It wouldn’t be 100% truthful for us to say that every multifamily deal that we do works out. Or, that every single investor makes the exact amount of money that we hoped they would make. It’s just not true.
Not every deal goes the way we plan. It’s just the reality of our business.
Today, I’m going to share 3 examples of deals that went south. We’ll talk about what went wrong and what we did about it. Because anyone can share their best stories. Learning from other’s mistakes, and our own is how we all get better.
The Tenant From Hell
A friend of mine, Paul Moore, is also a multifamily syndicator with a podcast called “How to Lose Money.” I’ve been a guest on there, twice! (Some of you know I lost money in the restaurant business, which we talked about on Paul’s podcast.)
The other example I shared with Paul was actually my very first deal. In the episode, I go pretty heavy into what happened. It was a 12 unit deal in Washington DC and I think more went wrong in that one deal than in ALL the deals I've done since then, combined. It's insane. It was such a nightmare.
Long story short, it was a tenant that made my life completely miserable. We were losing money. He was suing me and not paying the rent. He was organizing the other tenants. Couple this with DC, where the laws are very pro-tenant and anti-landlord, it made for a very difficult couple of years.
We missed our financial projections during the first 2.5 years of a 5-year project. Obviously, we missed our pro forma by a mile. Now, we did okay because we were able to increase the value of the building by the time we sold, but the returns were still not as projected.
To make it right for my investors, I simply took my share of the profits and gave them to the investors. And so, that's what happened. That definitely did not go well – for me anyway!
Biting Off More Than We Can Chew
I have a more recent example of a deal gone bad. A lot of people don't know about this, but it was just a year ago. We took a swing at a really large deal. It would have been the largest deal to date, and we really worked hard on it for nine months.
I won't say exactly where it was, but it was somewhere in Texas. It was really an order of magnitude. The deal was simply too big and it really wasn't a great deal. We struggled to raise money. We tried to go down a private equity path and got a black eye from it.
Ultimately, we lost six figures in deposits and due diligence costs that we never got back. Ouch. We don't talk about this one a lot, but we certainly learned a great deal from it.
Lender Woes
Sometimes, we inflict misery upon ourselves, right? Other times, there are things that happen outside of our control.
For example, we did a deal in Huntsville a few months ago. In the 11th hour, the lender reduced our loan proceeds significantly. They changed the terms from 80 / 20 LTV (Loan to Value) to 65 / 35 LTV.
That's a pretty big haircut right there.
We were short by nearly $400,000. This was money that we were going to use to improve the property. It really impacted our ability to execute our business plan. There was no way to get $400,000 out of free cash flow from the building and still make the projections for the investors.
We decided to pay out the distributions to the investors, but we really weren't executing on our business plan. And in the short term, that's great. The investors were happy to get distributions.
But in the long-term, it's bad because we're actually not adding value.
At one point we surrendered and realized this had to stop. But we didn’t want to punish the investors by cutting distributions. Instead, we decided to corral the GPs (General Partners) and make a loan.
We made a $250,000 loan over the next 18 months to recapitalize the asset. And sometimes, you gotta do what you gotta do to make the project right, and take care of the investor.
That's probably the number one lesson: make sure that you satisfy the investor – even if you have to dial back your own profits to do so.
At least, that’s our philosophy. We build our business to get repeat investors. They stay in because we take care of them. If we don’t, it makes it much more difficult to build a business that lasts.
Lessons Learned
“You live and, hopefully, you learn.”
I love this quote. In living, you have to accept the fact that you're gonna make mistakes. Without mistakes, you don't really live well. You live in fear, or you never really live at all, because you're too afraid to make mistakes.
You have to accept the fact that you're going to make some kind of mistake and just be at peace with it. That's lesson number one. Number two is definitely to learn from those mistakes.
The worst is not making a mistake, but making the same mistake twice.
The other lesson, at least philosophically, is to always take care of your investors or customers and to put them first. And sometimes that's difficult to do because it may come at your detriment.
Mistakes are inevitable. Accept them. Do the best you can, and learn from them.
Thanks for joining me today. If you haven’t downloaded your free copy of my report that compares real estate investing to the stock market, check it out here: www.themichaelblank.com/report
If you feel ready to start investing in multifamily real estate, let’s set up a phone call. Go to the NightHawk Equity website and select “Join the Investor Club” to get that scheduled. We look forward to working with you in the future and we'll see you in the next video!
