How NOT to Invest in Real Estate… A Case Study

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Here lies Walter Fielding. He bought a house, and it killed him.
–The Money Pit

If at first you don’t succeed, try, try again. Then quit. There’s no point in being a damn fool about it.
–W.C. Fields

The saying is that it takes the successful entrepreneur three tries before he gets it right. The first two businesses fail, and then he figures it out, and goes on to success from there.

I am living proof that the number three is an average. I played on the high end of the curve before figuring things out. Were it not for me, the saying would be that the successful entrepreneur requires 2.9999999 tries before he gets it right.

I’ve had the real estate investing bug since the late 1990s, when I stumbled into a Russ Whitney seminar. No money down, slap on a coat of paint, flip that bad boy, and PROFIT! What could go wrong? Russ acted like he owned half of Florida, and, at that time, my Monkey Brain (what I call my limbic system) was strong. Tag team those two together, and they were off to the races with me being dragged in tow.

My real estate investing career started with Cavalier Properties. There was a guy who ran a coffee shop who said that heíd done construction in the past and could help with renovations if I could do the funding.

Yeah. Stop right there.

Lesson 1: Never Trust a Coffee Shop Barista who says He Does Construction on the Side.

We wound up doing a few small jobs, left one person in a lurch which required lots of yelling and screaming from me and darn near ruined a friendship, and ended up with me owning a rental property that somehow, miraculously, managed to make a profit when all was said and done.

Still, it was nowhere near the real estate empire I envisioned.

Actually, I did learn one key lesson from that little adventure.

Lesson 2: No Money Down Never Really Means No Money Down. You Have Expenses Which Get Paid from Somewhere.

In business school, I decided to take the leap again. I’d taken the real estate investing elective course, and, surprisingly enough, by then, I’d accumulated enough book smarts that I actually didn’t learn too much in the course which I’d not already found out through reading everything I could get my hands on at Barnes and Noble.

I had classmates who were interested in real estate and I was darn sure not going to get in a situation where we were cash poor and house rich. I’d been down that path already and wanted to make sure that we were properly funded.

So, I started asking around and found about 15 people who said they’d pony up $10k to go in and buy and renovate a house in a historic district in Richmond, Virginia. I spent many a weekend in Richmond scouting out houses, and we found one that we wanted to make an offer on. We could get the house, renovate it, and then sell it for a pretty nice profit.

Thus was born Monumental Restorations.

However, once it came time for people to actually pony up the money, there were a lot of cold feet. Suddenly, everyone had other ideas, except for two brave, intrepid souls who committed along with me. Our slashed budget meant that we couldn’t go for the nice house renovation route.

We decided instead to go to another historic district in Richmond. It was on the other side of the tracks. We got a nice house in a crappy neighborhood. It needed a lot of work. We hired a contractor to do the work.

The problem with the contractor that we hired was that he had grandiose ideas of creating a perfect masterpiece when all we needed was for him to get it up to a rentable condition so we could either flip it or rent it. It was in a historic district, so there were renovation tax credits available which could have significantly lowered our basis in the property.

Unfortunately, we were all in Charlottesville and he was in Richmond and we did not supervise him like we should. It took him seemingly forever to rehab the place and he ran WAY over budget.

We had created the nicest house in a bad neighborhood.

The good thing was that one of the people in on the deal was married to a Richmond policeman, so it did become a convenient headquarters for the cops to do their weekend stakeouts.

We decided to rent it out to Section 8 tenants. They were supposed to take reasonable care of the place because their Section 8 status depended on being good tenants.

We waited for a rental check.

It never came.

We decided to go in with the agent and check what was going on.

We found evidence of several people living there and bags of pot everywhere. My impression of Section 8 has never recovered from that scene. I’m sure there are great Section 8 renters and it’s a good program, but I saw zero evidence of it as those people trashed our property.

Thus, we had to invest a few thousand more to make it habitable again. This time, we decided to fire sale the house just to get out. I was tired of making the drive and having the drug dealers on our same street look at me and wonder if I was a narc. It was a good thing I drove a hoopty, because otherwise, they might not have been kind enough to let me drive through their drug deals unscathed. By the time we sold it, everyone had lost their initial investment and then a little more as we had to cover the mortgage payments once our initial money ran out.

0 for 2.

So far, I’d failed because of lack of capital and lack of supervision. Remember, all of this happened while I was either in between being in the Army and grad school or grad school, so I had very little income. Each time things didn’t work out, it was painful. You’d think my past performance would make me a little more risk averse in real estate investing.

Once I graduated from grad school, I started working at Capital One. Several people invested in real estate there, and since I finally had a good income to support myself, I started talking to people. Furthermore, I knew a builder who actually made really nice houses. I had seen some of his homes and was very impressed. They were nice. He was (and is) an excellent builder. I started putting two and two together. I could get some people together, and we could fund this builder to build nice homes and make a little profit. He’d put in the sweat equity and weíd be his funder.

Thus was born Bridlewood.

I again had two more partners. This time, both of them, along with me, had real jobs, so we had the income and the capital to back our ventures. We decided to buy a lot in a ski resort and let the builder build a reasonable home on the lot. This was in 2004, when the market was hot. The builder sketched up plans, and we worked with a Realtor to put the house on the market.

It sold before we even broke ground.

Whoo whee!!!! Jackpot!

Since we had one house under contract, we decided to get another lot in the same area. There was a lot which was very underpriced, and we jumped on it. The builder started building the house, and all was going well.

Until the buyer decided he wanted a few modifications.

What originally was only going to take a week started dragging. Finally, after three months beyond when the house was supposed to be completed, where we ate the mortgage, it closed.

Lesson 3: If a Buyer Wants Modifications, Include Your Carrying Costs in the Price for the Modifications.

We still made quite a significant profit off of the deal. After paying ourselves back some, we had plenty of money to fund the building of the next house.

That house was MAGNIFICENT. I wanted that house like nobody’s business. It was a little more expensive than the first one. It also took a little longer to build than the builder had originally said it would take. We were getting nibbles on it, but didnít have any concrete offers. Still, we were confident it would sell, because it looked great and was pretty reasonably priced for what it offered.

Our builder also mentioned that he wanted to keep his crew together and that if we started multiple projects at once, we could probably lower the overall cost per square foot of the build.

Let me stop for a lesson.

Lesson 4: If You’re Building a Spec Home, Tie the Builder’s Compensation to Completion Dates and Milestones. Time is Money in Building.

We found two lots in a proposed development of six lots and made an offer on the lots discounting from the listing price because we were buying two. After a little back and forth, our offer was accepted. We closed, using up the rest of the money that we had, anticipating the sale of the second house to cover us.

The second house did sell a couple of months after it was completed, and it, too, was profitable. We didn’t have to dip into our pockets too much to cover the payments, although, for a while, we were making two lot payments and one house payment. Ouch.

By that time, though, the writing was on the wall that the real estate market was slowing down. We had seen what it was like to be carrying a house and some lots out of our own pockets, and it was a painful, but not devastating experience. We certainly didn’t want to be in a situation where we were carrying two house payments, particularly when what our builder would build, and, thus, what we’d have as a mortgage, would not be covered by what we could rent these houses out for.

We made the decision that we’d wait. We’d list houses on the market to be built and then, when we got an offer, we’d build. The prospect of being stuck with two spec homes made our Spidey senses tingle.

Then our builder got remarried and moved to Richmond. Then he got divorced and moved to goodness knows where. We lost touch.

We decided to try to sell the lots as land.

Our problem was that by then, the market had tanked. Fortunately, we didn’t have homes, but, unfortunately, we had bought two lots to keep a crew together that had disappeared into the wind, leaving us to hold the mortgages. We had put a significant down payment down, but that was rapidly eaten up as the market crashed.

In time, the money from the sale of the two houses went into the mortgage payments for the land, and we started having to dip into our own pockets to pay the mortgage.

Lesson 5: Raw Land is Hard to Move in Most Cases. It’s Certainly Difficult to Move Quickly for a Profit if There’s not Something on the Land.


Raw land Doesn’t depreciate, so you can’t even recapture some of the losses when the market value tanks.

It took seven years before we finally sold both of the lots. Once everything was said and done, we lost tens of thousands of dollars. We were fortunate that we had solid jobs and solid financial positions otherwise so that we could continue to feed that monster. It was bad, but it could have been worse. We could have built two half-million dollar spec homes on the lots and been stuck with THOSE mortgages.

The experience was like being cut with a knife. It left a nasty scar, but didn’t cause a critical wound.

Eight long years. If we would have stopped after the second house, we’d have been well into the six digits to the good.

As it was, we were well into the five digits to the bad.

Has the experience made me completely shy away from real estate? No. We have rental properties now. They’re all bought with cash. I may change my approach one day and use a little leverage (call me hypocrite now, since I say that there is no such thing as good debt!), but for now, we’re all cash in our rentals.

Hereís how I now approach real estate:

  • Carrying a Naked Mortgage Sucks. We actually started out the right way if we were going to spec build. We bought the first lot with cash and had enough cash in the bank to handle the construction loan payments while the house was being built. We sold the house before shovel met dirt, so we knew our costs from day 1. It was when we stretched ourselves too far and had mortgaged land that we lost our way.
  • I Buy Property for Income Potential, Not Appreciation Potential. There are flippers out there in the world who know exactly how to apply three brushes of paint and add 50% to the value of the home. I am not one of them. I know how to model out cash flow. If I get appreciation, it’s going to be all gravy.
  • Having no Mortgage on my Rental Properties Removes Desperation. If I absolutely have to have a renter to cover the mortgage, then I might lower my tenant standards and find myself with an even worse problem when the drifter ruins my place. Not needing to cover a mortgage leaves me time to make wise decisions instead of chasing a month or two of rent.
  • Having Cash and Being Patient Means You Can Drive a Hard Bargain. I can be very picky in what I choose to buy, and when I make an offer, I can provide a very credible case. Nothing says relief to a desperate seller (the only type I buy from) like the offer terms I can pay in cash and close in 7 days. This is my first and only offer.

Would I ever invest in raw land or in spec building again? Probably not, even if I had the cash. The risk/reward is simply too great for my tastes. I can find better deals in existing houses because I can take advantage of specific situations to my advantage.

Is investing in real estate for everyone? No. You have to either have a) capital or b) know-how to apply sweat equity to make a deal work, and even then, sometimes the deals don’t work. When they don’t work, you have to have the financial wherewithal to weather the storms.

It’s taken me four times to get it right. I don’t plan on changing my approach again.

Do you invest in raw land or spec homes? What do you do? Tell us your thoughts and stories (good or bad) in the comments below!

Photo: pnwra

About Author

Jason Hull

Jason is a Fort Worth financial advisor and creator of the Winning With Money course, a personal finance course with 20 lessons and 8 different worksheets designed to answer questions ranging from planning for your child's college to real estate to personal household budgeting. Learn more at his Fort Worth financial planner website, Hull Financial Planning. Hull Financial Planning, 2939 Crockett St. #315, Fort Worth TX 76107


  1. Wow Jason that was some story. It was interesting to me because I too will be starting off with very little capital. That’s why I plan on educating myself first. I’m going to get myself a real estate text book and study that, take real estate classes and then get licensed. I plan on first investing in rental properties and then years down the line when I am more experienced and have more capital to work with I plan on investing in commercial properties, buying and developing raw land, and investing in tax liens. Your story was really inspirational for me. You weathered some bad storms but you never gave up, you stayed dedicated and became successful. That’s what a newbie like me wants to hear, great blog!

    • Terry–

      Thanks for commenting! Glad you enjoyed the stories. Even if you’re investing in rental properties and planning on using leverage, I can’t emphasize enough the importance of having enough capital behind you to make it through rough patches. If I had it to do again, I’d either try to buy a property for cheap or I’d find a mentor ( in a nearby city – so that you’re not viewed as a potential competitor – and watch how he/she does it until you absolutely, positively learn nothing else on each deal. There’s no substitution in any book for on-the-ground experience and learning how to walk through a property and envision the potential rather than see the current state.

      Granted, I’m more risk averse than the average bear, and if you want to take a swing and use leverage, just be aware of the risks. It means that you *have* to get it right the first time, because failure will put you out for a long time. Plus, you’ll need more capital than you think. Increase the leverage; decrease the margin of error.

      I think my biggest mistake was a result of investment money burning a hole in my pocket. I wasn’t patient. I wanted to get going *right away* on investing in real estate. That’s not the way to do it. Impatience leads to mistakes. I scour every week to try to find a good deal to buy, as we’re ready to acquire another property. We had one deal fall through, and boy, that got me bothered. Suddenly, I was in full Monkey Brain mode, wanting to buy immediately. I had to take a step back and remember that, while good deals don’t come along every day, they do come along fairly frequently, and that I need to be patient to get the right deal and pass on the wrong deal.

      What you *don’t* buy is just as important as what you *do* buy.

      Good luck!

    • Glad you enjoyed it!

      I think one of the keys in working with a contractor is convincing him that when you win, he wins. I’m not saying be a jerk and try to get down to the lowest possible price, since that will ensure a one-time transaction as opposed to a partnership, but rather to convince him that it’s also in his best interest to do a good job at a reasonable price rather than trying to recreate the palace of Versailles with your house.

      It’s a fine line to walk. I was on the receiving end of all sorts of “hey, if you give us a discount and do a good job, we’ll throw you more work” lines from startups when I ran a software development company, and, frankly, 9x% (with x approaching 9.99999999) of them were pure BS trying to get us to work for cheap. I honestly think that’s where the strong foundation of capital comes in. If you can show that you have the ability to do more deals and that he’s going to get paid on time and a fair price, then you have a better chance to getting his best effort (and discretion about what works and what doesn’t) than if you’re just an upshot trying to wing a quick flip on no money down and asking him to get paid out of the profits when you sell it. Cash in hand is a powerful negotiating tool in more than just buying the property itself.

  2. Money Pit; the second best movie ever made, and a must see for REI folks.

    The best movie ever made is Used Cars with Kurt Russell, not REI but not really that far off subject.

  3. Jason, you have a real knack for storytelling. Not only did you provide a lot of valuable insights, you did so in a way that entertained and made me laugh out loud multiple times. I enjoyed it so much I read it to my wife, who also laughed. Thanks for the joy and the insights.

  4. Cleverly written, great advice. I have a great history of buy and hold rentals which is now my retirement income. I have some cash to invest, and in the current market, it is a bidding war for investment rental properties. I do have an undeveloped lot next to one of my properties and I have kind of decided to build and the numbers seem to be a better ROI to do that. But I’ve never built a new home before. Any advice?

    • Two things come to mind:

      1. Inspect at least 5 homes that the builder has built which are similar to what you want to build (e.g. mansion, rental property, A-frame, whatever) and talk to the owners. Also, get the builder to tell you who would be *unhappiest* with the home that he purchased from the builder and talk to that person.
      2. Review the builder’s project management documents. How does he keep the crew on task and in budget?

      Were I in your shoes, I’d comarket the builder with a Realtor as a to-be-built home and not do anything until you got a contract. Why tie up the capital?

  5. Great story. Below is what I agree and disagree with:
    1: Invest for income, and let appreciation be gravy.
    2: Having cash and being patient drives a hard bargain.
    3: The illiquidity of land is often overlooked

    1: Not considering Section 8 tenants. You can get very high rent prices from section 8 in certain areas when compared to the purchase price. If you manage your own properties, then you might be right. But if you pay 10% for property management, no better way to make them earn their money than by having them manage a section 8 tenant.
    2: Not having a mortgage on rentals. Once you buy in cash, I don’t understand why you don’t leverage yourself with a mortgage and pull that money back out for use. One circumstance I can understand not having a mortgage is if the price of your home is too low (less than 70k maybe). Or if you have too many houses that banks won’t lend you more than 4 or so loans.

    • Henry–

      Yeah, I admit that I’m probably leaving money on the table with both of your disagree comments. I had a bad experience with Section 8, and if I can easily find paying tenants who aren’t Section 8, then I’m going that route. I’m not saying that people can’t make a good investment income with owning Section 8 rentals, but my Monkey Brain throws too many bananas for me to want to go down that route again.

      For the second one, I’m up in the air on that one. I can see an argument for a reasonable amount of leverage if you’re actively acquiring and have the financial assets behind you to be able to escape a bad mortgage situation if you needed to do so. I’m acquiring at a slower pace, so the use of leverage wouldn’t particularly enable me to acquire more quickly due to the market situation right now (my particular geographic region is becoming more seller-friendly). I also have multiple properties and, so far, haven’t acquired any of them for more than $70k all-in, so I might not be a good candidate. I’d probably have to really buddy up to a banker, as I don’t have any debt whatsoever, so I’m not exactly an attractive candidate for a bank. I personally expect depreciation to create much greater tax incentives than mortgage interest would anyway, and, frankly, I don’t want to have to worry about debt anywhere when I retire in a few years.

  6. The lesson I take from this is keep your money (and houses) close, avoid spec construction starting out, and don’t trust strangers, or even friends to take care of business until you are sure they actually can. Friends can take care of friendship all day long, but not nec. business.

    I started out alone, bought the 100 or so properties I own now one by one, always looking for bargains, some for nothing (ie, little) down, some for cash, some with seller financing. Yes, I have some land, from a city lot to a 1000 acre parcel, that doesn’t cash flow well, if at all. One day. At least I bought them cheaply, and the taxes (which I’m ironically paying today) are low.

    I admire you for sticking with it. I’m curious, why on earth, as a non-builder, did you try to get into the spec home game? I’m scared to death of that market, too fraught with complications!

    • Yeah, friends and business relationships usually don’t mix. I was lucky to keep the friendships in the businesses which didn’t work, and even co-found and sell a company with friends. Sometimes it changes the relationship, and it can certainly make things uncomfortable when the going gets rough.

      Why did I go into the spec home market? I knew the builder and had known him for several years, and I knew his foreman as well. I’d seen what they could do and was very impressed. He was happy to have someone do the financing for him and was willing to split the profits. He could build homes very economically.

      In a hot market, a relationship like that would work well if you could buy the land (or stockpile an inventory) in cash and pre-sell the homes, since then you’d only be out the cost of the land – OPM pays the construction except the carrying cost of the construction loan – and your turns on the money are quick.

      There was one piece of discontinuity which I’d failed to previously mention in the article. The land we purchased after house #2 – the lots we sat on forever – were in a completely different area than the resort. The builder got tired of making the hour-long drive to the site every day. Thus, we lost continuity with an area we knew the economics of and a Realtor who’d seen what we could do. I don’t know if the story would be any different had we stuck to the resort, as the market bottomed out there, too, but we might have had someone hustling to sell a home quicker.

      I could probably write a completely different article about some of the other lessons we learned (like sticking with the same Realtor) that I didn’t include in this because it was already a long article! 🙂

  7. Great article and very timely for me as I am moving to the Richmond area within the next 45 days. I have been on looking daily at craigslist and Zillow . I’m planning to buy a 2- 4 family and live onsite but the majority of properties look like the one in your story. I plan to press on.
    Again great article…
    Harry Hylan

    • Jason Hull

      Good luck on your move, Harry. I love the Fan, though you’re probably not going to be able to find that 2-4plex in the area. That doesn’t mean you can’t, but finding the deal won’t be easy. I can certainly name a particular house I’d never want to revisit! 😉

  8. Travis Barron on

    @Jason Hull
    I just came across this the other day. Excellent, excellent article. I love how you point out the downside of leverage. Your approach to real estate investing and leverage is not only balanced, but a breath of fresh air. My favorite line was actually in one of your comments, “Increase the leverage; decrease the margin of error.” This is especially true for someone such as myself starting out as mistakes will inevitably be made. Thanks again for your efforts. Btw, the podcast you did was awesome as well!

  9. Hi Travis–

    I’m glad that you enjoyed the article! It’s so easy to gloss over the downsides of leverage, particularly when you’re in the heady days of just getting started and all you can see is possibilities. I remember the giddiness I felt after going to one of those “free seminars.” It’s easy to lose your head…and then your wallet. Done right, RE is a fantastic alternative investment category. Unfortunately, there are many more ways to do it incorrectly.

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