By Dr. James M. Dahle, WCI Founder
This is one of those posts that I'm writing in hopes that the comments section will be full of bad experiences investors have had with real estate. That's not to say bad experiences are not possible with other asset classes, but obviously people are getting the message somehow that “you can't lose with real estate,” which is obviously not the case.
However, before we get to the comments section, I've got to find something to write, so I thought I'd write a few words about how money can be lost in real estate investing, artfully illustrated by my own personal experiences losing money in real estate!
#1 Property Value Can Decrease
Let's start with this one. Trees don't grow to the sky. The value of real estate goes down from time to time. This is well-illustrated by looking at the share value of the Vanguard REIT Index Fund over the last 20 years or so.
Now, if you look carefully, you'll see something very interesting, right in the middle of the graph. I know, it's subtle and hard to see, but if you really squint you can see that there was a slight decline around the end of 2008. As an investor in this fund during that time period, having originally bought in very close to the preceding peak, I can assure you that decline was very real. 78% from peak to trough actually. But don't just look at the big drop. Look at all the little ones. Real estate goes down in value all the time.
Okay, now I'm sure there are a few of you real estate addicts who are now arguing in your head “but those are paper assets” blah blah blah. Are you seriously arguing that real estate never goes down in value? Maybe you'll pull out a chart showing housing prices going up, up, up all the time. Well, there are a few issues with those charts.
First, they usually don't account for the fact that houses are getting larger and more luxurious.
Second, they're never adjusted for inflation. Let's look at one that is.
As you can see, there are not only times when housing values decline, but they can also remain quite flat for long periods of time. Basically from 1970 to 1998 house prices did not increase on a real basis. Appreciation of the property is a major contributor to your real estate return, especially if you are highly leveraged. Take that away and things look much less rosy.
Robert Shiller adjusted for not only inflation but also the fact that houses are getting nicer. Here's what his data looked like (it's not quite up to date):
Lots of ups and downs there over the last century plus. But that's all housing, you say. I don't invest in residential. Okay, how about this chart?
Anyone still want to argue that real estate doesn't go down in value and that the value can't stay down for many years? I didn't think so.
#2 Individual Properties Do Not Mirror the Overall Market
Just like an individual stock may not track the return of the overall market (thus why you should invest in index funds) an individual property may not track the indices above. Real estate, at least outside of publicly-traded REITs, is a far less efficient market than the stock market. That means your skill, or lack thereof, can have a large impact on your returns. Luck can also be a major factor. (Of course, we call it skill when things go well and luck when things don't.) What are some of the reasons for this? Let's consider a few:
- First, you often don't buy a property as an investment. Many landlords are accidental real estate investors. They're renting out the place they used to live in. When they bought it they did so because they liked the layout and the paint and the neighborhood, not because a cold, calculating analysis showed it was likely to make money. Then they were forced to move before they wanted to or they're underwater or they heard from a friend that real estate is a good investment and so they keep it when they move out. Or they move out in 2010, like we did, and NOBODY wants to buy real estate at anywhere near a reasonable price. After moving out in June 2010, we spent 15 months trying to sell our townhouse accidental rental. We had it under contract within a month, but after that fell through we didn't even have a nibble until we gave up over a year later after multiple price reductions.
- Second, vacancies happen. A lot of times we run our numbers assuming we're actually going to get a rent check each month. That is often not the case. Maybe you account for one or two months a year of vacancies when you run the numbers, but then have three or four. In our case, even after we gave up trying to sell and went looking for renters it took us four more months to get one in!
- Third, unexpected expenses happen. Bathrooms flood, roofs leak, A/C units stop working, etc. These will cost you time, aggravation, and/or money. Experienced investors estimate well for these expenses, but sometimes even they are surprised. Inexperienced investors often hemorrhage all theirs gains paying for expenses and upgrades.
#3 Lack of Cash Flow
Lots of investors get in trouble due to cash flow problems. It simply isn't enough for rent to be higher than the mortgage payment. If your cash flow does not cover all of your expenses, even “one-time” expenses, you are going to have to feed the beast from your other earnings or your savings. Do this long enough and you will go broke. However, if you can keep your cash flow positive, you can ride out fairly dramatic but temporary decreases in value.
#4 Overleverage
Leverage can really boost your returns, but leverage works both ways. Interest never sleeps.
“It is a rule . . . in all the world that interest is to be paid on borrowed money. May I say something about interest? Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels . . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.” –J. Reuben Clark, Jr.
It is impossible to go bankrupt without debt. Most of the really terrible real estate investment disasters that occur result from overleverage. A 20%-40% downpayment not only improves your cash flow, but also gives you the ability to sell a property despite a significant decline immediately after purchase.
#5 Assumptions Were Wrong About Investment Property
When you run the numbers before buying an investment, you must take a certain number of assumptions. You try to be conservative, but sometimes you're just wrong. Maybe you (or your hired manager) can't increase rents like you thought you could. Maybe the property doesn't appreciate like you thought. Maybe vacancies increase. Whatever. But the process of estimating future returns is HIGHLY dependent on inputs. It's a garbage-in, garbage-out process. A number of my syndicated properties are currently underperforming their pro-forma. While you never know the true overall return until the investment is liquidated, and the manager will give you a wonderful sounding excuse for why they're underperforming each quarter, it basically boils down to the fact that you (or your manager) did a poor job of predicting the future.
#6 Property Manager Risk
Many of us (like me) have discovered that not only do we not enjoy buying, managing, and selling our own properties, but that we aren't all that good at it. So we hire someone else to do it. Their credentials sound very impressive when you hire them, but sometimes they just suck at their jobs. That risk is one reason you lose money in real estate.
#7 Crowdfunding Platform Risk
Sometimes we don't go directly through a manager, but instead through a third party like a crowdfunding platform. A good example of this risk showing up can be seen with RealtyShares, one of the largest and fastest-growing of the crowdfunding companies, at least until it wasn't. When they went under, I had one investment left with them, a debt investment backed by a property that the flipper was having trouble finishing and selling. He eventually did get it sold and supposedly paid off the loan. This is what RealtyShares told me:
Yet here I am on June 25th wondering where my last $34.17 in principal is.
My emails go unanswered. That's called manager/platform risk. Yes, I still made money on the investment, but I didn't make as much as I should have.
#8 Products Designed to Be Sold
Sometimes you just get sold an investment, rather than buying one. The classic example of this in real estate is the old broker-sold private REITs. The commissions and expenses were so high on these things that it was always unlikely that the investors were going to do very well. They were promised an 8% yield, which they usually received, at least for a while. The problem was a good chunk of the yield was a return of principal and the value of the investment was dropping while the share price appeared to be quite stable. One prominent example kept share values stable at $10/share. . . until all of a sudden, they were worth $1.50 per share. Ever since the 2012 JOBS Act, real estate is being sold in more and more forms all over the internet. Some of these will undoubtedly eventually show themselves to be products designed to be sold, not bought. Caveat Emptor.
#9 Liability with Rental Properties
A rental property is a toxic asset. Buy plenty of insurance to protect against loss AND liability. Fix problems promptly. The property should usually be placed in a limited liability company. In most states, this provides both internal and external liability protection. One way to lose money on a rental property is when liability risk shows up and you are not prepared for it.
Even successful real estate investors have taken their share of lumps. If you think you, as a new, inexperienced investor, cannot lose money in real estate, you're a fool. Diversify, exercise due diligence, beware of negative cash flow, don't overleverage, buy insurance, be skeptical about your (and anyone else's) ability to predict the future, and be prepared to hold your investment for years longer than you originally planned.
What do you think? How have you lost money in real estate? What's the worst real estate disaster you've heard of? Comment below!
Featured Real Estate Partners
I totally agree with the article, especially the non-traded REIT space formerly occupied by commission hungry registered reps of FINRA registered broker-dealers getting 7-8% to sell you an investment that paid 7-8% monthly from day 1. Basically, in the early years of the investment, you are getting a return of your capital disguised as income monthly.
If the promoters are really good at raising capital via the commission hungry brokers, they then are challenged to make prudent investments so they can sustain the monthly payouts.
In the end, they hope to sell the assets to another REIT or have the shares publicly trade, the latter route often a disaster when the net asset value is adjusted to reflect reality.
There is some hope as legitimate operators like Blackstone have entered the space and the shares can be bought via an RIA at zero commission at many major custodians like TD Ameritrade or Schwab. Blackstone’s BREIT i-shares have delivered north of 10% annualized returns in its first three years of existence. Blackstone is the largest real estate operator in the USA. We use this REIT for our clients seeking high after-tax income and long term price appreciation.
You mean 7-8% a year? I haven’t seen one claiming to pay 7-8% a month.
OMG, I could write a book on why not to invest in real estate. Early 2000’s, my practice was going well, and I decided I wanted to do something different and the real estate market was (and had been for years) booming in our area. A buddy and I built some spec houses, made some money. Then we decided to buy some investment lots. Three of us bought 3 lots together (not in a partnership just our names on the note). We sold two and made a little money. Banks were loaning us 100%. Actually I think in a couple of deals the bank asked if WE wanted any money at closing!!
Then the crash came. I had a lot in a TX development and one locally with partners. After several years, the bank said they weren’t going to renew the interest only loan and i was getting tired of covering my partners. My partners were in big trouble as they were in the construction business. I got tired of paying just interest, so I went to the bank (my best friends father) and said I would pay off my share to get off the loan. He shook his head and said ” No way we are letting you out of this deal. You are the strongest one, we are coming after you for the whole amount!” After a lot of back and forth, I talked my partners into paying their shares and we all moved on. We finally sold the lot at a great loss a couple of years ago. I also dumped the Tx lot at another huge loss. I have enough losses to last two lifetimes. I was lucky as I was never over extended and during the lean times my practice had low overhead and able to weather storm. It could have been devastating. The silver liner is that it motivated me to never borrow money again. I went on a campaign and paid everything off. Zero debt now.
I have some rental property and it does ok. From my perspective, rental property is good if you can pay cash for the property. Once the bank is involved, you will do all the work and they will make most of the money.
When the doctor and barber start talking to you about how much money they are making in real estate, GET OUT! It is going to crash. I remember the crash and the years prior very well. Crazy, scary time. Lots more bits and pieces to the story, but this is a pretty good summary. The bank is not your friend. The best way I know to make money is doing what I went to school for. I am starting to see history repeating itself when I talk to real estate agents and bankers…..look out.
Lots of debt. Lots of speculation (i.e. non-income producing property). Classic story.
Thanks for sharing a bad memory. I’m sorry you went through all that, EMAC.
But I’m not sure I would conclude “why not to invest in real estate.”
It just confirms that doctors are not exempt from knowledge and business experience. We need to do our due diligence. Look for positive cash flow. Plan your business. Have an exit strategy. Make conservative assumptions. Understand liability and legal structures. Have experience or partner with experience, etc.
To expect high return without risks is unreasonable. It is fine to take risks, but know what they are and prepare for them.
I encourage physicians to own real estate. It has served me very well for over 20 years. We just have to realize going to medical school doesn’t qualify us as real estate or financial experts.
You are correct wealthydoc. It is a bit hypocritical of me to say that, then finish saying I own rental property. I get a decent return on my rental property and I don’t find it a burden. If something were to happen to me it would be good cash flow for the wife for some spending money. I guess the real moral of my story is dont be stupid!
I share your pain regarding partners who run into financial difficulties. Many years ago, my wife and I, along with several other couples, purchased a waterfront property on the East Coast. The plan was to rent the vacation home during high season and have it available for personal use during the off season. What could go wrong.
From day one, the property had large negative cash, which was mitigated by the fact that the cash calls were spread among the several owners. Until . . . certain of the partners moved from the area and/or claimed financial hardship and simply stopped making their contributions. Short of suing them and collecting on judgments, an expensive and uncertain process, the only practical option was to have the remaining couples suck up the ever-increasing percentage of losses until the property could be sold, which took several years! The last couples standing wrote big checks at closing.:-(
Friends and “investments” rarely mix well.
Wasatcher
You are right Wasatcher friends and investments don’t mix especially if the ‘friend’ doesn’t understand investing. I tend stay away from investing with friends unless we first go through the education of RE investing.
Good post.
However, citing a REIT index fund as a proxy for real estate values isn’t an apples to apples comparison because REITs have embedded leverage. The Vanguard REIT index had a max drawdown of 78%, but your graph of nominal median home prices shows a max drop of about 30%, which would still be painful, but a 30% drawdown is an order of magnitude (or two) less painful than a 78% drawdown. A 30% drawdown needs a 43% gain to recover, but a 78% drawdown needs a 555% gain to recover.
That said, I agree completely with Paula Pant that buying rental properties with the expectation for property appreciation is speculation and not investing unless you can get ‘forced appreciation’ (e.g. very cost effective remodeling). Rental properties should be purchased on the basis of their cash flow.
No, while less, that’s actually the same order of magnitude:
https://en.wikipedia.org/wiki/Order_of_magnitude
At any rate, if your property drops 30% and it is 60% leveraged, it’s pretty much the same thing as that drop in publicly traded REITs.
My point was that comparing the drop of an unleveraged asset to a leveraged one is not apples to apples. It would be like comparing the returns of a 3x leveraged S&P 500 ETF to the S&P 500 itself. We cannot refer to the former as a direct proxy for the latter.
And you can own real estate outright (i.e. with no debt at all). Are you aware of any REITs that don’t use leverage to some extent?
Great. What do you suggest I compare to? Provide the chart and I’ll insert it into the post.
But most real estate investments are leveraged in one way or another. And yes, I know about some unlevered debt REITs if that counts in your book.
Your graph of house prices is perfectly fine for this purpose.
I went a little crazy and bought 52 units over 3 years from 2009-2012. A couple of the 52 were absolute nightmares. Had I ONLY bought those, I would’ve concluded that it was a horrible business to be in. But having a lot of different units (single family up to 11 unit) taught me that diversification is just as important in RE as anywhere else. And time…even if you pay a LITTLE too much, inflation will eventually “catch up” (i.e. you only buy once, but you manage every day). Not to minimize the price you pay…it’s important. But managing well, and having a decent number of units is one way to ensure an overall profitable experience.
Not bad timing either.
Wow, 52 units! Do you even work as a Physician anymore? Seems like that would be a full time job in and of itself?
Nice job Kennenth
Here are a few locally –
– Sibling’s building discovered that the builder forgot to add the waterproof membrane to the building. Sibling lost 100% of equity in investment.
– Entire neighbourhood of million dollar homes closed down due to unpredicted sinkholes.
– Major employer closes up shop, 90% of city leaves town. Houses and apartments are unsellable at any price.
– Parent successfully sued by vagrant who dropped garbage bin lid while dumpster diving.
– Other parent sued by tenant claiming settling of rented house. Such settling is invisible. Insurer pushes hard for a nuisance settlement to limit litigation costs.
– Looked at a development property on offer for $2M. Property is available because the first developer ran out of money after spending $6M on a retaining wall to create a driveway.
Nothing to add just wanted to say fantastic article.
In particular, hadn’t seen the long term data before with decades of flat performance in residential real estate.
My group lost several million on an outpatient imaging center. We partnered with the local hospital who a year later sold the hospital to another larger outfit. They didn’t want to be involved with the venture and screwed us over with the partnership agreement. Very painful.
Not sure that’s a “real estate” investment, but I suppose you could have bought a piece of real estate to go with the business.
Yes, we bought a piece of land for the venture. Very complicated situation that went south in a bad way after the hospital was taken over by another system.
Not only did we buy some land in a prime spot off the interstate hwy, we also built a new office building and put a magnet in it. Seems to me to meet the criteria of “real estate”.
Sure does, but it wasn’t necessarily the real estate aspect of it that failed was it? Did you end up having to sell it for much less than you bought/built it for?
We did have to divest for a significant loss due to a complicated situation regarding our contract. The outcome was not related directly to the real estate involved but my point is that there are many factors with some of these investments that may be impossible to foresee that can seriously impact an investment. There are many unknowns with these deals.
This is the second real estate investment that I have lost money on, both were single property investments. I am done with that stuff and only investing in diversified real estate investments.
I have a friend who ran a couple of small businesses and after the ’08 crash starting investing in real estate. He now owns about 30 units and manages another 100 units and does this as his full time job. He has both worked very hard and has also had luck on his side. He bought in a large Colorado market that has since sky rocketed in value. I would love to copy that sucess, however, the markets have changed considerably. These days it takes him up to a year to find a really good deal in that market. As a professional who runs my own practice, I can’t spend large amounts of time and searching for back room unlisted deals to make acceptable returns. Seems like Real Estate can make one a fortune but so can being smart (and boring) about long term consistent investing. Perhaps one day I will dip my toes into the real estate market but I’m in no hurry.
That is confidence, hard work, and timing. He made a great decision, but I am sure there were a lot of people in 2008 thinking he was crazy. I bet the banks weren’t competing to loan him any money on real estate back then. Like you, owning a practice, it was a rough few years. hardly a week went by that patients would come in and say we lost our jobs and cant afford paying you anymore for our kids braces. Hard spot. Out of all the patients I finished for nothing, I can only name one (real estate agent) that eventually paid me. We laugh about it now, but it wasnt funny then.
You are exactly right. I keenly remember him spending 40-50 hours just trying to get financing for his projects. Seems crazy in this environment where borrowed money is easy to come by and with great interest rates especially for professionals.
Maybe that explains why our orthodontist insists on full payment up front!
Very good points WCI. You can absolutely lose your shirt in real estate, however, a lot of risk can be mitigated by proper due diligence and a conservative investment philosophy. In my book this includes purchasing residential rental property that cashflows. Purchasing properties for appreciation has worked well for almost a decade but it feels like gambling to me. If you are new to real estate, start small so that if your first investment fails it will not sink you.
I started after residency in 2010 by buying a fourplex and have worked my way up to 92 units. It has been a great side hustle and is providing a supplementary income stream that I could almost retire on, although it would require some belt tightening…we have a lot of kids and some expensive habits.
It sounds rosy but bad things still happen. The most recent property that we have purchased has been the most disappointing–we have owned it for 6 months and it has a 30% vacancy rate at the moment. Surprisingly it is still breaking even, but that is a lot of capital to have tied up getting no return.
“92 units” isn’t something I’d call a “side hustle”. 🙂
At any rate, glad it’s working out well for you.
You are so right SR investing for appreciation is gambling, cash flow is and always will be KING. Whether the property goes up or down in value really doesn’t matter given your philosophy coming in a deal was focused on cash flow. Nice job on your 92 unit btw.
Great discussion thread from everyone… real estate is and will always be about location, location, location. However, I would like to include ‘team’. So location, location, location & a team. Given our busy schedules with our family, practices, & business ventures I’ve fired myself from being any kind of Landlord and took on a more business approach toward real estate investing by participating as a passive investor in RE syndication. I’ve shown this concept to IT and Broker contacts and they love it too. It’s 100% hands off and still with great tax benefits. No tenant, termites, or toilets to worry about. I pretty much enjoy an 8% cash on cash return. We invest for cash flow and not appreciation in growth markets.
Great article !
I decided to buy two turn keys out of state in a stable growth market. Figured I would get my feet wet and then buy on my own later after I see how it goes. I estimated maybe 5-15% a year gains and long term hold. What could go wrong I figured? Turn key newly renovated, professional manager, stable high population growth area in Texas.
Two years later, tenants trashed both places. Hail destroyed a roof (homeowners didn’t cover it). Debris destroyed part of the other home’s roof. Property manager didn’t inspect properties at all and almost impossible to reach for even the simplest of tasks (doesn’t return emails or phone calls). Plus 2 months vacancy with one property and 6 months vacancy with the other (due to PM not even bother to clean the place or show it in person, discovered when realtor inspected it). Its been a hellish nightmare. Almost every day for last two months I wake up with a new bill and a new headache I have to deal with – while I’m working 60-80 hour weeks. In addition, while one home was vacant, it was broken into and the stove stolen. Its been one thing after the next, but I’ve taken a stoic approach and used it as a learning tool. What I’ve learned:
1. Never buy directly outside of home market. Some people are very successful at this, but those people have a lot more time (and experience) than me and a lot of them do this for a living. My practice is very demanding. If you can’t drive to see it or roll up to the PM office in person if they are jerking you around, you are in for major surprises. You can’t trust anyone unless you have a solid long term relationship and proximity is everything even if the numbers are not as good as out of state. Plus you will know local risks much better and prepare yourself for them if its in your area (both local economy and things like hail damage ect.).
2. I’ve learned that passive syndications are for me. You can get more tax benefits and make more directly, sometimes. But, you also have the potential to make more many costly (in time and money) mistakes compared to an experienced sponsor. These mistakes will also be associated with extremely frustrating headaches, unlike passive funds and REITS. I’m looking at 50% loses in two years during a bull market. I didn’t think this would even be possible. I bought them as a conservative stable investment to balance out stocks. This has turned out to be the most toxic thing I’ve ever purchased. You just never know. To me the worst part is all the work, time and energy associated with loses. At least with a syndication or public REIT, you lose your money and you are done. Its not all this rehabbing, findings plumbers and contractors, dealing with negligent PM, realtors, waiting for sale to go through, and all the time continuing to pay a monthly mortgage.
3. No called strikes in investing. There will always be another deal. Look at number and pro forma. Look again and then look again. Get on forums. Learn from others as much as humanely possible and get their opinions on a deal. You don’t have to make all the mistakes yourself. No reason to jump into anything quickly even if it seems and feels relatively low risk. There is always risk. Always have a clear exist strategy for any direct investment that includes closing costs on both ends. I never considered selling within 5 years so didn’t even think of closing costs as I assumed it wouldn’t be an issue. But, with property tax hike on one property it became impossible to cash flow – something that was intelligently not included in pro forma as taxes were based on pre-renovation value. The other property was such a headache I didn’t want to repeat the experience in two years with a new property manager and give another tenant the opportunity to cause an additional 6k of damage. Good news is these loses can be taken off your taxes at the highest marginal bracket, all of them (according to my accountant). This is not like stock loses that are limited to 3k yearly.
4. I appreciate stocks and public REITS to a much greater extent. The benefits of index fund simplicity and liquidity cannot be overstated. We live busy stressful lives and we don’t need investments that become a second job/career. Simplify your life outside of work and focus on improving your human capital. This will be far more profitable long.
One house just sold and another is on the market so hopefully this nightmare will be ending in 1-2 months. I will tell you (like the stock market), theoretical loses and hiccups are nothing compared to the emotional experience of actually having them. Real estate can be the biggest headache you’ve ever had and I for one have never been happier to lose 30-50k when this is all over.
I’m with you on out of state turnkey properties.
Careful on deducting losses.
https://www.nolo.com/legal-encyclopedia/can-you-deduct-your-rental-losses.html
https://turbotax.intuit.com/tax-tips/rental-property/selling-rental-real-estate-at-a-loss/L2RKgClm4
Make sure you’re deducting a 1231 loss (i.e. when you sell the property, not just an operating loss)
Sorry to hear things didn’t work out for your ‘turnkey’ acquisition Desert Doc. I’ve learned that true turnkey providers not only sell the property to investors but also manage the property. Depending where you live and what your investment philosophy is I don’t see anything wrong with out of state investing especially if you live in California like myself. I have no choice to invest out of state as the cash flow makes more sense.
I love Syndications as well being a Limited Partner in a Syndication makes a whole lot sense for busy professionals, the returns are great and opportunity for tax benefits is awesome. Strictly hands off a true passive headache free investment. I’ve introduced Syndications to IT Professionals and they love it! I say if yo want to be a Landlord get a prescription, if want to be to be a Passive Investor join a Syndication.
You should probably disclose that you work for a turnkey company don’t you think?
I actually don’t work for a turnkey provider but I have engaged with one on a property in Tennessee. However I do help busy professionals remove the headaches related to being a Landlord through real estate Syndications…
And you just happen to use a link to a real estate site with your every comment? Sure….. 🙂
I did use a turn key provider that owned the PM company. It was still a disaster out of state. If it was in the city I live, I would have been far more successful. My partner bought here at a higher price and lower cash flow. Due to close relationship with agent who is also the PM, he did very very well and just sold for significant profit.
Cash flow is good in Memphis (I assume that is the turn key). But good luck selling. Vacancy is also likely to be higher than anticipated give low cost of housing. My friend has turn key in OKC, he has had a vacancy for almost 6 months believe.
That Houston multifamily has been a real disaster. When you leave public markets you enter the ugly world of fraud and bad actors. I put in the min of 15k, but it stings badly and now I feel very worried about my other CRE holdings. I have an investment in the equity multiple Fort Meyers Hyatt hotel, I assume this will fail as well due to Corona.
I will not be adding to this portion of my asset allocation for the next two year at least. Both because I want to see what went wrong and what worked and also because I’m now pushing 20% of my portfolio in real estate, which is more than enough for me.
I invested retirement funds in a business venture in Michigan. The complex was 32,000 sq ft of restaurant, motel, and two bars. Without any experience in the hospitality business I surrounded myself with experienced people who performed very well. Shortly into the ownership, several major problems with the building, the parking lot, grounds, roof, utilities as well as routine maintenance required on the 32,000 sq ft, 10 acre property, the cash flow was not adequate. The lease with option to purchase was NNN triple net without any owner contributions at all. The sellers represented the buildings as “well maintained”. Due to long term negligence by the previous buyers, the main building had structural problems and had to be torn down. The financing was no longer viable, and the lease defaulted. The attorney did not do his job, and I had to sell personal property to payout the remaining lease. The hard learned lesson leaned was to not believe what people tell you about property condition, attorney competence and business conditions. Several inspections by specialists in mechanicals, structural and past financial performances as well as legal and financial advice would have avoided this disaster. DO NOT TRUST WHAT PEOPLE TELL YOU>! You must exceed due diligence.