\n<\/p>\n
We messed up.<\/strong> Our real estate investing<\/strong><\/a> mistakes in 2023<\/strong> totaled up to hundreds of thousands of dollars<\/strong>, and although On the Market<\/em><\/a> is THE show where expert real estate investors come together, today is proof that we all make mistakes. From forgotten tax bills<\/strong> to landscaping debacles <\/strong>that cost six figures in interest<\/strong>, letting your property manager run your short-term rental into the ground, and forgetting about a house you own<\/strong>\u2014these mistakes are rough.<\/p>\n If you feel like you made severe investing mistakes<\/a> in 2023, worry not, because on this episode, our expert guests will talk through some of their most painful real estate losses<\/strong> of the past year as entertainment for you to enjoy! Ever forgot that you owned a house that had interest accruing on it? Thought that deal you lost money on was over? Didn\u2019t pull a permit, and now you\u2019re stuck paying six-figure holding costs<\/strong> over some shrubs? You probably haven\u2019t made these mistakes, but our guests have!<\/p>\n Stick around to hear exactly what you SHOULDN\u2019T do in 2024<\/strong> (and beyond) and how you can turn a terrible situation into a profitable deal\u2026or at least a lesson you don\u2019t repeat.<\/p>\n Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Dave: James: Dave: James: Dave: James: Dave: James: Kathy: Henry: James: Dave: James: Dave: Kathy: Dave: Kathy: James: Dave: James: Henry: Dave: James: Dave: Henry: Dave: Henry: Dave: Henry: Dave: James: Henry: Kathy: Dave: Henry: Dave: James: Dave: James: Dave: Henry: Dave: James: Kathy: James: Henry: Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Henry: Dave: Kathy: Dave: Kathy: James: Kathy: James: Henry: James: Kathy: James: Kathy: Dave: Kathy: Henry: Kathy: Dave: James: Dave: James: Henry: Dave: Kathy: Dave: Kathy: Dave: James: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Dave: Kathy: Dave: Henry: Kathy: Dave: Henry: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: James: Dave: Kathy: Dave: Henry: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey, everyone. Welcome to On the Market. I\u2019m your host, Dave Meyer, joined today by James, Kathy, and Henry. And today, we are going to be talking about the biggest mistakes that each of us made in 2023, at least so far. I guess we still have a couple of months to make even more and make mistakes, but at least I don\u2019t know about you guys, I\u2019ve got plenty of mistakes to fill out this show with.
We could have a very long episode today, but let\u2019s just start. Before we get into each of your individual mistakes, I\u2019d love to just know what mistakes you\u2019re hearing about right now. Henry, I know you work with a lot of students. You coach a lot of people. Are there any common mistakes or threads that you\u2019re hearing from about the current investing market?<\/p>\n
Yeah, I think one of the most common mistakes people are making right now is not factoring in enough holding costs, because the cost of money is so high, and so people are budgeting. They are budgeting for their holding costs when they\u2019re doing the flip, but then it may end up that they have to take out loans at a higher interest rate than expected, and then holding the properties for longer than expected.
It\u2019s much more costly now the longer you take to finish a project. And I think people aren\u2019t being conservative enough when factoring in the holding costs.<\/p>\n
Well, I think that\u2019s probably going to be a theme. That\u2019s actually a similar thing I was going to say. But Kathy, are you seeing any common errors that you think our audience should be trying to avoid?<\/p>\n
I mean, the big errors I\u2019ve seen over the years over and over again is people for buy and hold buying properties that look really good online, look cheap. They trust the agent. They don\u2019t get the appraisals and the inspections and get the third party people to verify that the properties in a good area and that it really will perform the way that they want it to and the way it says on paper.
So it\u2019s basically don\u2019t trust the pro forma, what\u2019s on paper. You always have to find out the reality of it. So not putting in the pro forma an assumption that rents are going to continue to rise. We just don\u2019t know that. We don\u2019t know that prices are going to continue to rise. The property just needs to make sense right now and be able to do the pro forma if things went well, stress test it, or if rent went down, could you still handle it?<\/p>\n
Have you heard this advice that people are saying? It doesn\u2019t have to cashflow in year one because rents will go up. And yeah, two years ago that made a lot of sense. But I think another common mistake is thinking that rents are necessarily going to keep going up. They could, I don\u2019t know. But if you\u2019re counting on that to make your deal work, that\u2019s a little bit risky.<\/p>\n
Yeah, I think I do say that kind of, so I will defend myself here.<\/p>\n
Okay.<\/p>\n
And that is that your costs are the highest in your first year. You\u2019ve got acquisition costs, your closing costs. So if you\u2019re just looking at your year one pro forma, it\u2019s not going to look very good. So just be careful of that.<\/p>\n
I just mean your run rate. If your run rate isn\u2019t looking good and you\u2019re going to be down not counting those one time costs that occur in your first year, then perhaps look elsewhere.<\/p>\n
Yeah, we just don\u2019t know. We know that we had massive rent growth, and maybe it\u2019s just going to stabilize for a while. Some of that rent growth was, what, 20% in one year of rents going up, so we should count that as rent growth for the next five years, honestly.<\/p>\n
Totally, yeah, yeah. What about you, James? Any common mistakes you\u2019re seeing?<\/p>\n
Just the abuse of debt and really setting up the deal correctly. It doesn\u2019t matter if it\u2019s hard money, town home financing. Any type of debt out there is substantially more expensive, which is slowing things down. What we\u2019re seeing is people are getting a little bit of trouble. Just like Henry said, these deals take a lot longer and they haven\u2019t adjusted their pro forma to account for those extra hold times. I mean, your typical house two years ago would sell in three days. Now it can take 30, and that debt racks up.
It costs more money. In conjunction with that, people still are going in and they\u2019re only buying because they want to get the deal done, and then they\u2019re not setting their exit strategies. I\u2019m seeing some people get into trouble because they close with a development loan. They\u2019re planning on refinancing the property rate and term, and then they didn\u2019t really understand the commercial debt side.
And they\u2019re having to bring a lot more money in because the loan to values have shifted so much with the debt ratio coverage, and then they\u2019re running out of liquidity. And so I feel like people are getting their liquidity locked up and getting stuck in very high payments and it can be very disastrous.<\/p>\n
All right. Well, those are some good common mistakes that we\u2019re seeing right now that everyone listening should obviously try to avoid. And after this quick break, we\u2019re going to get into the maybe uncommon mistakes that all four of us have made this year. So we\u2019ll be right back. James, let\u2019s hear about your mistakes. I feel like you take a lot of big swings every year. You\u2019re comfortable taking some risks. So does that come with making a few mistakes?<\/p>\n
Well, the first thing, one of my first mistakes I think I\u2019ve made this year is I didn\u2019t buy enough in the beginning of the year. The market was in this overcorrection mode for a second where we\u2019ve seen pricing jump up since the beginning of the year, probably another 5% on a rebound, not in growth, but rebounding back.
There was some no-brainer deals where you\u2019re looking at them and you\u2019re like, \u201cNo matter what, this is a good buy,\u201d But we did a pass because we had so much stuff going on. They were like, hey, this is the smarter thing to do. But really the smarter thing to do is to make a bunch of money. So it\u2019s like buy the deal no matter what and figure it out.<\/p>\n
Before you go on though, James, when you didn\u2019t buy more deals, is it because you felt like you had too much risk already out there, too much money in the market and you were uncertain about it, or you didn\u2019t have the capacity to handle it?<\/p>\n
There\u2019s numerous reasons why we didn\u2019t. Part of it is every time the market changes, we feel we have to rebuild our businesses and our systems at that point, like how we\u2019re doing our renovation plans, what kind of contractors we\u2019re bringing in, how we\u2019re going to issue permits, what kind of staff do we want on, and how we\u2019re implementing the plan needs to be different today than it was two years ago because it\u2019s a completely different market. Even though the market\u2019s still healthy, inventory is low, it\u2019s still different, right?
Cost of money\u2019s way up, so it makes more sense for us to bring in more higher caliber contractors and pay them a lot more because the debt will trade off. And so what it does is we\u2019ve been rebuilding all of our construction teams, our development team. We actually brought everybody in-house so we can keep speed going. So it\u2019s a lot of moving chess pieces around to get you going for that next market. That was one of the pauses we did. The other pause that we did is we have a lot of stuff.
We\u2019re building 80 town homes right now. We have $20 million in flips going, which are\u2026They\u2019re just bigger projects. And so we wanted to get through the inventory. But as you get through your inventory, you\u2019re not going to make what you when you bought it 12 months ago. Your performance is not going to hit the way you thought because the market has changed. And that\u2019s just part of real estate and investing. But the best way to offset that sometimes, if you\u2019re a no-brainer deal, you should still buy it and figure out how to\u2026
Rather than pass or sell it off, it\u2019s like still figure out how to collect that revenue even if it\u2019s a simple plan. So we could have done some very simple things and still made some pretty good money, but we took that pause. Now, the pause was good because it let us reset, but we probably left a quarter million bucks at least on the table.<\/p>\n
Yeah. All right, good. Thank you for explaining that. That makes sense. But obviously in retrospect, it hurts a little bit. Let\u2019s hear about this mistake.<\/p>\n
One of the biggest mistakes that I\u2019m dealing with right now\u2026 It\u2019s funny because people are like, \u201cYou\u2019re dealing with that? You do so many projects.\u201d It just happens. We are flipping a very expensive home. We have a loan for $1.8 million on it. It\u2019s worth four and a half million. We have a great buy on it. We went through a substantial, huge renovation where we put in about a million bucks into this property, or it\u2019s about 800 right now. Rebuilt the whole thing. It took us about 18 months to get permits, get it built through.
Actually it took us about 20 months to get the tenants out, get the permits, and rebuild it through. We\u2019re coming to final. And one thing that we had been talking to the city about was they\u2019re like, \u201cOh, hey, when you go to get your landscaping permit, just pull clear and grade. We\u2019ll be all good.\u201d That\u2019s an over the counter permit typically. So during this 18 months, we could have pulled this permit at any given time. But as you\u2019re going, you\u2019re buying deals, you\u2019re moving forward, you\u2019re working on the project, you\u2019re focused on the house and getting it stabilized.
We\u2019re done with the house, and we go to pull our clearing and grading permit. It turns out when we already knew there were some wetlands on the property and we have to go through a formal CIPA checklist for this landscaping plan.<\/p>\n
Oh no.<\/p>\n
We\u2019ve been sitting on this deal for seven months, paying $18,000 a month as we\u2019re waiting for approval and the house is completely done. And not only that, we don\u2019t want to sell it because part of the huge value of this property, it\u2019s on two and a half acres in Downtown Bellevue, which is very hard to find. So it\u2019s very exclusive, but we can\u2019t do anything until we get this permit. There were so many things that triggered based on that.
Even though we had been talking to the city and they said, \u201cEverything\u2019s going to be fine. Everything\u2019s going to be fine. Don\u2019t worry about it,\u201d then they changed their mind and they can do that sometimes. So the best thing to do is just lock down your permits and your game plan immediately, and we waited too long. And as of right now, if I hit the 10-month mark, which I\u2019m probably going to hit, that\u2019s $180,000 that cost me. When we bought the deal, we were on an 8% loan. Rates have gone up and now we\u2019re on an 11.5% loan.
So we\u2019re just eating that cost. And what that comes down to is just always\u2026 Even if you think it\u2019s not a big deal, just put the plan in motion, get it checked off, and then move on. Because we\u2019re literally finaled on our electrical, our plumbing, our building, everything, we just can\u2019t get a landscaping permit.<\/p>\n
Unbelievable.<\/p>\n
That hurts. That hurts.<\/p>\n
It hurts. What a waste of money.<\/p>\n
Do you normally just pull all your permits right at the top? Or how do you avoid that in the future?<\/p>\n
What you should do, because we knew it was a big lot, a lot of times you don\u2019t think to pull a clearing and grading permit, but because we were clearing out two and a half acres\u2026 And we weren\u2019t grading the whole thing. It was because we should have looked into the code more, and I would\u2019ve done it a little bit differently. So you need a clearing and grading permit in the specific city once you clear more than 5,000 square feet. And that\u2019s not like with a tractor. That\u2019s just clearing out shrubs.
And because we thought we were just removing sticker bushes but not touching the soil, it was going to all be good, which in the code it says that\u2019s okay, unless you do more than 5,000 square feet. Well, we have an 80,000 square foot lot. And honestly, because of the 18 months, the sticker bushes kept growing. If we would\u2019ve kept maintaining it throughout the whole project, it probably wouldn\u2019t have been a big deal either.
But why spend money maintaining it when you\u2019re going to rip it all out, throw 100 grand in the landscaping anyways? And so it\u2019s just one of those things where you coulda, woulda, shoulda. It would\u2019ve been very easy to put it into our plan. We just didn\u2019t, and now we got to pay the piper on it.<\/p>\n
That hurts. Sorry to hear that, man.<\/p>\n
Yeah, that\u2019s just another day in California, right? That\u2019s just how it works here. That\u2019s why flipping in California terrifies me.<\/p>\n
You just expect a 10-month wait.<\/p>\n
Yeah.<\/p>\n
But you know what? It\u2019s my fault. It\u2019s my fault. And you got to own your own mistakes as an investor, and that\u2019s just the way it goes sometimes. It sucks, but the good thing is we\u2019re going to get through the project. We\u2019re going to sell it. We\u2019re going to make a little bit of money or get our money back, and then we\u2019ll go do it again.<\/p>\n
Well, that\u2019s a good attitude to have, and luckily you have 180 grand to lose. In the deal, I mean. There\u2019s so much equity in it. Not you personally. But if you could still lose 180 grand in potential profit and still even break even, it shows that you had a great buy on that deal.<\/p>\n
A great buy, but I mean, think about what you can do. You can go buy another house with 180 grand.<\/p>\n
You can buy a couple in Arkansas.<\/p>\n
Oh yeah. Let it go, man.<\/p>\n
You could be making a high interest rate loan. You could be buying a deal. What a waste of time and money. Again, sometimes the plan goes bad.<\/p>\n
All right. Well, thank you for sharing that one with us. Henry, what\u2019s your biggest mistake of 2023?<\/p>\n
Oh man, my biggest mistake of 2023, so I just closed the deal where\u2026 This was my first flip where I lost money.<\/p>\n
How many flips have you done before you lost money on one?<\/p>\n
A couple hundred.<\/p>\n
Oh, okay. That\u2019s an excellent win percentage.<\/p>\n
I got pretty close to losing money earlier in the year, but actually when I did the math, I made like $8. I still counted that one as positive.<\/p>\n
Just don\u2019t count the rate of return on that one. You made money.<\/p>\n
As long as you\u2019re in the green, it\u2019s all good.<\/p>\n
Green is green, my man. Green is green.<\/p>\n
Just lost time.<\/p>\n
What was your hourly rate on that deal?<\/p>\n
But this one, so this is a house I bought. It was in a more rural part of town, but it was on three acres. It was a good deal, man. I paid 180 for it and ARV was 350 to 375. Needed about a 70,000 to $80,000 renovation. And so I bought it thinking and understanding I had multiple exits. So a lot of things factored into what made this a mistake. It was a good deal. I bought a good deal. It wasn\u2019t that I bought a bad deal, but it was a case of I grew too quickly.
And so during the time after I bought that, I ended up having to hire a project manager because we were buying so many deals at the time and working on so many projects. It\u2019s not like I had this established project manager process in place. I was coming to train this guy, and he\u2019s fantastic. He\u2019s doing a great job. But the timing of it was just not great because the holding costs were expensive. I mean, we had owned it for four months before we even looked at what are we going to do with this thing?
Are we going to go ahead and do this renovation or are we not? Because we had so many other projects that needed to get done. So by the time we got around to figuring out what we\u2019re going to do with this project, I just decided to go ahead and stick it on the MLS and try to whole tail it. And I tried that and I couldn\u2019t get a bite. So the mistake with the property was the layout just seemed difficult for most investors.
So in order to make this one work, you were going to have to essentially create a hallway in the middle of what\u2019s an existing bedroom, because you got to essentially walk through one bedroom to get to another and a bathroom to get to another. So the layout was just funky. And so if you\u2019re going to flip that, you got to fix that. And me, that\u2019s not a problem to me. I\u2019ll just fix it. I\u2019m optimistic enough to know we can go and we can fix that, but a lot of investors just didn\u2019t have that vision.
They didn\u2019t want to deal with that problem. And so when I stuck it on the market, it was hard for me to find somebody from an investment standpoint that wanted to solve that problem. We ended up selling it on market to an owner occupied who\u2019s going to live in it and fix it over time, but we sold it at a pretty significant discount. Everybody else made money. My agent made money. My money lender made money. Everybody involved made money. I was the only one that didn\u2019t make any money, but it was more of a conscious choice.
I just wanted to stop the bleeding of the high interest, sell the property, get done so I can move on to the things that I know are working and are going to generate the income that I want, plus the opportunity cost of what I can do now that I don\u2019t have that sitting over my head ahead. I could have done the renovation myself and spent the 70 and then sold the property for a higher amount, but it would\u2019ve took me another four or five months, maybe six with everything else I have going on.
Just doing the math of that monthly payment and I said, you know what? Let\u2019s just go ahead, call it. I think I ended up losing about 11 grand, so it wasn\u2019t the end of the world. Call it and move on. So everybody else made money. So it was good for everybody, just not me, but a case of growing too fast and the market conditions. And if I had it to do again, I probably still would\u2019ve bought the property and just made sure I got to it sooner and probably just managed that one myself, because it was a great opportunity. I got too busy.<\/p>\n
I mean, that\u2019s sort of what happens. I guess since this is the first one you lost money on, this might not apply, but when you do the volume of deals that you and James both do, do you give yourself an allowance knowing I\u2019m going to take a lot of swings this year, and if I miss on two of them, it\u2019s okay. Do you think that way, or does it really hurt? I guess I\u2019ll ask you, James, since you\u2019ve lost probably money on more than just one deal.<\/p>\n
Definitely more than one deal. I\u2019m a 2008 get your butt kicked investor. I always have that kind of little bit\u2026 I call them battle scars. That you\u2019re just like you kind of remember that things can go wrong really quickly. I always tell people, if you buy 10 deals and you\u2019re really good at this, you\u2019re most likely going to lose money on two of them. Three if you\u2019re going to get pretty average, or maybe be duds. Two are going to go a little bit better than average and you\u2019re going to hit a couple two.
Two are going to crush, and that\u2019s if you\u2019re good at it. And that\u2019s just the law of statistic. I mean, that\u2019s just statistical averages. It\u2019s going to happen. You\u2019re in a high risk environment. It\u2019s going to go great, it\u2019s going to go bad, and you want to blend it together.<\/p>\n
Well, Henry, I appreciate for your first loss. You\u2019ve got a pretty good attitude about it.<\/p>\n
Your batting average is pretty good, Henry.<\/p>\n
Yeah, yeah, you\u2019d be in the hall of fame.<\/p>\n
I mean, the expectation is you\u2019re going to lose some, right? I don\u2019t expect to never lose money. I\u2019m really fortunate that it hasn\u2019t happened before. I\u2019m fortunate that even though I lost money, nobody else did. My investors got paid. Everybody got paid, and that makes me feel good. I\u2019m okay losing some money. I don\u2019t want to have anybody else ever have to lose money because of a deal I\u2019m doing.
And so we didn\u2019t have to do this. All in all it\u2019s like a win for me because now I\u2019ve moved on and I\u2019m making money on other deals. But it wasn\u2019t fun having to bring a check to closing on a deal I\u2019m selling. That wasn\u2019t a good feeling.<\/p>\n
Yeah, that\u2019s probably a weird feeling.<\/p>\n
I got to give Henry some props on this because I was actually, turns out, I was the lender on this deal.<\/p>\n
And you made money.<\/p>\n
I made money. That\u2019s why I love private money lending. It\u2019s less work. But at the same time, as a borrower or an operator, I didn\u2019t even hear about this. Henry borrowed the money. He had to step to the plate, do what he needed to do, move on. That\u2019s a good operator. So hats off to you, Henry, because I never even heard about this.<\/p>\n
Thank you. I need you to give me more money, so that\u2019s why I didn\u2019t want\u2026<\/p>\n
Pretend you didn\u2019t hear any of this, James.<\/p>\n
But in all seriousness, that\u2019s a phenomenal\u2026 I tell my students this all the time. I\u2019m like, if you\u2019re going to borrow money, guys, you got to make your investors whole no matter what. No matter what. You\u2019re going to have to bite some bullets sometimes if you get yourself into a sticky situation. But if you want to grow in this business, man, you got to make your investors whole, period, point-blank. That is the most important part. You eat last, man. That\u2019s just always how it\u2019s going to be as an operator.<\/p>\n
Absolutely. Well, Kathy, as someone who raises a lot of money from investors, what is your biggest mistake in 2023?<\/p>\n
Well, in 2023, it\u2019s been a good year. Like James, I would say my biggest mistake was not raising more money for our single family rental fund, it\u2019s coming to an end, and buying more because it has been phenomenal. We just have not had competition. We\u2019re the only people at the table so often. The only one the wholesalers call and our deals have been phenomenal.<\/p>\n
That\u2019s great.<\/p>\n
That\u2019s the positive side. But the issues that I\u2019m dealing with in 2023 come from decisions I made a decade ago when I didn\u2019t know the things that I know today and the reason why I love to teach and share so that other people don\u2019t make these mistakes. Back then, I was, like Henry was saying, growing too fast, had too many opportunities, too much money being thrown at me.
And I would get excited about cool things. And one of the projects that came to me, things like a wine village, something that a lender doesn\u2019t know what that is. Basically it was just commercial property where wineries would lease from you and have tasting rooms and so forth because they only need a small space.<\/p>\n
I mean, a wine village sounds pretty cool.<\/p>\n
It\u2019s very cool, and it\u2019s in California. And it\u2019s in a part of California that doesn\u2019t have this. It was outside of Napa, on the way to Shasta. All of it looked great. The pro forma looked great, but what we discovered is that lenders didn\u2019t understand it well enough, so we had trouble getting the financing. So the big lesson\u2026 Okay, that\u2019s one, but I learned that years ago. But this year the thing I learned is that in some of these syndications, the way I would structure it, and I know the way that other people structure it, is different layers of lender.
And we\u2019ve been talking about lending. Some will be a bank loan, some might be private equity, some might be where you have a syndication. You have an LLC and you bring in one kind of investor who\u2019s on the equity side, and then you can bring in another investor that gets a lower rate because they\u2019re coming in as a lender. And that tends to be you get paid first as a lender. So I would structure these because a lot of people investing in their IRAs\u2026 I\u2019m going to get a little technical here, but it\u2019s important for people to understand this.
If you invest in your IRA, you take your IRA money and you invest in somebody\u2019s syndication, somebody\u2019s apartment deal or a wine village, and you are equity, meaning you\u2019re a part owner of it, you get what\u2019s left after everybody else gets paid. Well, in your IRA, it\u2019s considered investing in a business. It was an operational business. If you\u2019re building homes and selling them, that\u2019s an operational business versus an apartment that\u2019s more passive. You get UBIT, unrelated business income tax, within your IRA, and that could be like 50%.
So that\u2019s a big shock, but it doesn\u2019t happen if you\u2019re passive. So I would bring investors into a deal that was\u2026 They could come in as a lender, but then they\u2019ll also be equity investors. Well, if the deal goes bad, and I have one from 10 years ago that did, which a lot of people say, \u201cNo one can lose money in real estate over the past decade,\u201d but you know what? You can when you invest in things that are different and weird and shiny objects and so forth. So in this LLC, we had lenders and equity investors.
Now what I\u2019m learning is if there\u2019s losses and you can\u2019t pay everybody back and you can\u2019t pay the full amount of the loan, the equity investors pay loan forgiveness tax. In addition to losing their money, they pay tax on the loan forgiveness, the part of the loan they didn\u2019t pay. So here I\u2019ve got two groups of investors. It\u2019s just complicated. So again, before you ever do any syndication, always make sure you\u2019ve spoken to your CPA and they truly understand the position that you\u2019re in and what the tax consequences would be.
But I\u2019m concerned that a lot of people in these multifamily deals where there was like 10% equity and then there was like 10% that was a bridge loan and then the bank loan, well, those equity investors, if there\u2019s losses, they\u2019re also paying debt forgiveness on the part of the loan they didn\u2019t pay. So I think there\u2019s going to be a lot of investors out there shocked that not only did they lose their money, but now they pay tax. Hopefully the losses offset.
But if the loan is massive, and I didn\u2019t do any of these multifamily deals, I\u2019m just saying for those who did, if they leveraged up to 90%, which again I would never do on multi. My mentor was like, don\u2019t leverage over 60%. He was conservative, but that\u2019s why I didn\u2019t do any deals. Going to 90%, let\u2019s say\u2026 You\u2019ve seen some of these deals that have gone bad where 20% is lost. Now those equity investors pay. They\u2019re paying taxes on top of losing their money.<\/p>\n
It\u2019s just kicking someone while they\u2019re down. That\u2019s just rude.<\/p>\n
I don\u2019t get it, but the IRS looks like it. Well, you took this money to do this deal. So if you\u2019re not having to pay that money back, that\u2019s income. That\u2019s how they see it. I hope that wasn\u2019t way over complicated.<\/p>\n
No.<\/p>\n
You explained that well.<\/p>\n
That sounds terrible, but I\u2019m still focused\u2026 Can we go to the wine village? Does this exist?<\/p>\n
So we never could get the financing on it, so no. We\u2019re just trying to sell it now is land with all the entitlements. And if anybody out there wants a wine village, it\u2019s ready to be built. We just couldn\u2019t get the financing. It\u2019s a cool project.<\/p>\n
I want to visit a wine village. I\u2019m not sure I want to build one.<\/p>\n
There\u2019s some really good ones. We were modeling it after some in Washington, actually. I don\u2019t know. James, do you know of any wine villages because there\u2019s been successful ones in Washington State?<\/p>\n
Are they in Yakima probably or Chelan?<\/p>\n
Isn\u2019t there a wine area of Washington? I think it\u2019s there.<\/p>\n
Yeah, Yakima has gotten pretty nice wineries now down there, but I don\u2019t do wine. I don\u2019t even drink.<\/p>\n
You need a rockstar village.<\/p>\n
You repurpose it to a rockstar village.<\/p>\n
A rockstar village. These ones in Washington are killing it because you\u2019re just leasing a tiny little space. Because they\u2019re not making the wine there, they\u2019re just tasting it. They make their wine elsewhere. But all these wonderful wineries that are hidden out in the hills, nobody\u2019s going to go visit.
The wineries could come and have little tasting rooms in areas where there are people and they\u2019ll pay a lot because then it\u2019s direct to consumer versus having\u2026 They pay like 50% to go through a wholesaler. They were willing to pay a lot more to rent the space. So the numbers looked fantastic. Just you have to build it to make it work.<\/p>\n
It sounds like a cool concept.<\/p>\n
It\u2019s permitted. Anybody got money, let\u2019s build it.<\/p>\n
Well, for my biggest mistake, I guess my biggest investing mistake for this year, because there have been plenty of other ones, is probably something that everyone here identifies with, but it was not firing someone as soon as I should and just waiting too long, even though I knew I had to, but I was being lazy about it. And it\u2019s going to cost me a whole lot of money. I have a short-term rental. Most of the deals I buy now are passive. So I still operate a couple of deals in Colorado, and I have this short-term rental that I hired a full service property manager for when I moved to Europe.
And they\u2019ve just been bad since the beginning. And every couple of months, you probably get this, you get on them, they start doing well for a couple months, and then it slacks off again. And it goes up again and it goes off again. And I just waited for so long. And finally it got to the point where we were getting really bad reviews. There were some issues with the property that really needed physical rebuilding, and so we figured that. I came to the conclusion that I just finally had to pull the bandaid off, but it was right at the beginning of the summer in Colorado, which is the busiest season.
And so I lost all of my bookings for June, July, and August, which was probably 10 or 15 grand. And then I also lost all of my reviews, which when you think about all the money you lose from losing 50 or 60 good reviews, all the lost bookings for the last year. So if I had just done it in a smart way, Colorado where the short-term rental is, there\u2019s like a mud season, I could have just done it from March to May and it would\u2019ve been completely fine. But I was lazy about it and now I\u2019m licking my wounds a little bit.
So that one hurts. And I think probably relatable to everyone, because whether it\u2019s a property manager or a contractor, sometimes you just delay that inevitable, uncomfortable situation that you know you got to get yourself through.<\/p>\n
Hire slowly, fire quickly.<\/p>\n
It\u2019s easier said than done, man.<\/p>\n
Yeah, it is.<\/p>\n
I know. Living so far away, I didn\u2019t really want to figure it out, to be honest. I just wanted them to do a good job and they didn\u2019t. But it\u2019s okay. Like you said, you get a lot of good years. Sometimes you miss for a little bit. But as long as you\u2019re trending upward over time, it\u2019s good.<\/p>\n
That\u2019s interesting to me. So when you hire a short-term rental property management company and it\u2019s your property, they own the reviews technically?<\/p>\n
They did on this one, yeah. The new one I\u2019ve figured out a way to not do it, but I did not realize how they had structured it the first time around. So that really sucked.<\/p>\n
It\u2019s like kind of golden handcuffs because you don\u2019t want to leave it.<\/p>\n
That\u2019s terrible.<\/p>\n
Yeah, exactly. Exactly.<\/p>\n
Yeah, that\u2019s interesting because when I hired a property manager for my first out of state short-term rental, I thought they were going to handle it all and they said, \u201cNo, no, no. It should still be under your name and your Airbnb.\u201d And I ended up firing them before we even started because they were terrible.<\/p>\n
Really?<\/p>\n
Yeah, yeah. When they\u2019re not answering your messages right away at the beginning of a relationship, this is problematic. And then I was so glad that I got\u2026 Oh, that\u2019s why you\u2019re supposed to keep it in your own account for this reason, but I didn\u2019t know it at the time. It was just luck.<\/p>\n
Yeah, it\u2019s an important lesson. And now I\u2019m offering discounts to people I know or giving it away just so I can get some reviews. So if anyone wants to go to ski in Colorado, hit me up on Instagram. I got a very nice house. You could go visit this winter, or we can all go. You guys want to go?<\/p>\n
I will happily go check out your pad.<\/p>\n
Yeah, let\u2019s have a reunion.<\/p>\n
There\u2019s no one there.<\/p>\n
We\u2019ll just trash it.<\/p>\n
Honestly, it\u2019s like a 16 person house in a party town, so it gets some wear and tear for sure.<\/p>\n
Perfect.<\/p>\n
It wouldn\u2019t be the first time I\u2019ve trashed it, at least. That\u2019s for sure.<\/p>\n
Well, I\u2019ll be in Vail for Thanksgiving, so I think we should all just go to your place for Thanksgiving dinner and have an OTM Thanksgiving proper. Henry, you cook the turkey and let\u2019s just go.<\/p>\n
I\u2019m going to be on my honeymoon. I\u2019m going to be on my honeymoon Thanksgiving.<\/p>\n
Well, we\u2019ll just join you there then.<\/p>\n
You guys can go. Yeah, You guys want to come to Thailand?<\/p>\n
Oh, I would love to go to Thailand.<\/p>\n
Where are you going?<\/p>\n
We\u2019re going to Cambodia and Thailand.<\/p>\n
So jealous.<\/p>\n
I\u2019m very excited.<\/p>\n
Yeah.<\/p>\n
It\u2019s going to be very nice. But you guys can have the house. You can cook your turkey there.<\/p>\n
Henry\u2019s cooking.<\/p>\n
All right, well, thank you all so much for sharing your mistakes. I think this is an important part of real estate investing that I think we do a decent job sharing our mistakes on this show. We\u2019re probably going to do some more of this because today was our mistakes with investing, but we\u2019re going to have to come clean about some of our predictions for 2023 at some point too. There will be some admissions of mistakes definitely I think on all of our parts. I know I have a couple that are haunting me, so stay tuned for that.<\/p>\n
It\u2019s not the end of the year yet.<\/p>\n
Yes, that\u2019s true. We will see what happens, but we will also have a reckoning before the end of the year for that as well. If you want to learn more about our wonderful hosts here, James, if anyone wants to talk to you about losing 180 grand, where should they do that?<\/p>\n
Best way to figure out how to lose money is go to my Instagram at [crosstalk 00:32:10] jamesdavid.com. I got lots of stories for you.<\/p>\n
All right, Kathy, what about you?<\/p>\n
At RealWealth.com is our company, and then Kathy Fettke on Instagram.<\/p>\n
All right. Henry?<\/p>\n
Yeah, you can catch me at my website, seeyouattheclosingtable.com, or Instagram. I\u2019m @thehenrywashington.<\/p>\n
All right. And if you want to find me, you can do that on Instagram @TheDataDeli. Thank you all so much for listening. We\u2019ll see you next time. On The Market was created by me, Dave Meyer and Caitlin Bennett. The show is produced by Caitlin Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.<\/p>\n