Money Mistakes: Bad Real Estate Deal

Welcome back for another “Money Mistake”, where fellow bloggers reveal that yes, we can make mistakes with our money too. The important part is to learn from them and help others avoid making the same money mistakes we did. Enjoy!

Tell us a little about yourself.

I came from a third-world country to the US with only $1,000, not knowing anyone, guided only by an immigrant dream. It was challenging to survive and thrive in one of the most expensive parts of the world. Accumulated a net worth of $2.3M in 12 years to be financially independent; while enjoying each day.

A lot of my early success resulted from improving my human capital and turbo-charging my income. Once I had enough income, I went into aggressive levels of investing.

I am a black sheep among personal finance bloggers. While most bloggers invest in index funds, and it is the right move for many, I wanted to get to the Financial Freedom finish line as soon as possible.

I do have 50% of my net worth in stable index funds on the best investment platform. But I also dabble in SPACBitcoin, individual moonshot stocksreal estate syndicationgold, and farmland. I want my portfolio to grow but also survive under a variety of economic conditions. After you have lived your life in poverty, you are always afraid that it will all disappear one day. I am a firm believer in diversification among various income-producing assets.

I also leveraged real estate to buy my primary home and rental in the San Francisco Bay Area, an excellent investment. Of course, home price appreciation is not the same in different cities, so one must always be cautious. Fortunes have been made investing in real estate but also lost in real estate.

I always recommend having enough money before investing in real estate. There are ways to invest in real estate with little or no money, but all of them involve substantial sweat equity.

The investment in my Bay Area real estate grew to more than half of my net worth. So I did a cash-out refinance and then invested the money in the market during the crash.

I have made many money mistakes along the way, including 4 of my worst investments which lost me over $100k each. Some of these bets may eventually pan out, but I post to indicate that my investment ideas are not always successful.

What was your money mistake, and when did you make it?

I have made several money mistakes, but my biggest mistake was when I lost over 45% of my capital in a real estate deal.

What led you to making the mistake?

I was not knowledgeable about real estate investments at that point in time. Also I have a tendency to invest and learn along the way. This approach has worked well for me in the past because most investments one can deploy a small amount and scale up to the larger position eventually. However, with real estate you do not have the luxury of making small incremental investments along the way.

How did you recover from it?

From a financial sense, I never recovered the money lost. I did get to write off the loss as part of my year-end tax planning strategy. I won’t lie that losing money sucks. I was in a bad mood all week. But then I looked at the loss relative to my overall net worth. I plugged in the numbers in my retirement calculators and realized it would not hurt me from reaching my financial goals.

I highly recommend constantly tracking your net worth to ensure you are on track for your goals. There are several tools available for free.

What would you have done differently?

In hindsight, I should have learned more about the asset class and evaluated the pros and cons. But I took it as a learning lesson and developed a 10 point checklist. From now on, I know how to evaluate crowdfunded real estate deals.

How can others avoid the same money mistake?

Spend time learning about any new investment. Run the best and worst-case scenarios and never go all-in on any one asset class. I received many questions from readers on investing in 401(k) vs. real estate. I ran the numbers with several assumptions to provide a framework for decision-making. I highly recommend a similar approach when you need to compare two different investments.

Most importantly, what did you learn from your money mistake?

I learned that I need to do a better job when investing. I put all my learnings into developing a beginner’s guide to crowdfunded real estate.

As an investor, I now have clearly defined investing criteria to guide if I want to invest in debt or equity-type deals. New build or rehab? Residential or commercial real estate development? If residential, do I want single-family houses or apartment buildings? Commercial real estate investment could range from warehouses to office buildings. Which states do I want to invest in?

I also learned to research the crowdfunded real estate investment platforms, the sponsor, and each deal to make a judgment based on my risk profile. Follow my vetting process.

Anything else you want to say?

Losses and money mistakes are unavoidable when trying to grow your wealth. The most significant risk is not investing and staying in cash. Although cash and bonds might feel safe, inflation will eat up your purchasing power. It will be hard to survive, and you definitely can’t build generational wealth by investing conservatively.

To weather the storms from your money mistakes, make sure you have a high savings rate. At the end of the day, how much you save is the only factor within your control. Even the SEC recognizes that investments carry risks. Hence they restrict certain assets based on accredited investor qualifications of income, net worth, or knowledge.

So don’t beat yourself up over your losses. Learn from your money mistakes. Also, learn from other’s mistakes so you can avoid making similar errors. I am glad that Jeff has provided a forum for everyone to share and learn.

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