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How to Lose a Million Dollars from Real Estate: A Step by Step Path

by Marty Boardman on January 13, 2013 · 82 comments

  
How to Lose a Million Dollars

There is something very humbling about being the only person in my house with the technical skills required to replace an empty toilet paper dispenser. With a wife and two daughters I’m saddled with this task at least 10 times a week. I also happen to be the “the man” when it comes to operating a plunger and unclogging shower drains filled with long hair.

But you know what? A little dose of humility is good for the soul.

Take the real estate market crash in 2007, for example. The series of events that followed the historic meltdown of property values bankrupted me. I went from driving a brand new Mercedes Benz to a 1994 Honda Accord.

Talk about being served up a big fat piece of humble pie.

There are those that say you should never waste time dwelling on the past, looking through the rear view mirror. Live your life through the windshield they say. And I generally agree with this wisdom. However, history usually repeats itself.

Now I don’t know about you, but I’d rather stumble and fall with new mistakes rather than making the same ones all over again. After all, the definition of insanity is doing the same thing over and over again expecting a different result. This is why I recently started reflecting on what went wrong with my real estate investment business. How did I lose a million (actually it was millions) from real estate in 2008? What could I do to prevent it from happening again?

If I were to adopt a victim mentality I could have just blamed the whole mess on the big banks, Wall Street, the federal government, black cats and acid rain. I could also claim that even if I did everything right, everything would have still gone wrong.

Maybe so.

But I’m convinced my path to failure was paved with Fool’s gold because I followed these five steps to losing millions in real estate:

  1. Beginning with the beginning in mind.
  2. Being a novice in my market.
  3. Investing for appreciation, not cash flow.
  4. Treating my business like a hobby.
  5. Giving nothing away for free.

Beginning with the Beginning in Mind

“The Russians don’t take a dump, son, without a plan.”
-Admiral Painter (Fred Thompson) from The Hunt for Red October

Did I have plan for my real estate business? Sort of. Did I follow it? Not really. I got into investing because I wanted financial independence. That’s it. And in January of 2006 I could have had it. I owned $16 million in real estate (single family homes) with about $8 million in equity. I could have sold everything off and owned my own home and 10 rental houses free and clear. That would mean being debt free with passive income of at least $10,000 per month. Not a bad life.

But I got greedy. I continued to buy more, borrow more and spend more. Finally, the music stopped and I didn’t have a chair.

Being a Novice in my Market

In August, 2007 my brief reign as a real estate expert ended because of rising inventory levels, the sub-prime meltdown, investor paranoia, El Nino and global warming. Prices had hit their peak and I was still buying like crazy. I figured as long as I was picking properties up for 70 cents on the dollar I was safe from a market correction. But, if I had been following inventory levels and absorption rates (the amount of homes on the market divided by pending sales), I would have discovered that the party was over. In Maricopa County, Arizona we went from 8,000 homes on the market in mid 2005 to 60,000 homes by the summer of 2008. This ignorance really cost me. By the time I figured out what was going on it was too late.

Investing for Appreciation, Not Cash Flow

Robert Kiyosaki says that if you own something that costs you money it is not an asset. In 2006, my residential real estate portfolio was costing me over $30,000 per month (this included overhead expenses.) Talk about negative cash flow. At the time I was overcoming this huge deficit by “cash chunking”. I’m sure you’re familiar with the concept of cash flow – your assets generate income through rent payments, interest, etc. Well with “cash chunking” you sell your assets periodically to generate income.

Little did I know that the housing bust was looming and median home prices were about to plummet. Once it got tough to obtain financing my “cash chunking” business quickly went out of business.

Treating my Business like a Hobby

Although I studied my local real estate market, networked with other real estate professionals and spent thousands on real estate education programs, I never really operated as a business. Here’s why:

  •     I didn’t have formal business plan.
  •     I didn’t adopt an exit strategy for the business.
  •     I never understood important financial tools like balance sheets & cash flow statements.
  •     I had employees but no organizational chart or training system.

Giving Nothing Away for Free

While amassing this great real estate fortune I gave a lot away. I mentored aspiring real estate investors, for free, and spoke at numerous workshops and real estate investing events without the expectation of anything in return.

However, I donated a miniscule amount of my money and time to worthy causes. Imagine all the good I could have done. It’s not that I didn’t think about it. “I’ll get around to it eventually” I thought to myself. But that day never came. Of all the mistakes I made this is the one I regret the most and have vowed not to ever repeat.

Keeping an Eye on the Rear View Mirror and the Windshield

Whether you’re new to real estate or a seasoned pro then no doubt you’ve made some mistakes. What lessons have you learned? What would you do differently in the future?

Since 2009, I made a commitment to not do any of these five things again. I wrote a business plan, learned QuickBooks and started following all of the local real estate industry newsmakers. I donate my time and money to our church and a nearby homeless shelter for children.

Sure, I still make business mistakes like underestimating repairs and overestimating value. And, of course, forgetting to put more toilet paper on the dispenser around my house. But at least they won’t put me out of business.

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{ 81 comments… read them below or add one }

Jim Pratt January 13, 2013 at 12:10 pm

Marty, like “most” investors I too went through that. For me though, bought REOs for all cash, rehab and double their value. The cash flow is great and keeps me well afloat, through buying and refinancing was bringing in lots of cash. When the market disappeared and the government put a freeze on mortgages it put a halt to my party. Nowadays living off my cash flow (retired) WOW! The thrill is gone even though my plan has work, I miss the excitement. What really hurts is my real estate agent keeps sending me listings of homes at 50% below market and in turn key condition.

P.S. same family situation, but my wife THINKS she can, that’s when the arguments starts

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Marty Boardman January 14, 2013 at 9:04 am

Jim, congrats to you for doing what I should have done. If I would have followed through on my “sort of” plan I would have paid 2005 prices for the properties, however they would have been free and clear. Values will come back eventually. Heck, here in Phoenix they’re up 25% in the last 12 months. And assets are not a loss until sold.

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Adrian July 11, 2013 at 9:16 am

Jim,
I would love to talk to you and learn more about your strategy. Drop me a line if you’re still around.

Adrian

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Brandon Turner January 13, 2013 at 1:16 pm

Marty, this might be my favorite BiggerPockets article ever. I think this should be mandatory reading for every investor. I’ll be pointing people to this for years to come. Thanks for being so open and willing to share your story!

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Marty Boardman January 14, 2013 at 9:09 am

Brandon, here’s the funny thing – I got into real estate investment blogging in 2009 because I needed an outlet to describe my financial pain. For a year I wrote about my mistakes, failures, letdowns and losses. Little did I know at the time that this humbling experience would lead to new opportunities. Over the past 2 years I’ve raised over $2 million in new capital, flipped more than 90 houses and got a book deal.

I want everyone to know that it’s okay to fail – even healthy.

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Tim January 14, 2013 at 11:41 am

Marty, how were you able to raise $2 million in new capital to start over?

Thanks,

Tim

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Marty Boardman January 14, 2013 at 11:48 am

Tim, it’s a long story. I could write a book about it. Wait, I actually did write a book about it. It’s called Fixing and Flipping Real Estate: Strategies for the Post Boom Era. It’s available to purchase on Amazon.com or Barnes and Noble :) Just search my name.

Or, if you’d rather not spend $13 just look a a history of all my posts. I’ve written about it before.

Roy May 6, 2013 at 8:39 am

Marty,

As a relatively new investor, your story is humbling as well as motivating. Thank you for sharing. I’ve learned perserverence and the ability to learn overcome most mistakes and you have shown that. If you get the time, read about Abraham Lincoln’s business ventures. There is a story on perserverence, or could be just plain stubbornness. Whatever works!

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Dennis January 13, 2013 at 1:19 pm

Marty,

Great article, let me add one item that a lot of folks including me missed in the last RE bull market. “Buy low and sell high, and then buy low again.”

I can remember in the bull market every media outlet had flip house shows, all touted how to get rich in REI and how all our properties were going to double in values before our eyes.
As a country we all went temporarily insane, it was all speculation, fundamentals when out of the window.
One of my REI friends told me I was too conservative, to old fashioned, there was a new way of doing REI. To tell you the truth he was right I am too conservative, I have a fear of losing too much money. I am not a big risk taker, I am the turtle to the hare of RE investing.

Even though I have all of the above (bad/good) traits I still got into trouble, but my trouble was manageable. Thankfully our lending institutions have still not learned from their mistakes, and the fellows running our government have no idea what they should be doing, so I was saved by our wonderfully low interest rates. I am consolidating and restructuring as I know things are going to change for the worse in the very near future.

What would 10-15% interest rates do to your REI? If nothing then you are ready for any future. Slow and steady wins the race.

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Marty Boardman January 14, 2013 at 9:20 am

Dennis, I believe a key component to a “healthy” real estate market is affordability. From 2004-2008 home values skyrocketed and became unaffordable (unless the borrower obtained interest-only, adjustable rate mortgages). Unless you live in a big city (New York, LA, San Fran) it’s normally cheaper to own than rent. That wasn’t the case during the boom.

I actually considered selling my house at the peak because I could rent a similar home in a similar neighborhood for half of what I was paying on my mortgage. I would have pocketed $300,000 and saved $2000 a month.

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Sandy Blanton January 13, 2013 at 1:49 pm

Same nightmare story here, just different numbers: $10M portfolio with $3M in equity, plummeted to a negative $3M equity position. So many of us have been through this. Our next fortune in REI will be made with conservative leverage, no expectation of appreciation (as you mentioned) and with each unit a “worst -case” scenario well studied.

We have to learn from our past. Many Americans have built a fortune and lost it all. What most of us will find though is that once you’re built a fortune once, you know how to do it again. Good luck.

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Marty Boardman January 14, 2013 at 9:23 am

Sandy, the fact that I was able to build an empire in such a short period of time gives me hope that I can do it again. Frankly, I can’t afford not to. Thanks for the comment!

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Jeff Brown January 13, 2013 at 1:58 pm

Those who haven’t been humbled haven’t lived long enough. :) Mercedes to a Honda? How ’bout Mercedes to nothing? We find out who we are, but most importantly who we’re not, and shouldn’t ever be. Good stuff, Marty.

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Marty Boardman January 14, 2013 at 9:24 am

Jeff, luckily I bought the Honda prior to the crash and owned it free and clear. Otherwise, I would have been riding the bus.

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Michael Woodward January 13, 2013 at 2:11 pm

I want to also thank you for writing this. Perspective and humility are a wonderful things. It’s unfortunate that I usually have to learn them through some sort of pain…. but that seems to be way it has to be for me to accept and embrace them. It’s clear that your commitment to contribute to others is genuine by your willingness to write this article. I’m grateful and inspired. Thanks! Blessings to you and your family!

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Marty Boardman January 14, 2013 at 9:26 am

Michael, I honestly believe I got a little to big for my britches and needed to be knocked down a few pegs. Call it God, karma, the universe, whatever you believe. All I know is my ego was growing too big and needed to be deflated.

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Brad Zerhusen January 13, 2013 at 2:28 pm

Marty,
This is a great article to keep investors honest. Their is a generation of investors out there who haven’t seen a 2000-2006 bull market in real estate yet. Do you mind me asking what price point you were paying for properties and what were market rents on average?

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Joel January 13, 2013 at 2:29 pm

This is an important story about not having all your eggs in one basket.

With 8 million of equity as you said if you would have put some into say triple net properties with corporate tenants you would have fared better during the down turn.

Of course not many thought that the bubble was going to happen and the markets collapsed. You were just stuck with the musical chairs and nowhere to sit at the end.

Don’t feel bad I know some owners with 20 buildings and 200 units for apartments and they financed during the boom times. The prices they paid and softening rents from the short sales and foreclosures in the area have made them almost lose money now. The good properties are propping up the bad and they have to grind it out for a few more years until rents recover and debt service gets chopped down.

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Marty Boardman January 14, 2013 at 9:29 am

Joel, not sure I agree it’s a case of having all my eggs in one basket. Just about every type of investment tanked during the crash. My Dad’s 401K, invested primarily in slow growth mutual funds and bonds, lost money for 3 straight years. Commercial property in Phoenix suffered a similar fate. Plus, I know nothing about commercial. I would have been just as likely to lose out of pure ignorance.

Earl Nightingale once said “put all your eggs in one basket and then guard that basket.” The bottom line is I did a really bad job of guarding

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kris June 16, 2013 at 11:29 pm

Good advice on triple net investment. I had 2 million in equity, put 1 million to buy Walgreens NNN, and rest in 3 TIC’S, Apts and Office. TIC’S are in trouble, may lose one because 25 of us paid 36 million, got loan for 26, and value now 16???!!!
Eggs in different basket helped me. Thanks

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Brian Gibbons January 13, 2013 at 2:33 pm

Really great article! During the boom (2001 – 2010) I was living in Auckland NZ, did 5 rehabs, lived in them as I did them with wife and young kids, live conservatively, and sold everything in 2010.

I switched to Lease Option Assignments and do not leverage anything.

If there was a lesson, I wished I did more JV deals with people with retirement IRA money to fund only and no talent/time to find, rehab and resell for a profit.

Thanks for the article!

Brian

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Marty Boardman January 14, 2013 at 9:31 am

Maybe it’s time to relocate to New Zealand. Thanks for the comment!

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Mike McKinzie January 13, 2013 at 3:40 pm

Marty
An excellent article and there are so many things that you touch on. I could write a book about my adventures in Real Estate, from Agent to Broker to Investor. I am sure very few investors here remember the 18% First Trust Deed money back in the early 1980’s, wasn’t that a fun market.

What I wanted to mention was that I, along with just about everyone else, saw the same thing you did. My numbers are much smaller, only about $7,000,000 worth of real estate dropping to half that. But the other side of that is that my rents went from $25,000 monthly to $25,000 monthly. And my debt service went from $6,000 to $6,000 a month. My point is that the “equity position” I have does not affect my lifestyle or my income.

Any investor who relies on appreciation for part of their investment income is just fooling themselves. While there are a myriad of “rules” for real estate investing, I find a strong foundation of THREE that greatly reduces the chance of failure.
1. The Principal/Interest payment MUST be no more than 50% of the rent collected.
2. Own rentals that you would feel safe having your mother or grandmother live in.
3. Have six months of reserves that cover ALL expenses, including full mortgage payment.

As for an investor’s portfolio, half should be FREE and CLEAR and the other half be leveraged, but NOT to the hilt. Still follow the rules above.

Glad to see you are getting a fresh start and learning from your mistakes. One of mankinds biggest errors is NOT learning from his/her mistakes.

Good Luck.

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Marty Boardman January 14, 2013 at 9:33 am

Mike, that’s where I kick myself the most. In 2006, I could have de-leveraged myself and walked away debt free with 10K a month. But my ego, and greed, wouldn’t let me.

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Glenn Espinosa January 13, 2013 at 3:42 pm

Marty,

Thanks a lot for this article. Interestingly enough, I have been busy trying to implement the 5 things you are doing in your new business with my own. Thanks for the reassurance that I am doing it right and covering my basis.

It’s only when you fail that you learn. I know you’re already bouncing back better than before.

Best of luck in 2013!

Glenn

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Scott January 13, 2013 at 3:52 pm

I “missed” the real estate bubble because I was too busy being a “genius” in the IT business. Decided to concentrate on the IT staffing business, just as that market cratered. Stock portfolio dropped by 60%. Sold the airplane, sports car, hangar, raided the life savings and BARELY survived (jury is still out on that one).

Point is that it’s not just the folks in real estate that got hammered. I’m just getting into real estate investing. You’re post is one my favorites.

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Marty Boardman January 14, 2013 at 9:35 am

Scott, thanks for the comment. Few asset classes performed well during this time. About the only investment strategy that paid off was hiding cash under the mattress.

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Michael January 13, 2013 at 4:08 pm

Thanks for sharing Marty. Adversity is not part of the plan but you overcame it by not complaining and blaming everyone. Way to go & wish you good thoughts to get it back and pay it forward.

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Melisa January 13, 2013 at 4:22 pm

Marty what an awesome article it really has me thinking about my strategy. Thanks for openly sharing.

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Erion Shehaj January 13, 2013 at 6:57 pm

Thank you for this article Marty. It’s as real as it gets and every real estate investor needs to read it and commit it to memory. Unfortunately, many investors operate as if risk doesn’t apply to them. And they will think this article doesn’t apply to them either. What’s ironic is that they need it most.

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Marty Boardman January 14, 2013 at 9:37 am

Erion, when values are skyrocketing it’s easy to look like a genius. It’s easy to dismiss risk with 6-10% appreciation a month. It’s the hard times that help us learn and improve.

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Joshua Dorkin January 13, 2013 at 8:56 pm

Marty – I have nothing to say that the others before me haven’t said already. Thank you.

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Marty Boardman January 14, 2013 at 9:38 am

Thanks Josh. I appreciate you giving us a forum to educate, inform and terrify the masses!

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Joshua Dorkin January 14, 2013 at 10:49 am
Ha January 13, 2013 at 9:59 pm

Thanks for your story. Here I am feeling bad about my investments. But I guess I should be grateful that I still have something. I pulled money out of my primary resident in the end of 2008 to buy stocks, made a bunch of money in the stock market in 2009, I pulled 1/2 of my gains out to buy single family rentals in 2009 & 2010 and a bigger primary resident. Now I lost the other 1/2 of my gains in the stock market. I was thinking that I should have pulled out all of it to buy real estate. I was doing so good except that I got greedy and wanted faster gains in the market so I stuck my money in more risky stocks. Greed always catches up with us.

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Marty Boardman January 14, 2013 at 9:44 am

I don’t know much about investing in the stock market. At least with real estate there’s a little more control. Here’s my plan – buy 12 to 15 rental properties over the next 5-7 years with little or no leverage and live off the cash flow for the rest of my life. Seems simple, I know. Once I have that cash flow stream secured I’ll have some free time to figure out stocks.

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Robert Steele January 13, 2013 at 10:11 pm

Bravo!

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jason January 13, 2013 at 11:14 pm

I want to thank you for mentioning “Giving Nothing away for Free” as one of your biggest mistakes. Very humbling and very true. Had the money many of us had lost been donated to a worthy cause, the world could have found some benefit from the market crash.

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Marty Boardman January 14, 2013 at 9:48 am

Jason, this is a topic for another day, but I think many real estate investors (and business owners) become so focused on the bottom line that they forget about those in need. Our culture rewards self-absorbed people (i.e. celebs, musicians, athletes). Giving and serving is one of the most mature things we can do.

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Tom January 14, 2013 at 5:06 am

Thx for pointing out your mistakes along the way. This is a good lesson for everyone.

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Marty Boardman January 14, 2013 at 9:49 am

Tom, I could write a book about my mistakes. Actually, I just did. But I think we learn far more from failure than success. Thanks for the comment!

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Jason Lavis January 14, 2013 at 5:14 am

Great article, it is not everyone who can be open and honest about mistakes, share the story to the world, and start to bounce back so quickly. A lot of people would still be crying in their beer!

It pays to diversify within an asset sector, (some long term rental, some fixer uppers, some crisis plays etc), and diversify internationally. Lots of the old rules are changing (e.g. prices always go up in the medium term…)

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Marty Boardman January 14, 2013 at 9:55 am

Jason, you’re right, I never cried in my beer (didn’t want to water it down). My faith kept me going and today my family and I are on the right track.

I will disagree with you a little on the diversification. Just about every asset class dropped in value during the crash. I think debt is the real issue (too much of it). Had I de-leveraged, or got out of debt completely, I would have had plenty of cash flow to make it through the crash. Rents here actually went up because families that lost their homes to foreclosure needed houses to live in.

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Cheryl January 14, 2013 at 6:02 am

Thanks Marty. Many out there think it’s all so easy. I made some bad choices in the late 80’s and sat upside down on a number of properties for 6 or 8 yrs. (S&L crisis). I also got greedy and lost significant NW in the dot-com implosion. I stopped buying (except for a couple 1031’s) in early 2003 and did not get back in until late 2008. Glad to see that you got up, dusted yourself off and got back to work!

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Marty Boardman January 14, 2013 at 10:00 am

Cheryl, since the crash it’s my mission as an investor, writer and instructor to let the world know that real estate investing is NOT easy. Thanks for reading.

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J Scott January 14, 2013 at 6:58 am

Getting to know you this past year has made it clear to me that — despite any adversity in your life — your great attitude will allow you to always come out on top.

Great post…

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Marty Boardman January 14, 2013 at 10:02 am

Thanks J. It’s a honor to work with you – I’ve learned more about flipping houses from you in the past 6 months than I have in the last 10 years.

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Eric H January 14, 2013 at 8:57 am

Marty, you have reminded me…..of me. This article needs to be MANDATORY READING for all newbies and….well….everyone else in the REI business to boot. Thank you, now I don’t feel so alone.

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Marty Boardman January 14, 2013 at 10:03 am

Yes Eric, misery loves company. Just remember, no matter how bad it gets someone else has a few more zeros in the loss column than you do.

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Lauren C January 14, 2013 at 9:14 am

Marty,

This is a great article. I’m new to investing and haven’t made my first purchase yet. I’ve been working on creating guidelines to follow when I get started and these 5 points will definitely be making my list. I especially like the one about how you should keep the end in mind. It’s easy to get caught up in the business and forget what your end goal is. Thank again!

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Jose Gonzalez January 14, 2013 at 9:36 am

Marty,
This is one of the best posts I have read. I believe you made everyone think and reestructure the business to limit the risks of REI.
As for me, you made me doubt if what I am doing is allright… I have been buying Single family homes all cash.. what I do is to make the offers so the properties can give me close to 2% of monthly rent / total price. Then I verify that I am really paying about 70 cents per dollar in value. I own 80% of the properties free and clear, but already leveraged that 20% and looking to leverage much more to increase the return on the investment.
My business that gives the cash for the purchases is now self-operated but I really dont want to screw up my Real Estate portfolio…
What would be your advice for this noobie? Since I started buying at the end of 2011 in a low price market (just lucky), but still I dont have the experience to analyse if its the best strategy, or how I can improve it…
Thank you!

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Marty Boardman January 14, 2013 at 10:06 am

Jose, I’d limit your leverage to 50%. As a buy and holder I don’t think you should worry too much about purchase price. If you know your market and what houses will rent for your cap rate or ROI are more important numbers for determining whether or not to pull the trigger. That, and repair costs.

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Jason January 14, 2013 at 9:44 am

Marty,

Thank you. Its much harder to share the hard lessons learned than the big check wins. Congratulations on making this a positive experience rather than wallow in misery. Stories like these inspire me far more than the “how I made a millions dollars” stories.

Jason

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Marty Boardman January 14, 2013 at 10:10 am

Jason, I wallowed in misery for a while but in the end my faith carried me through. Eventually I started reading about some of the great individual success stories (Abraham Lincoln, Thomas Edison, Walt Disney) and they all failed miserably before reaching great heights. Why should I expect to be any different than them? I appreciate the comment!

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Jeff Brown January 14, 2013 at 10:03 am

Hey Marty — I’ve always loved Buffett’s thinkin’ on diversification, and adopted it in my own approach to investing. He said, “Wide diversification is only required when investors do not understand what they are doing.” I know, sounds a bit harsh, but if you look at what he’s limited his company’s investments to — the model — he’s not varied much in decades.

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Marty Boardman January 14, 2013 at 10:15 am

Jeff, I read Warren Buffett’s book “The Snowball” a few years ago and have adopted a lot of his strategies into my business too. You’re right, he never changes and I think we can all agree he’s done pretty well for himself and his investors.

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Sharon Vornholt January 14, 2013 at 1:59 pm

Great story Marty. That period of time left a lot of folks “high and dry”. Things were just so good for a long time. it was hard to see that “times were changing” if you weren’t paying close attention. You are certainly not the only one that can tell this story.

Thanks for sharing.

Sharon

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Marty Boardman January 14, 2013 at 3:35 pm

Thanks Sharon. You’re right, there was no lack of shoulders to cry on in 2008.

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kris January 14, 2013 at 6:35 pm

Losses has been common lately, 60% of TIC’s – Tenants-In-Common properties are in trouble. I am in one now, where 25 owners bought an office bld’g for 36 million, got loan for 26 million, and value is now 16 million!!!! due to vacancy increase, for loss of defense related budget cuts. Hope bank co-operates, or we lose property. Luckily it is a non-recourse loan, so life goes on!!!!

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Marty Boardman January 17, 2013 at 11:39 am

Although I’ve never owned commercial, I’ve heard similar tales. Industry people tell me commercial follows residential trends about 12-18 months. Good luck to you!

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Ryan H January 14, 2013 at 9:15 pm

Hands down the best blog/forum post/etc I’ve read on this website, made me do some thinking today. I respect the courage it took to write this.

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Marty Boardman January 17, 2013 at 11:41 am

Ryan, I appreciate the comment. I write about the ugly stuff because I hope others will learn from my mistakes. And it’s therapeutic.

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Nancy January 15, 2013 at 12:13 am

Good day! Many people experiencing this kind of situation. Many people losses and you cannot never bring the past anymore. It’s all about dedication to your work. Thank for the story Marty.

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Lee Carney January 15, 2013 at 12:49 am

I think we have all ‘been there, done that’ Marty. Thanks for sharing. I am glad to see you don’t stay down. “Success is getting up one more time than you fall”

Lee Carney

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Marty Boardman January 17, 2013 at 11:42 am

So true Lee. I think going broke is a right of passage for every successful business owner.

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Mo Woods January 15, 2013 at 8:05 am

Marty~

Wow! What a journey you have been on…from success to failure back to success. (Maybe you went from Mercedes to Honda back to Mercedes)
Cliche’s do have a bit of truth in them: “Success happens after many failures.” Failures are our best teachers. Thanks for sharing your story. I work with many new real estate investors who are so paralyzed by their fear of losing their money that they never do anything. Your story stands to demonstrate to just have the courage to take a “calculated” risk & take the leap of faith; you may just land on 2 solid feet in the life you really want. One full of abundance vs scarcity. One full of happiness vs despair. A life full of meaning, purpose, contribution and fulfillment. Congratulations on your epic failure. You paved your way to your newfound success. Happy Day!!

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Giovanni Isaksen January 15, 2013 at 3:48 pm

Great post Marty, I agree with Brandon that this is one of the best ever on here. Your #3 is the key to real estate investments. My grandfather said if it doesn’t cash flow it’s a speculation and a speculation is just a half step from a gamble.

Unfortunately I broke my own rule, buying a building to convert to condos because profits from selling a business were burning a hole in my pocket and I couldn’t find a property that would operate as an apartment; everything at the time was priced to sell as a condo conversion.

I was lucky to get out with a breakeven and that’s only if I don’t count my time or energy I put into the deal. That’s when I started to study real estate cycles. Knowing where you are in the cycle is now my #2 rule.

Good hunting and thanks for sharing your story.

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Marty Boardman January 17, 2013 at 11:45 am

Giovanni, now that I’ve lived through a 10-year real estate cycle my eyes will be more wide open when something like this happens again. That’s what I love about Warren Buffett. He studies history – in his book “The Snowball” he went back and looked at cutting edge technologies that changed the world (i.e. automobiles, planes) and discovered they were lousy investments. That’s why he didn’t get involved in the .com boom.

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Giovanni Isaksen January 17, 2013 at 2:46 pm

There’s an old quote: “Real estate has 10-year cycles, but real estate professionals have five-year memories.” Glenn R. Mueller Ph.D. has done some great research on real estate cycles, if you search on his name plus ‘real estate cycle testimony’ you’ll find a PDF that describes his work on cycles that he presented as part of his testimony before a Congressional committee.

With you 100% on Buffett (and Charlie Munger too). Those guys should be studied by every real estate investor because income property analysis is value investing applied to real estate. MarketWatch had a great piece by Soo Chuen Tan called ‘How to channel your inner Warren Buffett’ that describes Graham/Dodd/Buffett/Munger approach in a nutshell. You can find it by searching on the title.

Good hunting!

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Erik January 15, 2013 at 4:07 pm

Yikes!!

But a story not wholly original for many buyers of our generation. Well told; and here’s to learning from your mistakes!

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Katherine Grote January 17, 2013 at 11:09 am

Marty…this is without a doubt, the best blog post ever. Thanks for writing. I know it will help many! We too got in the business on a whim. We watched one to many episodes of, “Flip that House,”….really. And said, “Hey! We can do that!” Thankfully we’ve not gotten burned too badly along the way and the experiences learned are now paying off. Thanks again.
Katherine
P.S. I too am a fellow “Yumanite” :) Lived there 20+ years.

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Marty Boardman January 17, 2013 at 11:47 am

Wow Katherine, small world. Yuma is a great place to grow up – and not just a place to stop for gas on the way to San Diego!

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Matt January 17, 2013 at 5:58 pm

Excellent post Marty. I probably use the “don’t take a dump w/out a plan” quote once a week, so nice to see we’re on that same page.

If I may ask a more straight forward math question: what happened to the rental income from your investment properties?

You mentioned you were cash chunking to increase your revenues in a negative cash flow scenario, so I’m curious if the rent was less than your mortgage payments, rent prices somehow decreased, you had vacancies, etc?

Just trying to understand how the accounting worked out so we may identify the problem early if any of us might fight ourselves in your situation.

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Marty Boardman January 21, 2013 at 8:50 am

Matt, I was negative cash-flowing on almost all of my rentals, between $50-$300 per month each. It never worried me much back then because I had so much equity in the properties (there were all pre-foreclosures I purchased for 25-35% below market value). When money got tight I’d just sell off a couple. It was easy to do because the market was so hot.

The negative cash flow problem was compounded by my team. I had six full-time salaried employees.

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Matt January 21, 2013 at 9:32 am

Thanks Marty. Appreciate the details.

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Henry January 17, 2013 at 8:48 pm

I am wondering about the others you trained for free to do the same exit strategy and whether they lost millions too. I assume they did. Since you learned your lesson I would also assume that you did not go from Honda back to Mercedes. Who needs a Mercedes anyway when you can do just fine with a regular late model car according to Buffet. In step #3 you talk about following Poor Dad -Robert Kiyosaki’s principles or philosophy which coincidentally just recently filed for bankruptcy. Therefore, Kiyosaki’s philosophy may be flawed as well.

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Marty Boardman January 21, 2013 at 8:59 am

Henry, I wasn’t training anyone – not sure what gave you that impression. However, those investors I partnered with or borrowed from did lose money. There was a lot of collateral damage.

And no, didn’t go back to Mercedes from Honda. After selling my Benz for half of what I paid for it new I vowed never to buy new again. I sold my Honda two years ago after it hit the 230,000 mile mark and bought a 4 year-old Infiniti from my neighbor. Although I’ll admit I’m now in the market for a used Ford pickup truck.

As for Robert Kiyosaki, I’d encourage you to do a little more research on his bankruptcy. Check out this link:

http://www.nypost.com/p/pagesix/rich_dad_bankrupt_dad_UNJgqVDYCEthW1TEAYYwXN

He did not file personal bankruptcy. His company, Rich Global, LLC did after losing a lawsuit with the Learning Annex. The article says his net worth is still well over $80 million.

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Shaun January 25, 2013 at 9:46 pm

Marty I will echo so many others in saying this is one of the best articles I have ever read.
Thank you for the honesty and insights about the mistakes you made and the lessons you learned from them.

This should be mandatory reading for anyone getting started in investing.

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Henry King January 27, 2013 at 10:10 am

Hello all,
This article is very informative as well as all of the post here. I am basicly a newbie investor; I started my REI career 1 year ago. My game plan is to wholesale properties and then use that capital to buy rental properties to hold long term. My question is how can I access other sources of capital without having to deal with the banks (I’m already aware of owner financing)? And also, what formula can I use to ensure that I will not over-leverage my investments?
I want to own 400+ residential properties(mainly low income) and I know it could take up to 20yrs. or more to do it. I would greatly appreciate any suggestions on how I can accelerate my efforts and maybe cut the time frame down a bit.. Thank you for your time..

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Tommy B. June 16, 2013 at 6:10 pm

Great food for thought! I appreciate the message here. It also shows that the hard part is learning how to create wealth. Once that is learned then it can be done again and again. Barring addiction or other mental illness, it is very rare to see someone with the drive and intelligence to build a system to create wealth, lose it and never achieve it again. Great come back story! Thanks for sharing! Heading to amazon now.

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Wendell de Guzman August 28, 2013 at 5:37 pm

Great post Marty.

One mistake I did is NOT buying real estate when the market went down. I stopped buying. I was too scared to get back in the game. Now I am back but I am kicking myself for not getting back sooner.

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