunity to dive into a deal that I was in escrow in Phoenix, Arizona. And this is where I’m going to actually blame my co-hosts for helping me push me along and getting into this deal. Because for those of you that don’t know, I’m a wholesaler. I primarily wholesale property. Very rarely do I hold. And here was an opportunity. And the reason why I even got into the opportunity is I had a massive tax bill last year and I keep being told from my fellow real estate investors and every single one of my co-hosts on the On The Market podcast to buy houses, buy property, so I can depreciate it and lower my tax bill. And here I find this opportunity in Phoenix, Arizona.
It’s a 53 unit off market property in a class neighborhood. It’s a B class building, but it’s an A class neighborhood. In fact, it’s around the corner from my house, so walking distance. I can go there, I could hang out, if I ever got in trouble at home, I could stay in one of the units. That would be my doghouse. I’m looking at this opportunity because a) it would provide me a great depreciation situation. I would write off a lot of income. I was able to get into the deal at 12 and a half million dollars. Now that deal, although it seems like,” Hey Jamal, that sounds a little bit pricey at 12 and a half million dollars for 53 units,” right two days after we had gotten under contract, I had a potential wholesale buyer. I had a multi-family buyer who wanted me to sell my contract to them at $15 million.
That would’ve been an immediate two and a half million dollar wholesale fee. Now, as a wholesaler, to me that would’ve just been an incredible situation. I would’ve been able to get their earnest deposit to replace my earnest deposit. I could have assigned the contract over and possibly have made two and a half million dollars. I bring this situation to my brothers and sister on the On The Market podcast and I say, “What should I do? Should I buy this property or should I wholesale the property and make a quick fee?”
Now I was convinced, thoroughly convinced that Jamil, it’s really important that you hold, it’s really important that you invest for cash flow and it’s really important that you keep more of your money instead of just generating cash or your wholesale business and giving it all to the IRS. And so I make the decision that we are going to move forward with purchasing the property. Now, to kind of set the stage for you guys where this is in my career, this is just recent. This is two months ago. We get into contract on the property. Well, a few months ago we get into contract on the property in April, and market is really hot right now. We’re not seeing really anything coming around.
There’s talk of potential rate hikes, but we’re still not there yet. And my business partner, who was very, very experienced in the world of multi-family, a multi-family broker herself, had assured me that we would have lenders just throwing us money for this deal. And we had a financing contingency. Our earnest deposit on the property was $475,000. Immediately, guys, I just want to explain to you, I’m getting nervous because I don’t… Even though I do a lot of transactions, typically in my wholesale business, I can do anywhere between 50 to 80 transactions a month, so I’m really not afraid of buying and selling property. But I’m nervous to put out all of this money in earnest deposits.
And as we’re checking the boxes through our escrow time, the financing contingency date is coming around. And I’m nervous because we don’t have a loan quote. We don’t have any commitments from lenders yet. And I asked Sophia, my business partner in the deal, if she is confident that we are going to line up lending. And she was so confident that the lenders who had all given her commitments were going to come through. In fact, her answer was “Jamil, it’s not how much, it’s how little we’re going to have to put down. We have lenders right now who want this building, they want to be the lenders on this loan. I can almost guarantee that we’ll be able to get this thing done at 90% leverage.”
And I imagine that, a building 53 units and 90% leverage… As somebody that’s not primarily investing in multi-family real estate, this just seems like an amazing opportunity. And I’m with someone who I trust, who I will absolutely… Who I believed would have the contacts and the relationships in the industry that would actually come through. And so there we go. We blow through our financing contingency and we deposit another couple of hundred thousand dollars into the file. And now we are in $475,000 hard in earnest money.
And the rate hikes start and they happen fast. And it was so dramatic how quiet the lenders became because as I’m reading the headlines and as I’m watching the retail housing market just come to a grinding halt, I get very nervous about whether or not we’re actually going to have a lender that’s going to come and make this deal happen for us. And I’m calling Sophia daily. I’m asking, “Do we have anything? Has anybody given us a firm quote? And as the days progress, her responses become less and less assured. In fact, we get to a point where she made a phone call to me and she was in tears.
She said, “I’ve been in the business for near a decade and I’ve done hundreds of deals and I’ve never had my lending partners ghost me before.” And we are talking about a multi-family horror story here and it’s a Halloween episode, guys, but this isn’t the kind of ghost that you want. This is the kind of ghosting that when you got near a half a million dollars up for grabs it’s the scary kind of ghost. And I feel terrible. I feel terrible about the situation as a whole. Because for me, the first thing I had said to myself before I got into this deal was, “Jamil, you are so talented at what you do,” and this is me talking to myself in the third person so I apologize if I’m offending anybody with that.
“But you know what? I’m really talented at finding deals. I’m really talented at wholesaling and I always tell myself, don’t get out of your lane. Stay in your lane, fool. You’re good at what you’re good at. You understand what you understand. And now you’re playing in this world that I had not ventured into before and I truly am worried. What am I going to do?” As the days get closer and closer to our close of escrow, it’s obvious that we are not going to find a lender. In fact, all of the loan quotes that we were getting back had the building valued at $8 million. Now imagine that. You get into escrow on a property and it’s 12 and a half million. You’re able to find a buyer immediately for a two and a half million dollar lift.
So I would go so far as to say that the value of the building was 15 million. If I could find a buyer two days after going under contract for an additional two and a half million dollars, I’d say the value of the building was maybe even more than 15 million, considering how fast that buyer would come to the table. But the fact that I allowed myself to get bullied into moving forward with this deal and purchasing this deal instead of just wholesaling it like I should’ve, because I would’ve at least gotten that earnest deposit from the buyer. At the end of the day what ended up happening was we had to walk. We had to walk away from the deal. We did not close. There was no way that we could finance the property at the purchase price. The lenders did not like the deal.
We tried to go back to the sellers and renegotiate. We explained to them that everything had changed, that the world had been flipped upside down. And this building was no longer worth the 12 and a half million that we were in contract at, not even close. And they were not willing to negotiate with us. They had us pinned up against the wall and they walked with our $475,000. And that was a really tough lesson for me at this level. Now, I’ve been in real estate since 2002. I’ve been doing this for 20 years. And the first time that I ever went broke was when I got out of my lane in 2007 and I started investing in condo conversions.
And so this whole game of wanting to get involved in something that’s outside of your expertise, and again, that was the first time I was in multi-family was back. This is the second time I tried to get involved in a deal and I got burned. And it was really tough. It was a really tough pill to swallow, especially because I consider myself an expert. I consider myself somebody who should have known better and I didn’t.

David:
Well, that is a situation where the market shifted so drastically and so quickly. I guess Andrew and Matt could probably support this if I’m right or not, but I imagine you had cap rate expansion at the same time as interest rates rising, at the same time that lenders are pulling back and saying, “Oh, we don’t know what’s going on in the market so now we don’t want to lend out all of our capital.” And it went from all systems go full steam ahead to slamming on the brakes at the same time. And when you had all three of those things happen, you get put in a situation where it looks like you made a mistake, but at the time you put the deal under the contract, there was no way of knowing that was coming.
And I think we get used to real estate just, well this is the way it works. This is just what we do. Do you know what’s in the contract as an agent? No, but I don’t need to, because it always just goes fine. I don’t have to understand the mold situation like Matt brought up. We had a similar situation at the one brokerage where we had probably 50 clients that had rate locks and rates went up so fast so quickly from what the Fed did that the lenders literally said, “We are not going to honor the rate locks. We will not lend at that. We’re just not giving the money.” And we had to go call over 50 people and say, “Yes, your rate was locked. We didn’t realize that this could happen but lenders are just saying whether they have a legal right to or not, we’re just not doing it. We’re not funding. If you want the money, it has to be at this.”
“Yeah, we told you 15% down and we changed our mind. We don’t want to lend our money at 15% down. Now it’s 25% down.” And we’re talking about people that were in the high fours to mid fives that were bumped up to mid sevens. And this is at the last couple days for some of them before they closed. You look like a total butt head having to tell somebody that. But it just happens. The market shifted so radically fast. And we’ve been talking about how hot the market gets, but it could cool off just as fast. And we’re used to seeing this type of thing with cryptos and securities and equities and now it’s happening in the real estate space and it’s absolutely wild.
That’s a horrible story. Jamil. I remember when you reached out to me, I was like, “Oh, I bet he just needs a little bit of capital. We’ll bridge the gap,” and then you explain it more. And I was like, “Oh God, that’s true. It went from 15 million to 8 million.” There isn’t a thing that you could do on this one.

Andrew:
That’s one thing that I think a lot of people miss or underestimate is how quickly the capital markets can shift.

David:
Yes.

Andrew:
You go back to 2007, you could hear the collective sphincters of lenders just tighten and it just shut off. There was no nothing-

David:
In synchronicity throughout the entire country.

Andrew:
And then the domino effect goes from there. That’s probably one of the most important things to watch.

David:
We saw that in COVID. Remember that when there was [inaudible 00:51:00] in place and they were like, “Nope, no loans going out at all. Fannie’s not lending. Freddy’s not lending. Doesn’t matter where you are in your escrow.” Nothing you can do.

Matt:
Hey Jamil, I appreciate your vulnerability because, and David talked about this before about how people… There’s a real estate investor persona on social media that we’re all superheroes and we’re either closing deals, going on vacation or going to a Mastermind, one of those three. And because that’s all real estate investors do according to social media. That’s it. We don’t ever deal with anything else, any problems or whatever, we’re just hanging out with people or closing deals. That’s it. And I appreciate your vulnerability because it is those things that are listed are maybe 3% of real estate investing. The 97% is grinding it out and dealing with deals and dealing with curve balls and that, and it takes courage to put out the other 97% of real estate investing that sometimes you lose, sometimes you end up having the wins that you can’t control change. Kudos to you on getting real man.
If you had that deal over again, aside from not doing the deal, what would you do different? If you don’t mind just throwing that out there.

Jamil:
Well, first things first, I should have put together the wholesale situation because truth be told, if I had put together the wholesale deal, which is what I am good at doing anyways, I would’ve had the buyers earnest money locked in. The buyer that was going to take the property from me in the first place. They were all cash, so they wouldn’t have even been subject to this situation with the lending. It would have been the perfect scenario.
Now, on the other side of that, I wouldn’t feel good about this person buying this property from me at an inflated price anyway, so there’s that other side of the coin. I’m not interested in finding a bigger fool. I don’t believe in that. I believe that everything that we do finds a way back to us. And again, my intentions weren’t bad in originally wholesaling the deal. My intentions are always good when I wholesale. I want to provide value to my buyer, I want to provide value to my seller, and I love being in the middle, and I love being able to create value for myself by connecting the dots.
First things first, Matt, what I would’ve done is I would have followed my instinct to always take the bird in the hand. That’s the man that I was built to be, and I should always eat my birds when they’re in my hands.

Andrew:
Yes, I guess that is the next step. That’s why you have the bird in your hand.

Jamil:
Right.

David:
Yeah. Why not eat it. Even if it’s crow.

Jamil:
Even if it’s crow.

Matt:
I love it.

Jamil:
I should have-

Andrew:
Oh man, good job, David.

Jamil:
I should have just done the thing that I know how to do.

David:
You need to make a YouTube video about it. Have a bird in your hand as the thumbnail for the video and tell this story. Yeah. However, we’re also resulting. You guys know the poker term where we look back and we say it didn’t work out. We’re like, I should done something different. If you’d to close on that deal and saved all of your money and paid no income taxes for the year, this would be an example of you telling everybody else, “Hey, this is the way you got to do it. I wholesale. Instead, I went into this thing. I like Matt’s question because maybe on the next deal you do the same thing, but you figure out a way to protect the earnest money deposit.

Jamil:
No, you’re absolutely right, David, and Matt, the thing that we actually made an error on with the contract is in that we put this thing under contract when everything had gone bananas. Sellers were dictating terms and it was a very oppressive contract. But when I spoke to Sophia, my business partner in the deal, and I asked, “Is this normal? Is this level of aggressiveness part of the way that people are transacting in multi-family right now?” Because for me, even though the market had gone crazy, when I’m buying distress property, I still have an out. I still have an inspection period. I still have a way to negotiate a change in condition and accordingly, that just wasn’t available in the multi-family space at that time.
I think it’s really important to understand this and for the greater Bigger Pockets audience that’s listening in, guys take notes to this. When things start to get super heated, when the market just gets so crazy that people are throwing away due diligence, that people are putting caution to the wind. When you are starting to see these conditions present themselves, understand that they can’t last long, and that just might be the time when you sit something out. Matt, I would’ve written a different contract. I wouldn’t have gone into that deal where the earnest deposits were so aggressive, I wouldn’t have gone into the deal where the timelines were as tight as they were. I felt nervous about it right out the gate.
I took another individual’s word. This is another thing, the reason I’m a real estate entrepreneur is because I don’t like putting my destiny into the hands of other people. But when I’m ready to write a check for $450,000 and somebody else is telling me that, “Don’t worry about it. We got the lending covered.” I mean, what’s wrong with me? Really though? Where was my discernment at that time? And so there’s a lot of lessons here and it’s a lot about me. I really think that I allowed the heat of the market. I allowed greed, because I thought I had an incredible deal and the greedy goblin inside of me let me make decisions that were outside of the benefit of my family. And I made a huge error. And you know what? You’re right. I had to be vulnerable and I’m sharing this so that people can understand what it looks like when you’re making a wrong turn.

Matt:
Oh, thanks again for your vulnerability, man. I feel that. What I got is that I think it’s only time to get great in business at one or two things. And dabbling at $12 million is one of those things where it’s like, man, this could go great. It might not. If I want to buy a fixer upper or a wholesale or an Airbnb in a market that your wholesale business is playing in, I’m calling you. Somebody that’s closing 80 wholesales a month, dude? What? That’s insane. The fact that you built that level of a business is off the charts. If I want to either learn how to wholesale or to buy a wholesale deal in one of your sandboxes, you’re the guy. And if you’re looking for a negative K-1 or something like that for passive losses, maybe a lesson is there’s others that can help with that kind of thing that could have helped you structure a better contract or whatever, man.
I love your attitude around it. I think you obviously shook it off. I appreciate you going there and I think that it’s one of those lessons just this business can deliver really, really bad right hooks. And as I said before, it’s one of those things where the successful real estate investor is the one that doesn’t let the right hook knock them down, they just stay in the ring. You’re going to make that money back with your wholesale business. I mean, you’ll just double down on wholesales and this’ll be just a really expensive but lesson you’ll easily recover from because of what you built already because of your core genius and your core greatness in the business.

Jamil:
Thank you Matt.

David:
And your amazing sense of fashion.

Jamil:
Yeah, I think I’m going to start adopting the look. Yeah, I’m going to adopt the look as an everyday thing.

David:
It’s very natural for you. Andrew, did you want to share your last horror story about the flood?

Andrew:
Yeah, this is a horror story that unfortunately is very timely.

David:
I was almost going to say, not to cut you off, but we may be hearing horror stories when this comes out from the actual situation going on in Florida right now where there’s a hurricane coming and you can’t control that. You don’t know what’s going to happen. This is a great example of the fact that trying to blame yourself for things you couldn’t have seen coming never works.

Andrew:
Right. The previous example I got, I talked about we sold those properties, basically investors broke even. We just got out of it and moved on. This one has a much happier ending. We purchased 150 units down in Lynnhaven, Florida, which is Panama City beach area, Florida panhandle. This was fall of 2016, I believe we closed in November. It was a C plus property in an A minus area for real, and so a ton of opportunity. We renovated it, took us about 18 months. We bumped the rent. We had just gotten to stabilization.
Our manager, we said, did a great job, and she moved up in the management company, went offsite. New manager came in. Three days later, 1:30 PM on October 10th, 2018, Hurricane Michael came through with 161 mile an hour winds, the strongest hurricane in recorded history to hit the Florida panhandle. And I have a screenshot that I keep of the eye wall of the hurricane directly over our property. And in three hours time we went from a hundred percent occupied to 9% occupied. The property used to be covered in beautiful tall pine trees. They all came down and sliced up the buildings like bread. And we actually had a guy who the next day we had to chainsaw him out of his unit because he was trapped in the unit.
What did we do to make that potential tragedy, potential horror story not be any worse than what it could have been? For one, I am a wannabe athlete trapped in a nerd’s body, and one of the benefits of being a nerd is I’ve always loved meteorology. I was watching this storm since it formed. It was a wee baby storm in the Northwest Caribbean, and I had a gut feeling that this wasn’t going to be good. One of the things we did is our team… And if you have a property in any area that is subject to disaster, whether it’s hurricanes or fires or whatever, sit down and think through what can you do to prepare for the event that you might not be able to control. There’s still ways to mitigate it.
Number one, we got tons of supplies in advance. We had cases and cases of bottled water. We had mounds and mounds of sandbags. We have tons of plywood. We basically forced everybody except for a few stubborn folks to just get the heck out of town, get out of your units. That’s a big reason why we had no injuries despite 18 inch trunks coming through the buildings. The next thing we did… These two things made a huge, huge difference.
We actually had one of our big contractors from Atlanta come down to the Florida panhandle and stay at a hotel the night before about 50 miles inland. He was still safe, but he was very close to that. He’d be able to come help us out that very next day. Again, I mean, we knew this was coming. Also, the day before the storm, we filed a claim with our insurance carrier, even though the storm hadn’t hit yet, we knew this is not going to be good. And the thing is, you can actually go back and cancel that claim and just say, “Oh nope, nevermind. Zero claim.” We put the carrier on notice the day before that we were expecting a claim.
And then we also knew we were in hurricane country. So we had $350,000 sitting in the properties reserve account just in case something happened and we needed it. So what happened? Three hours later, knee deep water in the parking lots, buildings either flattened, destroyed, ripped apart. Again, I think I mentioned this, we had no injuries. The next day we were able to start remediation because we had our contractors already lined up. They came straight to us. We were able to bring water to the residents. We were able to have a generator and have one unit with power. Power was out for something like three months. We had one unit that had power so people could come in, cool down, charge phones, all that kind of stuff.
We were able to pay contractors immediately with our 350,000 to get in there and start cleaning up, get water out of units, get the trees off of the unit so that the building doesn’t suffer more damage from additional rain. It’s Florida, it’s humid. Those things will turn black with mold in 72 hours if you don’t deal with it. And this was a big one because we put the insurance carrier on notice the day before, we got in line before everybody else. If you have a fire at your property, okay, you’re probably the only one making a claim. But if you’re in a situation where a hurricane devastates a hundred miles of coastline, can you just imagine the volume of claims the insurance carriers are processing?
We saw properties that sat untouched, un repaired for two to three years because they didn’t get their claim in fast enough and it took that long for them to get through the process. We had our first quarter million dollar check from the insurance carrier two weeks in. Also, we had what’s called loss of rent insurance, meaning with 14 units left, we didn’t obviously have the income to pay the mortgage or those expenses or salaries anymore. Well, the loss of rent insurance, the insurance company cuts a check to cover all of that, and so we were able to keep our staff and still pay the bills and still pay the mortgage. We never defaulted. We were never late.
And then this is a beautiful thing from our side and from our investor’s side, we bought that property for $4,125,000. When it was all said and done, 18 months later after we’d renovated it, the insurance carrier invested a little over $6 million on our behalf renovating and repairing that property. So now we basically have a 2019 construction property and it’s like, “Well, wait a second, Andrew, how do you buy a property for 4 million and get insurance proceeds of 6 million? It’s called making sure that you get full replacement value policies that are rated for whatever disasters could hit your area. If you’re in Texas, you need to be covered for hurricanes, wind, and hail, all that kind of stuff. You’re in California, maybe earthquake.
On the Gulf Coast it’s called category rated insurance for named hurricanes. And the lender will say, “Oh, you only need $70 a square foot.” We said, “No, no, no, no. It actually would probably cost us a hundred. We’re going to pay more on our insurance premiums to make certain we’re covered.” And a lot of times if you gamble and just get a lower premium by lower coverage, it’s going to work out just fine until you have a building burned down or a hurricane takes out the whole property and you max out the limits just trying to get the place rebuilt.
Today, that property, like I said, it’s effectively 2019 construction, the net operating income is 50% higher than it was before the hurricane. And the building that we bought for 4 million, even in today’s environment is worth 18 to 20 million. People will ask, “Oh man, what do you think about buying in areas where you can get hurricanes or fires or all this kind of stuff?” And you can do it, as long as you properly evaluate and mitigate the risks. Honestly, that was probably some of the 18 most stressful months I’ve ever had in multi-family. And that first 24 hours of just sitting here on my computer watching the hurricane pass directly over us knowing what was happening, the amount of rain and 160 mile winds, and I had staff and people who lived there, was again probably one of the worst experiences I’ve had multi-family. But with proper mitigation strategies, even horror stories can end up working out well.

Jamil:
I think this is not a horror story, brother. I think this was a hero story. The amount of planning, the things that you had in place there, there’s maybe this many people on the planet who care, who care to have stockpiled water, to have had resources, to have done the things that you had done as a property owner, as a business owner, as somebody who has been given the position in life where you’re truly in charge of people’s safety and of people’s livelihoods. I’ve never heard of somebody being that well prepared for a disaster before because look, it’s not human nature to do so.
But I have to say, Andrew, you impress the hell out of me, man. That was an incredible, incredible foresight. And I think that anybody who had the opportunity or has the opportunity to live in one of your properties or to be anywhere near you with respect to how you do business is a lucky person.

Andrew:
Well, and I got to give credit to our onsite team and staff. They are the ones who enacted everything and made it happen and delivered the water and cut the pine tree and got the contractors, all that stuff. I mean it really… I’m sitting out here in California, safe and warm and dry and they were the ones walking through knee deep water and knocking on doors and making sure everyone was safe. It really came down to having an awesome team in place. And then like you said, having some things set up in advance so that they could do that.

Matt:
I commend you too, Andrew. And I think that on the analytical side with regards to insurance, it is tempting when you look at a deal to say, “Okay, well maybe I’ll do some co-insurance here,” which is where the insurance company kicks in some money and you’re pretty much self-insured, where if you need a hundred thousand worth of damage, if that happens to one of your properties, the insurance company kicks in maybe 80% and you have to kick in 20%. In exchange for that co-insurance your premium’s going to be much, much less. That is penny wise, pound foolish when you have an issue like you did because you would end up losing 20% of that money that the bank kicked in to renovate your property.
I commend you for being more analytical about it. And I’ve seen many, many real estate investors make insurance errors. And as you said, maybe you never need it, maybe you just keep that cash flow and you drop your premium by 10%, 15%, and that just goes right to your bottom line. Or maybe a real catastrophic issue happens that you need insurance on. And the more real estate you buy, the more likelihood of having an insurance claim is going to come up in the future. I commend you for not being penny wise and pound foolish on your insurance, which enabled you to pretty much build a brand new apartment complex with the insurance company’s aid.

Andrew:
And there’s one other thing that’s really important that I forgot to mention. If you have a little kitchen fire that’s going to cost five grand, don’t worry about it. But if you have a building burn down or something significant, go get a really experienced public adjuster. Because the insurance company’s going to send out their own adjuster and their goal, they run a business, it’s not nefarious, but their goal is to collect premiums and not make payouts. And so they will send an adjuster out and try to give you as little as they can for the damages. A public adjuster will basically argue on your behalf of, “No, this shouldn’t be a hundred thousand, this should be 150.
On any kind of catastrophe like that, it is a full-time job. The contractor scope for repairs was 1,100 pages. There is no way I had the skill or ability to negotiate with the insurance company over that kind of thing. The public adjuster, again, who we talked to a couple days before the storm, we made sure we were front of his line. He really is a huge piece of why that worked out well is because we had somebody advocating who knew how to advocate in that kind of scenario on our behalf.

David:
Jamil, before we get out of here, where can people find out more about you?

Jamil:
You can find me on my Instagram @jdamjil. I also have a YouTube page where I share all kinds of tricks and tips on how to get a great wholesale deal. And that’s just youtube.com/jamildamji.

David:
Andrew, same question.

Andrew:
Yeah, I shouldn’t be but I’m a social media ghost, so best way to find me is just Google Vantage Point Acquisitions. It should bring up our website, which is vpacq.com. There’s a couple different ways to contact us on the website or you can also connect on Bigger Pockets and on LinkedIn.

David:
And Matt?

Matt:
Sure, it’s Sheriff Faircloth here. You can get a hold of us at derosagroup.com, wearing my son’s sons cowboy hat. D-E-R-O-S-A group.com, D-E-R-O-S-A group.com. You can pick up a copy of my book, Raising Private Capital, Bigger Pockets best seller over there. You can join our investor mailing list and you can check out our social handles on our website, derosagroup.com.

David:
Guys, this has been one of the better shows I think that we’ve ever done. We showed the warts, we showed the cream that we use to fix those juicy warts. We got to see Jamil in a robe and we got to see me actually for the first time in my life dressing up for Halloween. We also got to share some amazing horror stories that I hope everybody benefits from.
Each and every one of you, I want to thank you guys for being here, for sharing the ugly as well as the good. I hope to see you again. We’re going a little long, so I’m going to get us out of here. Listeners, if you like this, let us know in YouTube, log in, go to the comments, tell us what you liked, what you didn’t like, and if you want to see more of this content in the future, and then be sure to share and subscribe. Thank you very much.
This is David, Sergeant Slaughter Green for Jamil Hugh Hefner Damji, Andrew Hang Loose Cushman, and Matt didn’t know we were doing this today, Faircloth, signing off.