7 lessons learned after Losing More Than $100K
Investing is risky! I know. Earlier this year I personally had a six figure loss on an investment I made. I wrote the check. Put my faith and money on the line with a team I believed in and still do believe in. And in the end, I lost all of it. We had money hard post due diligence and we couldn’t close. Ouch. What did I learn? Before I continue, please know this was my money—not a penny of any investor’s money was ever at risk. I will probably post more on this topic because it’s so loaded with lessons. Let’s start with the big ones…
- Nothing in life is guaranteed. Recently, my 85 yr old aunt was notified that her assisted living / retirement home had been sold and she had to get out within the next many months. We were talking about this and she said, “that’s life. There are no guarantees.” I remember thinking when she told me this I wanted to be that calm in the face of such an unknown. She can’t drive any longer. She’s stooped over and can’t walk very far. Her whole world is centered around her care-givers and fellow seniors. This was a major upheaval and she took it in stride.
No matter how much I work to vet a team, project, fund, stock (any investment type) in the end after I do all the things that should ensure a tremendously favorable outcome, there are risks. This is why we work really hard to understand where the risk points are, plan for them and focus on delivering risk adjusted returns when we bring an offering to our investors.
- Losing money hurts. A lot. No matter how much, for any individual the risk of losing money is a serious matter and one that should never be taken lightly. I never want to have another phone call like the one I received that morning. I will do whatever it takes, every single time, to ensure my investors never get that kind of call from me too. After the hurt, I realized it was an opportunity for a post-mortem on what MAC Assets could do better. I dug in and I’ve changed several processes. (More on that in another article) You either win or learn in life. This time we learned.
- Sometimes, you just can’t control it all! There are elements of this business that are extremely difficult to control. In the deal that fell apart, 2 well known investors didn’t honor their commitments. It wasn’t personal, it was a situation out of their control. One very small technical detail involving a 1031 exchange. That domino fell, thereby making our dominos fall. With 20/20 hindsight, a super specific question was never poised to our investors creating the exchange. An assumption was made by the GP team that was wrong. Our system broke down. We couldn’t control how an investor’s exchange docs were created; however, we could have learned it was never going to work on a different time frame. Maybe that would have been enough to avoid the loss. Hard to say.
Reflecting on my days in corporate sales, this is akin to what happened so often I became numb to it. We’ve all felt it as sales pros. The sales cycle goes full tilt. You find a suspect. Do the work. Convert the suspect to a prospect. Spend the time, energy, hours, and build a solid relationship, Get an RFP. Deliver the goods. Win the RFP. Tell your boss. Get the attaboys. Ops says “nope—we can’t deliver on the accepted time frame.” Insert whatever reason it is here and try hard not to blow up yelling on the phone to someone. Gotta cancel the order. There goes the quarterly deliverable. No fault of your own. Ouch.
Best defense against this (aside from working hand in glove with Ops, and every other department in the org) is output for a salesperson. Multiple different proposals, clients, projects. In other words, a robust pipeline. Even then, sometimes, you just can’t control it. Covid hits. Or someone’s mom dies. Or supply chain snafus send the shipment back to its point of origin and the Qtr closes without delivery. Sometimes it’s just out of your control. But, and this is a huge but, you can control your output! And this is the crucial takeaway for us. We needed to have like $3M lined up in reserve and we didn’t. Output failure. I can only look myself in the mirror and say “learn.”
- There can never be enough contingency plans. Never! We got hit with a trifecta of issues and each time we overcame one, another issue hit. In the end, timing caught up with us. It’s sometimes like a falling knife—catching it will cut you, but is that better than losing it all? The above pipeline saved us 2 times, but couldn’t do it the 3rd time.
- Markets matter! Policy matters. Business is not done in a vacuum. Transactions are done by people. And people have emotions. Emotions are a part of every transaction that must always be part of the calculus of a transaction. Doesn’t matter if it’s good times or bad, emotions are the drivers of far too many decisions. If you can keep emotions out of your decision making it doesn’t mean someone on the other side of the transaction will do the same.
The volatility of Q2 this year has been well documented. Fed interest rate changes have massively impacted multiple sectors in commercial real estate. We’ve all realized the 300 basis point rise in the fed funds is impacting our lives. Lending institutions are twitchy and driving very different terms to loan. Typical value add bridge notes were offering loan to cost financing between 70-80% plus 100% of cap ex. In the course of less than 3 months that world has dried up. LTC leverage has been greatly reduced, often in the low 60s range. Debt coverage ratios have become more strenuous. Commitments from lenders of funding levels are being changed within hours of closings. All of these lending changes require more cash to close any purchase. And, as more cash is expended, less leverage is available, less arbitrage occurs, and eventually, you, the investor, receive a lower return on your investment.
- Banks are focusing very hard to ensure that no loan goes bad. Intrinsically, this is good for our economy. No one wants defaults. A more stringent lending environment means less aggressive financing, arguably leading to less aggressive purchase prices, a slowing of demand and a reduction across the economy in inflation. However, this also means what once was a safe haven for your investment dollars without excessive risk now is “more safe’ and the returns reflect that with lower payouts and reduced cash flows. Deals are harder to close with many more obstacles than even a few months ago.
- Relationships have quantifiable value. If we had had stronger relationships with the lender, or the seller, we might have been able to get to some accord. Our seller ran out of patience. The lender changed terms. These breakdowns are compounding effects upon each other.
How do you, the passive real estate investor, benefit from this article? Simple. This experience is like so many others that occur every day in your life. Relationships have quantifiable value. Build your relationships with operators that match your values and can openly and honestly admit when something doesn’t go as planned. Every project will have some of those events. Investing is work, and it’s always, always got some risk. Most often the rewards materialize, Sometimes they don’t. That’s life. Oh yeah, my aunt found a new place to live she really likes.