\n<\/p>\n
When most people think of JL Collins<\/strong>, they think of smart stock and index fund investing. In his classic, The Simple Path to Wealth<\/em><\/strong><\/a>, JL lays out the foundational path that investors can follow to secure financial freedom<\/strong> simply, easily, and without a ton of stress. So it may come to many FI chasers\u2019 surprise that JL has written a new book on <\/strong>real estate investing<\/strong><\/a>, and not index funds, the stock market, or our current state of high inflation<\/strong>.<\/p>\n In, How I Lost Money in Real Estate Before It Was Fashionable<\/em><\/strong><\/a>,<\/em><\/strong> JL lays out, quite candidly, how not to invest in real estate<\/strong>. And before you get mad about that type of advice on a BiggerPockets Podcast, please note that JL isn\u2019t saying to NOT invest in real estate, but to invest in real estate in a smarter way than he did.<\/p>\n JL is the first to admit that real estate is a phenomenal way to build wealth, create passive income, and retire early<\/strong>. But, if you haven\u2019t fulfilled your 250+ hours of real estate investing education, you probably shouldn\u2019t be purchasing income properties. In today\u2019s show, you\u2019ll hear JL explicitly list out all the mistakes he made when investing, and how you can mitigate these risks<\/strong> and come out profitable instead!<\/p>\n Mindy: JL Collins: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Scott: Mindy: Scott: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Mindy: Scott: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Scott: JL Collins: Scott: Mindy: JL Collins: Scott: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Scott: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Scott: JL Collins: Scott: JL Collins: Mindy: JL Collins: Scott: Mindy: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Mindy: JL Collins: Scott: Mindy: JL Collins: Scott: JL Collins: Scott: Mindy: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: Mindy: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Scott: JL Collins: Mindy: Scott: JL Collins: Mindy: JL Collins: Mindy: JL Collins: Mindy: Scott: Mindy: JL Collins: Scott: JL Collins: Scott: Mindy: Scott: JL Collins: Scott: Mindy: JL Collins: Scott: Mindy: JL Collins: Scott: JL Collins: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: Scott: Mindy: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes<\/a>\u00a0by leaving us a rating and review! It takes just 30 seconds.\u00a0Thanks! We really appreciate it!<\/p>\n
Welcome to the BiggerPockets Money podcast show number 285, where we interviewed JL Collins and talk about losing money in real estate.<\/p>\n
My lawyer, Wayne, pointed out that there was no real practical way to enforce that because of the cost of litigation that it would take. So when YP said, \u201cYou don\u2019t like it. Sue me,\u201d he knew my hands were tied. Well, when Wayne was saying to me, \u201cJL, you have to close. I mean, the law says that when essentially it\u2019s done and you\u2019re just down to a checklist, you have to close. You can\u2019t keep canceling these closings like you\u2019re doing,\u201d and you can imagine what I said to Wayne. I said, \u201cLet him sue me.\u201d<\/p>\n
Hello, hello, hello. Hello. My name is Mindy Jensen, and with me as always is my smart cookie co-host, Scott trench.<\/p>\n
Oh, I\u2019ll take that. That\u2019s a pretty crummy introduction, but I guess it\u2019ll work for today.<\/p>\n
Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story even the ones that cause you to lose money in real estate because we truly believe financial freedom is attainable for everyone no matter when or where you\u2019re starting or what kind of mistakes you make in the beginning.<\/p>\n
That\u2019s right. Whether you want to retire early and travel the world, going to make big time investments in assets like real estate, avoid losing money in real estate by making smart to decisions or start your own business. We\u2019ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.<\/p>\n
Today, we have three-time guest, JL Collins, joining us again. He is going to talk not about the stock market, which is what he is known for, but he\u2019s going to instead talk about real estate and his success is, Scott?<\/p>\n
Well, well, the success is he got an education in real estate investing based on this. No. What we\u2019re going to hear today is we\u2019re going back to 1979 when inflation\u2019s looming, the economy is looking fairly bleak and the outlook is eerily similar to what I think a lot of folks are worried about in today\u2019s economy here in 2022 and about how a tremendous amount of money was lost on a condo purchase that was intended to be a home and investment.
There\u2019s losses at every step of the journey all the way through a long hold period. I think there\u2019s a lot of information to learn from this. It was a really fun time. JL Collins is really great to talk about it with a sense of humor looking back, but you can imagine how scary and terrible that was going back. I think there\u2019s a lot of lessons that are really important to learn from.<\/p>\n
Yeah, absolutely. This is a great retelling of a story that is actually, I\u2019m sure much worse to have lived through, and 40 years of hindsight makes it a lot easier to retell the story.<\/p>\n
The story we talk about today is fully documented in JL Collins\u2019 new book titled How I Lost Money In Real Estate Before It Was A Fashionable: A Cautionary Tale. I had a chance to pre-read this book. I thought it was phenomenal. It\u2019s a short, quick read. It\u2019s very well-illustrated. It\u2019s a very powerful message, and it gives all of the details and the specific numbers and the timeline behind some of the things we\u2019ll talk about today. You can buy that book on Amazon, on his website, which we\u2019ll link to in the show notes and the show notes, again, will be found at biggerpocket.com\/moneyshow285.<\/p>\n
Okay. You have listened to this show before more then you have heard our guest on episode 20, on episode 116, and now back again for the third time making up now 1% of our guests that we have had, Jim Collins, JL Collins, from The Simple Path to Wealth, from JL Collins NH. What else do you do? From Chautauqua. What else do you do, Jim? Welcome back to the show, Jim. Tell us all your things. Give us your resume. We only have an hour so don\u2019t give us the whole thing.<\/p>\n
Okay. Well, I mean, jlcollinsnh.com is the blog. You can go there, and from there, I\u2019m on Twitter and Facebook, and I\u2019ve got two books out, The Simple Path to Wealth, which was the first one that I published in 2016, and then last fall, I just brought out the second one, which is How I Lost Money In Real Estate Before It Was Fashionable. Yeah.<\/p>\n
The hard path to wealth.<\/p>\n
Yeah, Chautauqua, you mentioned. You\u2019ve been to Chautauqua, and that\u2019s our annual event where we take small groups of people out to some cool place for cool conversations in a cool environment, and that is finally returning for 2022 after two years of COVID-related hiatus, I guess is the word. Yeah.<\/p>\n
So you\u2019re all over the board. Where are you right now? Because it looks like you\u2019re in a hotel room, Jim. You\u2019re just tracing around the world.<\/p>\n
Yeah, I\u2019m always in hotel rooms. We\u2019re nomadic. So this particular hotel room is the St. George, Utah, which is in the Southwest corner of Utah. Beautiful area.<\/p>\n
Awesome. Well, today, I think we were hoping to learn more about how you did lose money in real estate and the full details behind that, and I think that\u2019s-<\/p>\n
Wait, wait, wait, wait.<\/p>\n
What is it?<\/p>\n
This is BiggerPockets. We talk about making money in real estate. You can\u2019t lose money in real estate. Right, Jim?<\/p>\n
Oh, I did, and in my experience, it\u2019s surprisingly easy. All it takes is being naive and unaware, which by the way, I applaud you at BiggerPockets for trying to correct investors, but you were not around when I was making this series of tragic errors.<\/p>\n
Yeah. Thanks, Josh Dorkin, for not foreseeing the future and being there when Jim needed you.<\/p>\n
I know.<\/p>\n
Okay. So let\u2019s set the stage. What year are we talking about?<\/p>\n
So we would be talking about 1979.<\/p>\n
Oh, is this the beginning of-<\/p>\n
Tough year.<\/p>\n
Yeah, very tough year, and isn\u2019t this the beginning of really crazy interest rates?<\/p>\n
Well, it wasn\u2019t the beginning of crazy interest rates. It was the middle of crazy interest rates. It was towards the end of a decade\u2019s worth of stagflation, which was the hallmark of the 1970s. I think we finally broke the back of that around 1982 if my memory serves me. By the way, that\u2019s one of the reasons that this particular inflationary environment that we\u2019re entering has me nervous. It just seems very familiar somehow.<\/p>\n
Yeah. I just typed that into the notes that Scott and I have. I\u2019m like, \u201cStagflation? Hmm. That sounds very familiar over the last 20 years.\u201d<\/p>\n
Yeah. Well, I don\u2019t think we\u2019ve had anything like it over the last 20 years, but stagflation was a period of a stagnant economy, which so far, fortunately, we don\u2019t have and high inflation, which at the moment we do have.<\/p>\n
Oh, oh, I thought stagnant like there was no inflation, like we have had such low interest rates since-<\/p>\n
Oh, no, no.<\/p>\n
Okay. Okay.<\/p>\n
Yes. See, I\u2019m dating myself and thank you for pointing that out, but just for our audience, stagflation was a term coined in the 1970s to describe the economic environment, which is I say lasted for about a decade where you had very high inflation rates in a very stagnant economy. As you pointed out, for the last 20, actually probably closer to 40 years now, we\u2019ve had very low inflation and declining interest rates, so a totally different kind of environment. Right now, we have high inflation, which has sprung on the scene in the last year or so, and fortunately, we have a robust economy still.<\/p>\n
Awesome. So I think that\u2019s great setting the stage from an economic point of view, but how do we set the stage from a personal point of view? What got you into this first investment and what were your life circumstances at the time?<\/p>\n
Yeah. So I was obviously a much young man at the time. I was in the first few years of my professional career, and I was doing pretty well, and I had a nice little apartment where the rent was cheap and I was perfectly happy, but everybody in the world at the time was saying, \u201cYou have to buy real estate. You have to buy real estate. You have to buy real estate,\u201d and because I was young and naive, I thought, \u201cWell, I don\u2019t particularly want to buy real estate, but I guess I\u2019d better buy real estate.\u201d
Because I had zero interest in actually doing this, what it took was my old college roommate who lived in Chicago at the time, who was very eager to buy himself, and he was out diligently looking and he found this building. There was an old courtyard building built in probably early 1900s, 1910, 1920, something like that. The concept was they were gutting this building, this three-story building, and you were going to have this charming old building with brand new apartments in it, and that appealed to me and that appealed to my buddy, Steve.
So my first mistake was I figured, \u201cWell, Steve\u2019s done all the leg work. Why should I go and do any due diligence on this? I\u2019ll just follow in his footsteps, and buy a condo in the same building.\u201d<\/p>\n
So what happens next? Did it work out?<\/p>\n
Yes, from episode 285. Everything was great.<\/p>\n
Yeah. If it had worked out, then I wouldn\u2019t have done a book in it for me, which is the silver lining I had to wait about 40 years for, by the way. Yeah, no, it really didn\u2019t work out very well. Steve\u2019s father was a banker and he was also investing in real estate at the time and eager to see his son and my extension, his son\u2019s buddy, benefit from real estate, which, of course, as we all know can only go up, but what none of us knew at the time was the Chicago real estate market was about to collapse.<\/p>\n
So your plan going in was, \u201cHey, this building\u2019s going to get fixed up. My buddy\u2019s interested in it and telling me all these great things. I\u2019m going to buy it. Things are going to go up and I\u2019m going to make \u2026\u201d Did you have a timeline? Did you have any expectations around it or really anything beyond \u201cI\u2019m going to buy it and it\u2019s going to go up\u201d or what was was the framework you were approaching the problem from?<\/p>\n
Well, the framework was, A, again, the advice that went unchecked on my part, and again, first mistake was you should definitely own real estate. Renting is not a good thing to do, and if anybody who reads the book and looks at the math, and it will see that at least in this case, renting was absolutely the thing I should have continued to do, but it would\u2019ve been in January, February, and it\u2019s testing my memory both from the time I wrote the book last year and, of course, 40 years ago, but early in 1979, my buddy Steve had actually put in a contract to buy his condo, and I followed suit and put in a contract to buy one in the same building.
The idea was because the building was being gutted, it would take about six months for these things to be finished. So we\u2019d be closing and moving in sometime around, theoretically, sometime around August 1st. I could go into a monologue and describe the sequence if you want me to, but I\u2019m not sure that\u2019s best for the interview, but I\u2019ll leave that up to you if you want me to do that or just go step-by-step.<\/p>\n
I\u2019m going to look into my crystal ball and say they didn\u2019t meet the August 1st deadline. Did they, Jim?<\/p>\n
Well, your crystal is flawless as it turns out. You might have even read the book, which might have given your crystal ball a little polish.<\/p>\n
Not only have I read the book, I\u2019ve lived this story, too.<\/p>\n
Well, there you go. So yes, you\u2019re correct. They didn\u2019t meet the August 1st deadline and silly me. I had heard at that point the advice that if you\u2019re involved in building something or doing a major renovation, you spent a lot of time going to the site and checking it out. Again, I was impossibly naive, which, by the way, is the title of one of the chapters. I was impossibly na\u00efve, and I figured, \u201cWhy am I going to go to the site? I don\u2019t know anything about renovating a condo. I\u2019m a busy guy.\u201d So I didn\u2019t go to the site. I figured these are competent people. They would get it done. Bad thing to figure out at the time.<\/p>\n
I\u2019m sorry. I\u2019m not laughing at you.<\/p>\n
Mindy\u2019s evil laugh there. Wow.<\/p>\n
I\u2019m laughing at I\u2019ve been there. I\u2019ve been there.<\/p>\n
You\u2019re laughing with me, are you?<\/p>\n
I\u2019m laughing with you.<\/p>\n
Well, I certainly deserve to be laughed at, I mean, there\u2019s no-<\/p>\n
No. It was the phrase, these are competent people.<\/p>\n
Well, yeah, right, which is a laughable thing to say, and it was an even more laughable thing to believe, but anyway, that was the assumption that I made. So there\u2019s another mistake upfront. Along about the middle of July, it finally occurred to me, \u201cOh, this condo that I bought should be about done, and maybe I should go over and see how wonderful it looks,\u201d and so I did, and it looked exactly the same as it did in February. I mean, it hadn\u2019t been touched. Not a mode of dust had been moved, and it was gutted, I mean, as it had been when I had first seen. It was gutted to the \u2026 What do you call it? The lath in the old buildings, right?
I mean, I was horrified because, of course, I\u2019d given notice at my apartment that I was \u2026 I thought I was being so clever because instead of saying I\u2019m moving out on August 1st, which would\u2019ve been really silly, I said September 1st. I thought giving myself that extra month was very clever.
Well, now, I\u2019m looking at a place that is in two weeks from when theoretically it\u2019s done and I\u2019m moving in and closing, and it hasn\u2019t even been started. So I was more than a little outraged. I was down in \u2026 I use his initials to protect his anonymity, although why I do that, I don\u2019t know, but YP are his initials. I was down in his office with my fists on his desk leaning over and threatening to climb down his throat, and he was assuring me, of course, that everything would be done by August 1st, which even I wasn\u2019t na\u00efve enough to believe.
What\u2019s interesting is what he had been doing, and you have to understand at the time the real estate market in Chicago had been red hot and like we\u2019re seeing in the real estate market today, I would say, and the prices of properties were going up dramatically even within month over month.
So what YP was doing is he wasn\u2019t even trying to finish these apartments that he\u2019d sold, and there were 52, I think, in the building. So he\u2019d sell them, he\u2019d collect the down payments, and then he\u2019d just sit on them. When the outraged owners would come storming in into his office like I did, what he would say is, \u201cWell, why don\u2019t I just give you your money back?\u201d A lot of people were smarter than me said, \u201cYes, I want my money back,\u201d and then he\u2019d refund the deposit, and he\u2019d simply turn the unit around and resell it for another 15%.
Well, this was wonderful as long as the real estate market kept cranking its way up, but on that July day, what neither YP or I realized is the Chicago real estate market, particularly the condo market, and condos seemed to get hit hardest first when the market turned sour was in the process of plummeting. So he said, \u201cWell, why don\u2019t I give you your money back?\u201d I said another mistake I made, \u201cNo, I don\u2019t want my money. I want the condo. I want to live in this place.\u201d I so wish I\u2019d said, \u201cYeah, give me my money back,\u201d because within a month or maybe six weeks, all those apartments that he\u2019d been able to successfully turn over and resell over and over again suddenly that merry-go-round stopped, and he wound up with a building that was half empty and at that point unsellable.
Of course, there\u2019s no way he\u2019s giving me my money back at that point. A month, six weeks later, I was demanding my money back and he was not only refusing, but he simply didn\u2019t have the capability to pay it back. Then things got really ugly because now he can\u2019t meet his commitments to the bank, and now he has to try to actually finish these units so he can close on them and get the balance of the money to satisfy the bank. Of course, as you pointed out to me, and I should have recognized, I\u2019m not dealing with somebody competent. So getting the apartments finished was a whole another nightmare that didn\u2019t go well.<\/p>\n
So you\u2019re supposed to move in on August 1st. When did you actually end up moving in?<\/p>\n
So his memory serves, it\u2019s probably October 1st, and in my defense, I probably moved in to the nicest department in the building because while I didn\u2019t pay any attention in the beginning as I should have, after July 15th I was paying intense attention. I don\u2019t want to say threaten the man, but I was an intimidating presence in his office on a regular basis. So I think my place got more attention than most, but the other thing is that he made a critical mistake. I made a lot of mistakes in this journey, but YP made a critical mistake at one point, and I think out of his desperation to get these things closed so he could get that money from the bank. He let me move in before we closed and before the apartment was fully done.
So now, I\u2019m living in this place and it was essentially done. I had a checklist of things that needed to be finished and fine tuned, but it was perfectly livable. Now, I\u2019m in it. I don\u2019t actually own it because we haven\u2019t closed. I\u2019m not paying any rent so I\u2019m living rent and mortgage-free. So I suddenly went from being in a very bad position being in a very good position, and I would refuse to close until they completed this checklist that I had.
YP would keep saying, \u201cWe\u2019ll complete it and let\u2019s set up a closing day,\u201d and I\u2019d say, \u201cOkay. Let\u2019s do that,\u201d and they\u2019d finish a couple things on my list. Closing day would come and I\u2019d cancel it because the list wasn\u2019t completed. Of course, that made him crazy. That made his lawyer crazy. That actually made my lawyer, who I engage, crazy, but my lawyer Wayne had said to me when I was so outraged in trying to get out of this deal because the contract had said, if it wasn\u2019t finished by a certain time that he was obligated to refund my money and, of course, he just refused to honor the contract.
My lawyer Wayne pointed out that there was no real practical way to enforce that because of the cost of litigation that it would take. So when YP said, \u201cYou don\u2019t like it. Sue me,\u201d he knew my hands were tied. Well, when Wayne was saying to me, \u201cJL, you have to close. I mean, the law says that when essentially it\u2019s done and you\u2019re just down to a checklist, you have to close. You can\u2019t keep canceling these closings like you\u2019re doing,\u201d and you can imagine what I said to Wayne. I said, \u201cLet him sue me.\u201d<\/p>\n
Okay. So I am listening to this and I\u2019m thinking a lot of things. First of all, poor Wayne. I can completely understand what Wayne is thinking, and YP, I don\u2019t feel at all bad for him because I\u2019ve dealt with YP many times and, sorry, you should have honored your obligations in the beginning. Back to the beginning when you said you weren\u2019t checking in on things, I don\u2019t know if anybody else\u2019s condo units were getting worked on at all, but the squeaky wheel gets the grease, and if you\u2019re not there checking on your stuff, they\u2019re not going to work on it at all. Were they working on anybody else\u2019s unit?<\/p>\n
I think they were, but probably not as diligently as on mine because I was the squeaky as possible wheel. Again, he had a very small crew to do the work because he never intended to do the work. That wasn\u2019t his strategy. He was just going to keep reselling these things, I guess, forever, because he like everybody at the time believed that real estate could only go up and that they would only be more valuable six months from now than they were at that particular point.
By the way, I absolutely agree with you. I have no sympathy for YP. He eventually fled the country, actually, went back to his home country and he just left the bag, hold the bag, and they auctioned the remaining apartments, which by the way, went for about half what I paid for mine.<\/p>\n
Of course.<\/p>\n
To give you an idea, that\u2019s just the beginning of the disaster that this-<\/p>\n
What did you pay for yours?<\/p>\n
So I put down $5,000, and you have to inflation injustice to make it significant, of course, and in the book I do that. My memory\u2019s not good enough to do it for you in our interview here, but I put $5,000 down on a $45,000 condo. The base condo was 40 grand and I took all the options, which added 5,000 to it. Then when they went at auction and, of course, they didn\u2019t have the options because the condos that got auctioned off were not finished, they were in various states of progress, so some of them were just shells. Some of them were, I guess, pretty far along, but they went for $20,000-$24,000 at auction, and there were about half the building.<\/p>\n
Were these luxury condos like really in a pretty nice place?<\/p>\n
I guess today with the hype around everything\u2019s luxury, so I guess somebody selling it today would\u2019ve called it a luxury condo. Mine was actually, when it was finally done, was a very nice place, a nice space. It was a one bedroom, one bath. I don\u2019t remember how big it was. It wasn\u2019t terribly big. Probably 700-800 square feet, something like that, but it was nicely finished. As I say, I took all the options and it did turn out to be basically a new apartment in a charming old building.
So the project had the potential to be really nice, and I think ultimately became a nice building as the owners themselves took over and finished their apartments. Then of course, the common areas of the building were not finished when he fled and left everybody holding the bags. So that required special assessments on all the owners to raise the money to finish the common areas.<\/p>\n
Okay. I want to jump in here again and say to those of you who are listening who are thinking, \u201cOh, I want to get into real estate,\u201d listen to Jim\u2019s story. He said condos were going up month after month. Prices were just continuing to go up. That\u2019s where we are right now in much of the world or, I\u2019m sorry, much of the United States. There are some markets where this isn\u2019t the case, but in most markets, we are seeing exponential growth month over month. What are we in Denver? It\u2019s been 27% price increase over the last 18 months or 12 months or something like that. We just had a fire that has taken out a thousand houses in two cities just south of me that is going to affect the real estate market for years to come because that was a thousand single family homes.
The market is marching north, but that doesn\u2019t mean that it will always go up. I mean, listen to Jim\u2019s story. Real estate only goes up. May I remind you 2008, 2009, \u201910, \u201911, \u201912. The market can go down. I wanted to have you on the show to share your story about how you don\u2019t always make money in real estate because BiggerPockets can be really, really good at you to do these things, but we also try to encourage you to run your numbers and invest or buy like you\u2019re buying an investment. It sounds like you bought because Steve told you to, which is I bought because I wanted to and Scott bought because Brandon told him to. You don\u2019t just buy a house because you feel like you should get into real estate. You buy a house to \u2026 I was going to say you buy a house because it\u2019s a good investment, but it\u2019s not an investment, and it could be an investment.
I mean, my houses are investments, but that\u2019s because I buy the worst dump on the planet. I bought those to condos that were not done. I forced the appreciation, but I don\u2019t know where I was going with this. There\u2019s a lot of parallels with this market that you were in and the market that we\u2019re in right now.<\/p>\n
Yeah. It feels that way. Now, of course, we don\u2019t know for sure where the market we\u2019re in right now is going. I mean, it could continue to go up. As you mentioned in Colorado where you are and I happened to be in Colorado when that fire took place, I was in Golden, which is just south of there. What a tragedy. So I mean, there are factors like that are driving up the prices at least in Colorado.
As we travel around the country, I mean, I hear it everywhere we\u2019ve gone how prices are going up, and we are in an inflationary economy. So I don\u2019t know where this market is going. The same thing I say when I talk about the stock market, I have no idea what the stock market\u2019s going to do next. I do know that the stock market plunges periodically. That\u2019s a natural part of it, and real estate plunges periodically. That\u2019s a natural part of the process.
You mentioned 2008. The time I\u2019m describing, which was in the beginning of the 1980s are both cases of that happening. I wouldn\u2019t, by the way, lay all the blame of my tragic story at the feet of my buddy Steve, although he was the one who lured me in this particular building, but everybody at the time, and I mean everybody was saying, \u201cYou have to buy real estate,\u201d especially if you\u2019re young and single and you were renting and renting is throwing you, all the same stuff that I hear today.
So it was an environment that I let myself get swept up in, and I was young and naive and I didn\u2019t step back and say, \u201cWait a second. Is this right for me?\u201d Setting aside anything macro because I don\u2019t think anybody is much less I could have predicted that the market was about to plunge in 1979, but what I could have done is stepped back and said, \u201cWait a second. Is this really the right thing for me to do? Does it really make economic sense to give up an apartment that I liked, that I was enjoying, that I was paying $160 a month for,\u201d and again, remember you got injustice stuff for inflation, \u201cand move into a condo that was going to cost me $270 a month in mortgage and assessments and everything?\u201d
By the way, of course, I had no way of knowing this at the time, it wound up being $570 a month, which with all the special assessments and everything that came later. So clearly, is that a good economic decision? Setting aside the fact there was no appreciation. In fact, as we talked about earlier, they went in auction at half what I paid, but doesn\u2019t make any economic sense to give up $160 a month apartment that you like, that you enjoy to go into a condo that is going to cost you for sure $370, and actually turned out to be 570.
Clearly, the answer to that is no. That\u2019s not a good economic decision to have made. Then I would\u2019ve set back and said, \u201cWell, does the condo offer me a lifestyle that is worth all that extra money to me?\u201d The answer there, yeah, it was nicer than my apartment, but I didn\u2019t care about that. It wasn\u2019t that much nicer. I much would\u2019ve preferred to have that extra money each month to invest.
So I think those are the kinds of mistakes I made, just some of them. The book is filled with many more, but those are the kinds of things I would suggest that anybody looking in this environment asks themselves. Go ahead.<\/p>\n
Yeah. So we\u2019re in this spot now where you\u2019ve got this condo, you\u2019ve already given us a sneak peak that there\u2019s special assessments that are coming down the road in addition to it being worth half what you paid for shortly after you closing the deal. What\u2019s the next phase of the journey? Is our story over at this point?<\/p>\n
I want to jump in here before Jim answers and say I have never owned a condo that didn\u2019t have a special assessment. Never in my whole life that I\u2019ve owned condos I\u2019ve not had a special assessment. Okay. Jim, what\u2019s your next story?<\/p>\n
Well, let me address that first, Mindy, and then I\u2019ll go back to, if I can remember Scott\u2019s question, we\u2019ll go back to it, but at the same time, I bought a condo for my mother in Florida, and the only condos that don\u2019t have special assessments that I\u2019m aware of are ones that have very large regular assessments, and then they create a pool of money for when those big things happen.
The condo that I had bought for my mother was, she was retired, and it was filled with retired people, and they tend to have cash on-hand. So they wanted the smallest possible assessment monthly to cover their basic expenses, and then every now and again if they needed a new roof or they wanted to repave the parking lot or something like that, I\u2019d get a notice saying, \u201cOh, we\u2019re going to repave the parking lot, and there\u2019s a special assessment of $5,000 and it\u2019s due in two weeks.\u201d
Well, when you\u2019re old and retired, then maybe that\u2019s not a big deal when you\u2019re young like I was at the time coming up with five grand in the spur of the moment was a whole another frame of reference. I\u2019m sorry, Scott, real briefly, your question was?<\/p>\n
Well, I was just going to ask you to continue the story and tell us what happens next now that you\u2019ve got this place and it\u2019s worth half what you paid for. You\u2019re getting special assessments. What happens next?<\/p>\n
Yeah. Well, so what happens in the immediate future is now I\u2019m living in this thing and in pretty short order, I\u2019m paying $570 a month or the privilege of living in this thing. I\u2019m just licking my wounds. As long as I don\u2019t sell it, I\u2019ve got a $40,000 mortgage, so if I can only sell it for say $25,000, I mean, I\u2019ve got to come up with 15,000 just to get out from under it.
In the meantime, I\u2019m dating the woman who is about to become my wife and we decide that we\u2019re going to need a bigger place than this when we get married. So I went off and bought a two flat in Chicago, two flat is a term for, what would you call it out in Colorado? It\u2019s a two-family house, basically, which, by the way, I did much better on because at least as painful as this first purchase was, it did teach me. It was a very expensive education, but I did learn.
So the two flat wound up pretty good, but when we moved to that, then I\u2019m left with the conundrum of what to do with this condo, and as I say to sell it would mean taking not only a huge loss, but coming up with 15 grand to satisfy the bank, which I didn\u2019t want to do. So I wound up renting it, and I wound up renting it to a wonderful woman. I actually forget how we found each other, but she was a terrific tenant. She paid her rent on time. She took impeccable care of the place, and then when she left after a couple of years, she actually found the next tenant for me, who was equally wonderful, but the problem with that was I could only run it for 370. Meanwhile, it\u2019s costing me $570. So it\u2019s hemorrhaging about $200 a month just to hang onto it. So that\u2019s the second part of the incredible loss that this thing represented, and then-<\/p>\n
How long does that continue for? How long are you losing money on this property from a rental perspective?<\/p>\n
Well, so that continues for about five or six years-<\/p>\n
Oh, my gosh.<\/p>\n
\u2026 but it gets worse because as I say, my first tenant was kind enough to find my second tenant. The second tenant was kind enough to fine me a third tenant who was also \u2026 So the one bright spot in this thing is I was very lucky with the ease of finding tenants and the caliber of tenants that they were. They all took great care of the place. They paid the rent, exactly what you want with a tenant. Well, my third tenant, what a terrible woman she was, didn\u2019t find me the fourth tenant. Of course, anybody who has rental real estate realizes that your tenant has no obligation to do this, and she certainly didn\u2019t have any obligation.
Then it was unrentable. I began to realize how terribly lucky I\u2019d been in not only finding good tenants, but finding tenants at all. So suddenly, and now, by the way, I have since moved away from Chicago. So I\u2019m doing this long distance, and now I\u2019m not hemorrhaging $200 a month. I\u2019m hemorrhaging $570 a month, and that went on for about 18 months.<\/p>\n
Oh, my gosh. Okay. So what year is it? What year is it, the end of this 18 months? The loss are stacking up to thousands or tens. We lost $25,000 just in the value day one or in the first year or two. We\u2019ve also lost $200 a month for three to five years and now we\u2019re losing $570. So we\u2019re in the 20, 30, 40, $50,000 loss range at this point.<\/p>\n
That\u2019s before you account for inflation. So it\u2019s actually, if you look at it at today\u2019s dollars, it\u2019s my much, much worse. Again, my memory isn\u2019t good enough to do that calculation, but in today\u2019s dollars, the total loss was well into six figures. Then I also do a calculation in the book where what if I just taken this money and invested it in the S&P 500, and that\u2019s really depressing because that amounts up to over a million dollars.
So it\u2019s not just the actual cash lost. It\u2019s also the opportunity cost lost, but in any event, so now I\u2019m sitting on this thing that I can\u2019t rent. I also can\u2019t sell. The market was so bad for condos I couldn\u2019t get a realtor to take the listing. Now, think about that for a second because for a realtor to take the listing requires no effort on their part. They can just take the listing, sit on it, and if the thing happens to sell by some magic, they can collect a commission. I couldn\u2019t even get a realtor to do that. That\u2019s how bad the market was at the time. So I\u2019m stuck with this thing that I for whatever reason can\u2019t find a tenant for.<\/p>\n
What year are we in right now?<\/p>\n
We\u2019re in \u201985-\u201986, yeah, somewhere in that timeframe.<\/p>\n
Okay. Keep going. So you\u2019re not able to get a listing. What do you do now?<\/p>\n
Well, so now I just suffer, I mean, as I say for about 18 months of no tenant and, of course, I\u2019m trying to find a tenant, but when you\u2019re trying to do this long distance, it\u2019s difficult. So finally, what finally brought my pain \u2026 Are you ready to hear how my pain ends or at least before the IRS gets involved, how the pain ended?<\/p>\n
Did it burn down and you didn\u2019t have any insurance?<\/p>\n
Yeah, well, no, no, no. There\u2019s a whole another thing with the IRS, but finally out of the blue, one of the good things to come out of this is that when I was still living in it and YP had fled the scene, and we were the owners of this building. We\u2019re brought together in the way that only adversity can bring people together, right? So we knew each other pretty well. We worked hard together to get the common areas finished, for instance, and to come up with these special assessments that we all imposed upon ourselves to get the building in order.
Anyway, we had become friends and, shamefully, I forget this guy\u2019s name, but he had become the president of the condo association and a good guy. One day out of the blue, he calls me up and he says, \u201cI have somebody who might be interested in buying your condo.\u201d Of course, I can\u2019t tell you what wonderful news this is, right? It\u2019s like somebody calling you up and saying, \u201cI have somebody who has a pile of gold bars they don\u2019t quite know what to do with and they want to give them to you.\u201d I mean, the news could not have been any better than that.
He said, \u201cNo. The woman who\u2019s interested, her boyfriend lives in the building and your apartment actually is adjacent to his apartment.\u201d So not only does she want to be in the building, but as it happens, my unit was the most ideal for her purposes. So anyway, I immediately arranged a business trip to Chicago so I could meet with her. Of course, I was hoping that she was naive and silly and I could take advantage of her, and she wasn\u2019t any of those things. She was sharp and smart and a lawyer, in fact, but she did want the apartment.
So she\u2019s looking at it, and at one point she says, \u201cSo how much do you want for it?\u201d Of course, I\u2019m mentally doing the calculation. I\u2019m saying, \u201cWell, I paid $45,000 for it back in \u201979,\u201d and I realized, and talk about understatement, I realized that the condo market hasn\u2019t gone up much since then. Yeah, Mindy, she was nice to the news. She didn\u2019t burst out laughing in my faith, although she would\u2019ve been justified.
I said, \u201cI realized the market hasn\u2019t gone up much since then, but I\u2019d be willing to take what I paid for at 45,000,\u201d and without batting an eye, she looked at me and she said, \u201cI\u2019ll give you 30.\u201d
Now, at this point, 30 is like manna from heaven. I mean, at this point, I know that this woman and I are going to do a deal. The only question is, how can I get out from under this with, of course, I still basically owe the bank 40 grand, the 40 grand I borrowed because as you know, most of your payments in the early years are interest. It might have been down to 39 grand or something. Anyway, in my mind, I owe the bank 40 grand.
So we go back and forth a little bit and she agrees to buy it for $40,000. So at that point, you say to yourself, \u201cOh, for the great tragedy this is, you only ultimately lost $5,000.\u201d Of course, that doesn\u2019t count all the money that hemorrhaged out over the six years that I held onto it, which I do in the book total up, by the way. So that\u2019s the deal that we struck and that allowed me to get out from under it without having to come up with extra money for the bank, but as I say, that\u2019s before the IRS, before I had to pay tax on my capital gain. Don\u2019t you want to know how you pay tax on a capital?<\/p>\n
The story doesn\u2019t end here, huh? All right.<\/p>\n
Yeah. Yeah. Wait a second. If you sold it for less than you bought it for, I\u2019m not a tax expert, but that sounds like a capital loss.<\/p>\n
Yeah. Well, that\u2019s what I thought, but the IRS explained to me that both you and I are wrong about that, Mindy. So in those days, I don\u2019t think this is true anymore. I know when you own a rental because while I bought this thing to live in it, I converted it to a rental and I began writing off the expenses involved with it, including depreciating it. In those days, you could do something called accelerated depreciation, which basically meant that instead of depreciating over 30 years or whatever it was, you could say, \u201cThis thing\u2019s wearing out faster than normal and, therefore, I\u2019m going to depreciate it over some shorter period.\u201d I forget what that period is, but it allowed you to take a bigger deduction for depreciation.
Of course, because I\u2019m hemorrhaging so much cash in this thing, I am grasping at straws, anything to make the pain a little less, but when you take depreciation, as I\u2019m sure you and many of your listeners know, that reduces your cost basis in an equivalent amount for when you ultimately sell it. So the depreciation I\u2019d taken over those five, six years had taken my cost basis from $45,000 down to $25,000.
So the IRS said, \u201cYeah. You lost $5,000. You sold it for 40. You bought it for 45. You sold it for 40. You lost $5,000, but you\u2019d depreciated it and, therefore, your cost bases is not 45,000. It\u2019s 25,000, and you sold it for 40,000. So that\u2019s a capital gain of $15,000, and we want our cut.\u201d So that was the final bit of pain and injury and insult in the process.<\/p>\n
That\u2019s phenomenal.<\/p>\n
Yeah. I\u2019m laughing now, but it\u2019s taken me years to see the humor.<\/p>\n
Oh, my gosh!<\/p>\n
So it doesn\u2019t sound like adjusted for inflation you lost six figures. It sounds like you lost six figures in the \u201980s, too.<\/p>\n
I don\u2019t know that was that close. I was probably 40, 50, 60 grand in those dollars. As I say, I run the numbers in the book and it\u2019s comfortably into six figures when you take inflation into account for today. So in fact, I actually do a chart in the book. I don\u2019t have a copy of the book with me or I\u2019ll look it up. I do a chart taking all the numbers that I mentioned in the book because I mentioned that the numbers as they were at the time and I calculate what they would be in inflation adjusted numbers. So people, if they\u2019re curious, can go and look and say, \u201cWell, $160 a month for an apartment is stupid cheap,\u201d and of course, even then it was a good deal, but you can look at what the equivalent would be today for that apartment.<\/p>\n
So if you could go back and think it through, what would you do instead of this purchase and the whole journey that we just unpacked here in great detail?<\/p>\n
Oh, Scott, I would\u2019ve gotten a pack of about a $40,000 bills and I would\u2019ve sat outside and lit them on fire one at a time, and it would\u2019ve been less painful and more entertaining. No. Well, first of all, my apartment, when I first went to look at it in July and he offered me my money back, I should have grabbed that with both hands because he didn\u2019t realize that the market had turned on him, and I had been an excellent tenant for the apartment where I was renting for a number of years, and my landlords loved me and I could have easily gone back and said, \u201cHey, I want to continue renting,\u201d and they would\u2019ve been happy to let me stay in my $160 apartment.
Moreover, even going back before that, when my buddy Steve was so excited about buying a place for himself and the world around him and around me was all saying, \u201cYou got to buy real estate. You got to buy real estate,\u201d I should have taken a step back and said, \u201cWell, is this really right for me? Is this really something that I want?\u201d and the answer to that question even then would\u2019ve been no. I mean, I was perfectly content in my apartment. Even if things had gone swimmingly with the condo, it would\u2019ve been considerably less expensive to continue to live in the apartment. So yeah, I wish I had had the wisdom not to get swept up in the mania, in the common wisdom that you have to buy.<\/p>\n
What about once you\u2019re in the deal, you got it, and you got to deal with it? Anything you would\u2019ve changed following the purchase once you had the property or already in the whole and from that point on?<\/p>\n
Yeah. I\u2019m not sure that there was anything I could do other than what I did. I mean, I think I made most of my mistakes in the beginning, but once I\u2019d closed on the thing, the die was cast and you have to live with your decision, right? That\u2019s another important lesson, I guess, to come out of this is that once you close on the property and you own it, you have to live with that decision, and if it turns out to be a good decision and it keeps appreciating or it\u2019s the place you really want to live and you enjoy it, even if it costs more than where you were before or if it\u2019s a rental and you\u2019ve done your homework and it\u2019s positive cash flow and doing well, then those are all good things, but even if you make a colossal blunder like I did, you own it, and at that point, you just have to figure out how to deal with it.
In my case, I had to keep digging into my own pocket to make up the shortfall, well, between what I\u2019d been running for initially and what the 570 bucks a month this thing was now costing me, which was more than I had figured on because I didn\u2019t count on the special assessments, but I just had to dig deeper in my own pocket, and then when I rented it, I had to keep digging into my own pocket to make up the difference between what I owed the bank and my assessments and what I was able to get in rent.
By the way, that\u2019s another great lesson that I would caution anybody listening to this who\u2019s not familiar. Landlords don\u2019t get to set the rent. I hear all the time that, \u201cWell, of course, owning is better than renting because if you\u2019re renting, you\u2019re paying all the owner\u2019s cost plus a profit to that owner.\u201d Well, sometimes if the guy you\u2019re renting from, if the person you\u2019re renting from has done their homework and done a good job, that will be true, but that\u2019s not always true. There are a lot of people like me that get forced into renting places that back into it, where your rent is a screaming bargain compared to what it actually costs. So landlord doesn\u2019t set the rent. The market sets the rent. If I\u2019d been able to set the rent, I would\u2019ve set it for $650 a month, but I don\u2019t have that option. The market sets what the rent\u2019s going to be.
If you\u2019ve done your homework as an investor, well, you know what the market is going to set that rent at and what you\u2019re considering buying, and you make sure that you buy it in such a fashion that that rent that the market is setting for you is profitable. If you do stupid things like I did, you wind up owning something that is far more expensive than what the market\u2019s allowing it to run for.<\/p>\n
Now, I think it\u2019s super valuable perspective, and I love that you\u2019re like, \u201cHey, the answer to all of this is live with the decision once you\u2019ve made it,\u201d and really all of these factors downstream no matter how good you got of the eventually at managing that property and making the decisions that you could to optimize from there, there was just really not much you could do to change the situation. It was determined by the market and you had to live with it for as long as it took to get out from under it.<\/p>\n
Yeah, exactly. You also don\u2019t get to decide when to get out from under it in all the cases. As I say, I couldn\u2019t even get an agent to take the listing. That\u2019s how hard it was to sell this thing. So I had to just suffer through it until finally the right buyer happened to walk in my door. Thankfully, the president of the association who she reached out to, he and I had stayed in touch and he knew that I was, I was going to say interested selling, desperately probably is the better word. So, yeah, I mean, it pays to keep all your doors open, I suppose, but yeah.
So once you own it, you have to live with it for better or worse, and there\u2019s the compelling case for not doing what I did, and rather going into it with your eyes wide open and having done your due diligence and your homework before you sign on the dotted line.<\/p>\n
If you\u2019d held onto it for another 10 years, what do you think would\u2019ve happened?<\/p>\n
I don\u2019t think it was so deep underwater that I\u2019m not sure 10 years would\u2019ve done it. If I\u2019d held onto it until now, maybe it would\u2019ve turned out okay. It depends, Scott, on whether I\u2019m holding onto it as an investment property or as something to live in. If it had suited my living needs for a longer period of time, then it would\u2019ve just been an expensive place to live in.<\/p>\n
Could you have bought another property in Chicago around that time and done much better on it if you\u2019d been looking at it from an investment mindset?<\/p>\n
Well, not only could I, I did. That was the two flat that I bought. So I bought the two flat I want to say in \u201981, a couple years later. The good news such as it is is that this was a real education. This condo was a real education. So when I decided that I was going to buy the two flat, I was a much older and wiser real estate buyer at that point. I did a whole lot more due diligence. I was a whole lot more savvy in how I approached it. That deal turned out pretty well. In fact, it turned out very well. The only mistake I made with that one is I should have held onto it a little bit longer, but again, by then I had moved out of Chicago and I was not com comfortable being a long distance landlord even though on the two flat it was cash flow positive.
In fact, if I look at it holistically once I own the two flat and I own the condo simultaneously, the two flat was positive enough that it was paying for the losses on the condo. So I didn\u2019t have to dig into my pocket in the same way that I did before that, but of course, that also means that instead of the two flat adding money to my pocket, it was just making up for the mistake, for the massive mistake the condo represented.<\/p>\n
Well, what I love about that is that we started off this with the circumstances of the market and how eerily similar they are and then the disaster that you just went, that was this condo purchase, but we\u2019re hearing that even in a tough market like that, with your savvy purchase on the two flat you were able to generate cash flow and achieve value creation over your whole period with that.<\/p>\n
Yeah, and by then, the market had cooled quite a bit, but as we talked about at the very beginning of our conversation, this was a period of very high inflation. What\u2019s interesting about that? I don\u2019t know. I don\u2019t tell the two flat story in this book, but I actually bought that for no money down. I did that by getting a mortgage from the bank for, testing my memory, I think for 75% of the purchase price, and interest rates in those days, I think my mortgage was 16%-17%. Then I negotiated a deal with the seller for the other 40,000 or the other 25% or whatever it was for I want to say 7%. So I wound up with a blended interest rate, if you will, of around 13%, which, of course, sounds horrific to anybody listening today, but at the time, it was a very, very attractive interest rate. Yeah.
Now, the mistake I made on that one, by the way, is I had read this book called Nothing Down about buying real estate with nothing down, and I thought, \u201cWell, that\u2019s a pretty cool idea,\u201d and I made that my goal, and I accomplished that goal, and it turned out to be pretty profitable overall, but the mistake there was that\u2019s the wrong goal, at least in my opinion. You should never go into buying real estate, as an example, with your goal being, \u201cI\u2019m going to buy this with nothing down,\u201d unless you have no money.
I had money to put down and, in fact, I could have done a better, more profitable deal by putting money down, and the goal should have been, \u201cI want to buy this piece of real estate in the most advantageous possible way for me with the resources I have.\u201d In my case, I had resources to put money down. I had the knowledge to do it without putting money down, and I should\u2019ve looked at those two options, and if I\u2019d done that, I would\u2019ve, for a variety of reasons, I would\u2019ve put money down, but anyway, both those options were far better than the condo.<\/p>\n
Yeah. Wow.<\/p>\n
Well, and we\u2019ve talked about the money that you lost. This has been a lighthearted retelling of the story, but we didn\u2019t really get into the stress that you \u2026 This was a very stressful time, I\u2019m assuming. It was very stressful for me when I first read the book. I was reading through them like, \u201cThis is my condo in Chicago,\u201d and I remember just we would have these meetings and it was so stressful. You look back at it now and you\u2019re like, \u201cWell, that was a $10,000 problem,\u201d but at the time, $10,000 was a lot of money. At the time, $40,000 was a lot of money. Losing $150 a month or $300 a month or $570 a month was a lot of money that you had to come out of your pocket, and you\u2019re not thinking at the time, \u201cOh, well, my other property is making up for it so everything\u2019s okay.\u201d You\u2019re thinking to yourself, \u201cI have to write another darn check for $570 to the bank every single month. I could have been renting for $160.\u201d We don\u2019t talk about the stress and the sleeplessness and the anxiety that you\u2019re feeling for, and this was for six years that you had this. I mean, did you ever think one time, \u201cYay! Hooray! Real estate\u2019s awesome\u201d?<\/p>\n
Well, yeah, when I sold it and before I realized-<\/p>\n
A manna from heaven.<\/p>\n
\u2026 and before I realized what the IRS would have to say about it. I was saying, \u201cYay!\u201d The IRS took the yay away. Yeah, I\u2019m laughing about this with great-<\/p>\n
I think that\u2019s your motto.<\/p>\n
Yeah. I mean, at this point, with a distance of 40 years, I could see the humor in it and I\u2019ve gotten a book out of it. So there is the upside, but at the time, I would not have been able to chuckle for this as we\u2019re doing it at the time. I mean, I would not have been able to see the humor, and I don\u2019t remember feeling stressed. I remember feeling extraordinarily aggravated.
The other reason that I bought a condo is I bought into this concept that if you buy a condo, it\u2019s worry-free, you don\u2019t have to mow the lawn. Well, that\u2019s true. In the entire time I own the condo, I never once mowed the lawn. What I didn\u2019t count on was the endless meetings with lawyers and the endless battles with YP before he fled, and then the endless conversations with the other owners trying to figure out how we were going to fix this, how we were going to finish the common areas that had been left undone, and how are we going to raise the funds for that.
So I never had to fix the plumbing or mow the lawn or shovel the snow, but there was endless work involved in owning this thing, so endless. I think, Mindy, it comes down to there was so much aggravation I didn\u2019t feel the stress. The aggravation just overwhelmed the stress and the work. So yeah, it was an enormous amount of work and effort. Again, as I say, the good news is that was provided a tremendous education, which probably has benefited me and certainly benefited me with the next real estate purchase, but yeah, but there was lots of aggravation and probably lots of underlying stretch and certainly no laughs.<\/p>\n
Well, is there anything else that we should know about this experience before we adjourn here?<\/p>\n
I think we\u2019ve covered it pretty thoroughly. I mean, I tell the story in a more coherent fashion in the book, and as they say, the numbers are there if anybody\u2019s curious, not only is the actual numbers and the dollars of the day, but also inflation adjusted if people want to play with that, but my subtitle on it is A Cautionary Tale, and that\u2019s what it is. This is not a book telling people don\u2019t buy a condo or don\u2019t buy a house or don\u2019t invest in real estate because all those things can be good things, and I have done all of those things and have had them be good things for me as well. It\u2019s a cautionary tale into not being impossibly naive in how you approach it, doing your homework.
Again, I would applaud you got on BiggerPockets for the educational resource you are to help people not make the kind of mistake that I made. I like to think that if BiggerPockets has been around at the time, I would\u2019ve been at least smart enough to take a look at it and might have saved myself a whole lot of grief. On the other hand, I wouldn\u2019t have a new book out.<\/p>\n
Yeah. So I definitely encourage folks to check out the book. The book is called, again, How I Lost Money In Real Estate Before It Was Fashionable, subtitle, A Cautionary Tale as you mentioned there. It\u2019s a wonderful, fun, quick read. I think you are able to make light of the situation looking back on it. I think you learn a lot about the mistakes that can lead to enormous piling up losses in real estate. For me, for one, coming out reading the book, I felt actually better about my real estate investing and the way I approach it from reading it because it is good to hear that you can lose money from all this stuff, but feeling like, \u201cHey, okay. I\u2019m a little bit more prepared than maybe Jim was going into this purchase of this condo.\u201d<\/p>\n
\u201cMy goodness, JL, I\u2019m not that stupid.\u201d<\/p>\n
Yeah. I have these concepts around cash flow. So I think it was really helpful to get that view and it was a fun read and reinforced a lot of the core beliefs I have around really self-educating around this, knowing the numbers and running them before buying real estate.<\/p>\n
I appreciate that take, Scott, because that\u2019s exactly how I wrote it. It\u2019s a very short book. It\u2019s meant to be a very entertaining, fun read. It is meant to have a serious message underlying it that here\u2019s a classic example of lots of things that can go wrong if you\u2019re not careful. I mean, it almost reads like fiction because so many things go wrong, but everything in it is absolutely true.
The other thing I\u2019ll throw out is it\u2019s filled with wonderful illustrations, and I can call them wonderful because I didn\u2019t do them, but I found just a terrific illustrator who I think is just spot on with the illustrations that go along with the story. So I think it\u2019s a feast for the eyes and, hopefully, it\u2019s a fun read as it was for you. Then yeah, it\u2019s worth, hopefully, being a cautionary tale for those who need a cautionary tale. Certainly, I would hand it to anybody before they go out and buy something.<\/p>\n
Absolutely.<\/p>\n
A feast for the eyes of the reader, but a famine for Jim Collins.<\/p>\n
Well, I\u2019ve recovered since, but it was nip and tuck there for a while.<\/p>\n
Yeah. If you\u2019re thinking about buying real estate, you should read this book, and if this book can scare you out of buying real estate, then choose another investment vehicle because this book is not even close to the worst thing that can happen to you in real estate.<\/p>\n
You got them mortified to hear that.<\/p>\n
You didn\u2019t even have a tenant that trashed your whole house, did you?<\/p>\n
No, and that, Mindy, is a great point because when I was investing in real estate back in the day, and especially this is before the internet, I don\u2019t know if it\u2019s still true because I no longer invest in real estate, but back in the day when you invest in real estate, you wound up getting to know other real estate investors because you tend to \u2026 Also occurred to me that I was the only real estate investor that I knew who didn\u2019t have a tenant horror story, who didn\u2019t have a story of a tenant trashing their place. I was the only one, and I knew quite a few at that point in Chicago, and suddenly, it occurred to me that it wasn\u2019t that I was smarter than all these other people because clearly, I wasn\u2019t, it just that my time in the barrel hadn\u2019t come. I\u2019d just been lucky.
In hearing their stories I thought, \u201cI don\u2019t want to deal with this,\u201d and that\u2019s why I got out of real estate investing. It actually made me money. This was a bad start to it, but overall, it made me money, but it just felt like too much work. Ultimately, with the bad tenant thing, too much risk that I just didn\u2019t want to deal with, but that\u2019s me. I mean, people, as you well know, people have made fortunes in real estate if you go in with your eyes wide open and having done your homework. So there you go.<\/p>\n
That\u2019s the best way to invest by being prepared and doing your homework, and what do you say, Scott? 150 to 250 hours of research before you start investing.<\/p>\n
I think that\u2019s the starting point. That\u2019s the minimum price to pay before getting into real estate investing.<\/p>\n
250 to 500? Yeah.<\/p>\n
Where were you in 1979 when I needed you?<\/p>\n
I\u2019d blame Josh on that.<\/p>\n
Why didn\u2019t you call me up?<\/p>\n
It was a tough year for me.<\/p>\n
Oh, my God! I was in second grade.<\/p>\n
Well, Jim, where can people find the book?<\/p>\n
Well, the easiest way to find it I suppose is on Amazon, and the easiest way to get to it on Amazon actually is to go to my blog, jlcollinsnh.com, and if you click on it, there\u2019s a cover of How I Lost Money In Real Estate Before It Was Fashionable, and then right below that is the cover for Simple Path to Wealth. Click on either of those, it\u2019ll take you to Amazon and you\u2019re good to go.<\/p>\n
Awesome. We\u2019ll also link to all of that at the show notes at biggerpockets.com\/moneyshow285. For anybody that is interested in checking out any of these books, go to Jim\u2019s site, go to Amazon or go to the show notes link there.<\/p>\n
Jim, thank you so much for your time today. Thank you for being 1% of the guests that we have ever had on our show, and thank you for sharing your story of losing money in real estate because we don\u2019t do that enough here. So I appreciate you taking time out of your very busy day of doing nothing all day long to talk to us.<\/p>\n
Yeah. I could be out sightseeing. Instead, I\u2019m hanging out with you. Hey, I appreciate the invitation to come back. It\u2019s always a pleasure to hang out with both of you in the real world, but also on the podcast. So anytime you want to have somebody on that you can laugh and mock regarding my real estate condo, I\u2019m available.<\/p>\n
We will certainly do that.<\/p>\n
Awesome. Okay. Thanks, Jim. Say hi to Jane for me and we\u2019ll talk to you soon.<\/p>\n
Will do.<\/p>\n
Thanks, Jim.<\/p>\n
Take care. Bye-bye, guys.<\/p>\n
Okay, Scott. That was JL Collins. That was a lot of fun. Honestly, when I was reading his book, that was a lot of PTSD because I went through almost the exact same scenario in the same city that JL Collins went through. I bought a condo that was supposed to be rehabbed. It wasn\u2019t. It wasn\u2019t rehabbed correctly. I think the guy did end up skipping town. Just a whole lot of disasters. I did not lose quite as much money as he did, but this was back in 2001 where the market was starting to climb up. I think I broke even, but I sold it after a year instead of after seven years of renting it lower, but still, all the stress, all the anxiety, all the everything, I relived it, and it didn\u2019t dampen my spirits for real estate, obviously.
I love real estate, but one of the key takeaways that I got from that book is if this story freaks you out, absorb that freak out. Let that freak you out and realize that real estate isn\u2019t the right investment vehicle for me at this time. You can explore it again later. Maybe down the road you\u2019ll be in a better position to invest in real estate. Maybe the market will be in a better place for you to jump in, but if this story freaks you out, I want you to let that freak you out and take a step back and learn from it. If it doesn\u2019t freak you out, please visit biggerpockets.com and learn, learn, learn.
What do you say, Scott? 250 to 500 hours is the starting point for where you need to be doing your investment research before you buy a property. I mean, buying a property and jumping in with both feet, I know you are trying to answer me, Scott, and I\u2019m just on a roll. Let me keep going. Buying a property and jumping in with both feet is going to be the best education possible. Listen to Jim. He just shared this, this really great education he got, but if you can learn those same things without the pain and anxiety, that\u2019s better. You don\u2019t need to go to school of hard knocks when you can learn from somebody who went there.<\/p>\n
Yeah, we think we\u2019re cheaper at BiggerPockets than the education that Jim or JL Collins went through here, and probably the same amount of hours at the end of the day. So I think that\u2019s it. I think it\u2019s that 250 to 500 hour mark is really that minimum. We mentioned 150. Getting up there and really committing the mental bandwidth to learning about this and absorbing different perspectives and hearing the horror stories, hearing the success stories and going through it I think we\u2019ll make a huge difference in the odds of success for anybody that wants to get into this, and if you\u2019re not willing to pay that price, maybe real estate\u2019s not a good spent for you.
One other thing I want to point out is JL Collins got lucky in his story. When he was talking about how he had one tenant and that tenant found another tenant for him and that tenant found another tenant for him, my biggest mistake personally as a landlord was I did something very similar to that. I did a really diligent screening process for two tenants. They split up. They were a couple and she brought in a roommate, who was great, and everything went well. Then she left and I was left with the roommate. She brought in her boyfriend, right? Everything was great.
Then she left that person and I now have the boyfriend, and I\u2019m several layers away from my screening process, and this remaining tenant, the boyfriend, several layers removed, caused a tremendous amount of problems and actually ended up getting arrested before I got the property back and was able to rerent and rehab it. So it could have been even worse from that. I really encourage you, don\u2019t let the tenants refer or if you let the tenant refer another tenant, that\u2019s fine, but go through the screening process and check the credit criminal and income check and do your reference check if you\u2019re going to self-manage on that because I didn\u2019t and I paid a price for that. So it could have been even worse for him and he could have got a bad tenant or a tenant that trashed the place. Thankfully, I did not have that problem.<\/p>\n
Yes, yes. Real estate is not the right investment vehicle for everyone, and there are so many different ways to invest your money to grow and generate wealth. You don\u2019t have to just be stuck on real estate. Even though I love real estate, I\u2019ve had my problems, too. I\u2019ve had co contractor problems. Oh, my goodness. That\u2019s why my husband and I DIY everything because it\u2019s so much easier to just learn how to roof my house and try and find a roofer or that\u2019s actually one of the things I don\u2019t do, but it\u2019s way easier to learn how to do a new skill than to try and find somebody to do it for you.<\/p>\n
One last thing here. We would love to hear from, I think, a couple of other folks who might have invested in this time period in the late \u201970s, early \u201980s in real estate, and maybe had some successes and failures, what worked, what didn\u2019t. I think there\u2019s a lot of, to my mind, overlap between the economic environment that we talked about at the beginning of this podcast and today\u2019s economic environment. I think it would be really valuable to hear a couple of those stories on the show.<\/p>\n
Ooh. My dad bought a house. My parents bought a house up in Oregon the minute before the market crashed and they ended up owning it for 30 years because they couldn\u2019t sell it for the longest time that I don\u2019t remember why they ended up eventually selling it.<\/p>\n
Yeah. I think we\u2019d love to hear stories from investors in particular, who have those successes or failures in that time period. I think that\u2019ll be really valuable as we\u2019re thinking about how to navigate the waters ahead.<\/p>\n
Maybe I\u2019ll set my dad. Maybe we can do a test recording with my dad and if it works out, great, and if not, then we won\u2019t air it.<\/p>\n
Sounds great.<\/p>\n
He\u2019ll be here in a few months. Okay, cool. Well, I\u2019ll set him up. I mean, I would have to. He\u2019s not a techie. Okay. Scott, should we get out of here?<\/p>\n
Let\u2019s do it.<\/p>\n
Okay. Before we do, let\u2019s just say, let\u2019s use our new phrase. The IRS takes the yay away. That\u2019s their new motto. So I have a friend named Evan who works there and I\u2019m going to share that with him, \u201cHey, do you guys need a new motto?\u201d Okay. From episode 285 of the BiggerPockets Money podcast, he is Scott Trench, and I am Mindy Jensen saying, \u201cGive me a shout out.\u201d<\/p>\n