My real estate education came through a different form than a classroom, a mentor or a self-help book. I learned it on my own.
And after having owned nearly a million dollars worth of real estate before the age of 25…
We filed for bankruptcy.
No words come to mind after typing that sentence. It hurts today, even writing it. We lost everything we had, filing chapter 7 and finding our way through uncertain depths and layers of terrible that comes with it. Our bank accounts were decimated from countless properties going belly up. Any access to credit was gone. The few dollars we had left and were putting the “food on the table” and paying the attorney.
Related: How Much Debt Should You Carry?
If you haven’t ever been through bankruptcy (and I hope you haven’t), after you do all the filing, all the information about all your personal life, deal with your attorney, all the documentation and paperwork, you file and eventually go and meet in front of the trustee.
Guess what. They are shrewd lawyers whose only job is to find everything you may or may not have included (which legally, obviously, you were supposed to include everything), how it was included, what portion for business or for personal, etc. And by the way, you are sitting in a room with a whole bunch of others who are also filing theirs, getting to listen to all your baggage, why you had to file, all your debts, everything.
Look up #horriblelifeexperiene in the dictionary. This is there.
After this process is complete, any line of credit, mortgage refinance, regular bank loan, credit card is no longer a possibility — period. We had depleted every bit of cash we had trying to save the houses (which in hindsight wasn’t necessarily the best idea). It was a situation.
So you might be wondering at this point, how did we get there?
How I Bought, Rehabbed, Rented, Refinanced, and Repeated for 14 Rental Properties
This is the dream right? Going from zero to 10+ rental properties, providing stable cash flow and long-term wealth for you and your family, and building a scalable business model to boot! Learn how this investor did just that, in this exclusive story featured on BiggerPockets!
3 Beginner Mistakes That Might Lead to Disaster
1. Partnering With the Wrong Person:
I literally met this guy sitting at another table in a restaurant.
I heard he was an “investor” as he was sitting there talking and went over and introduced myself. He was not only a contractor and investor, but he knew of properties that were waiting and ripe to be bought. Hello! Bazinga! Out of the heavens drops my new business partner. Smart, athletic, confident and lived in one of the best neighborhoods here in KC.
I had my golden ticket.
We met numerous times before the two properties were actually purchased, and we had a game plan. I would work on the finance/accounting side; he would run his crew. He knew how to run the crews, and I could buy the houses, work with the realtors, set up anything with the city utilities and such. We had even gotten an office together. We talked about the matching fancy cars we would own from our successes. We went the gym together. We would complete the rehabs and split the profit.
It was a perfect match.
The first week or two after closing on the houses, there were already problems. We had our first cash outlay from the bank for renovations, and there was his hand, waiting for the cash from my hand to his pocket for the week. Soon he started not showing up at the start of the day, and then the middle of the day, and then whole days he wouldn’t show up nor answer his phone.
Mind you, I knew nothing about construction. Or real estate for that matter.
Several more weeks went by this way, and I continued to get more and more concerned. He was going through a divorce and had a lot of hard things going on at home. I began learning more of this, none of which had been discussed prior. The sob stories. The problems. Perhaps addictions. Eventually, I had paid him thousands of dollars in what should have been work — but wasn’t.
I was trusting, naive and stupid, and he at best was a broken person — and at worst, a complete psychopathic liar. The day I bought my first investment property (or any property for that matter), I bought two. With no money. A local (shark) bank. And boom; I was a “real estate investor.”
And the worst part, I didn’t fire the partner. I didn’t sell the houses. I didn’t find someone who knew what in the world to do. I just tried to do it myself, and that didn’t work either.
2. Buying More Houses — With Scarce Money, Little Knowhow & No Direction
Soon after my wife and I (at my urging, of course) bought more houses. They were rentals not in the best part of town. From another investor, off Craigslist. Craigslist is an awesome place to buy a house, but not if you don’t know what you’re doing. Or what to look for. Or if you have little money. And especially if you can’t even afford to have the inspection on the house.
I messed up everything I could mess up on these deals.
Somehow I worked the deal with the seller to pay all the closing costs. We had an 80/20 mortgage, a we-could-care-less bank and a scumbag mortgage guy who helped seal the deal. I know this now looking back; I thought the mortgage guy making it work was amazing then. The truth is, I should have never bought them, and they should have never lent to me. In the end, I am not blaming it on anyone but myself. I didn’t know how to run my business.
3. Having Bad Luck
The week before Christmas, a main water line to one of the houses broke.
Another one was broken into the day before the tenant was to move in. They kicked the back door in and proceeded to cut out every bit of copper pipe in the basement, cut out the coil in the HVAC, cut out the hot water heater, pissed on the floor and left the gas on in the house in the process.
That day I could have died. Like, literally. Died.
We walked into the house and realized, quickly, obviously, the house was a ticking time bomb. I happened to have a buddy with me and we ran to the garage door, opened it, and ran outside as fast as we could. Two or three hours later, with two fire trucks, firefighters, and the battalion chief, my house was now safe to re-enter. But I had to put thousands of dollars back into it and wait another 6 weeks to get the inspector back out from section 8, and I had to get the tenant placed.
There was mold throughout the basement of a house. Had I done the smart thing and had an inspection BEFORE buying, it would have come up, and I’d like to think I would have had the wits to back out of the deal. I spent more than a year trying to fix the problems on that house, and eventually it didn’t pass inspection with section 8.
At that point we were starting to see the writing on the wall. That house we lost to foreclosure.
Then we lost the little red brick ranch house my wife and I bought as our first home together. We had turned it into a rental. It was perfect. Old hard woods. Beautiful treed street. It sold for pennies on the dollar in a short sale.
You see, we literally lost everything. Bankruptcy is no joke. And real estate investing is no joke either.
Through these events, we had a decision to make. Did we move on from real estate forever, or did we double down, so to speak, and get back into the real estate business? For me it was clear — out of the horror and destruction emerged an intense desire to rebuild our business…and to do it right. Having learned the “hard way” also gave me a great insight on how to approach new deals, new partners, new projects.
It gave me a confidence that I hadn’t had before, even though life during that time was very difficult.
And, you know what, I’ve shared this story with every single parter, banker or private money person I have had since. Because I wanted them to know we have been through the fire. And until you have been in the fire, you don’t know how you will react — and not only did we react, but we made a conscience choice to rebuild.
Looking back, there were a few key things that helped us move forward.
4 Tips to Safeguard Against Real Estate Nightmares
1. Move More Slowly
You don’t have to buy that much, that fast. Leave some room to learn. Leave some room for failure that you can survive. If you are growing, awesome. Make sure you grow in education, experience and capital with the growth of your real estate portfolio.
2. Have Someone You Trust to Ask the Hard Questions
You must have someone around you who you trust to tell you you’re being stupid, but who also understands the real estate business (not Dad saying you should buy mutual funds, but rather a business or real estate mentor) and can apprise deals as they come up — with the knowhow to analyze them and most importantly, a strategy to get out of them (hopefully with a great profit).
3. Don’t Be Afraid to Say No
I just wrote a whole blog post on this recently. But the point is, there is a deal for everyone, and not every deal is for you. Don’t be afraid to say no and find one that works for you.
4. Learn from your mistakes
Believe me. We did. We do almost everything differently now. And you know what, although I could have never said this at the time, we are now better off because of what happened.
We were forced to decide what we wanted to really do. There’s nothing more compelling than an empty bank account and a family to feed.
The Moral of the Story
Real estate investing is an amazing business. One that I am passionate about, a lifelong student of, and something that has fundamentally changed my life for the better. But — listen — it’s not all roses and sunshine. It’s lessons. It’s heartache. It’s mountaintop awesomeness, but can also bring you to the depths of despair if you’re not careful.
Things happen in life, some good and some bad. We have great deals and we have ones that lose or don’t make much money. In the end we learn, we grow and we make a decision about whether these things will hold us back. Ultimately, we have the choice to use what we have learned as fuel to make a better deal the next time, or we give up.
I didn’t want the loss of our business at first to be our defining moment. Rather, we turned it into a temporary setback on the pursuit of what was most important — growing a real estate business that fit us, that we understood, that was built to grow, that was sustainable and that we could ultimately succeed at.
And within just over 18 months after filing that bankruptcy, we bought our first investment property and have gone on to doing millions of dollars of real estate deals.
What I’m saying is: Find your passion. Learn it. Follow it. Fight for it. And it will happen. It might not end up being the journey you anticipated, but if you want it badly enough, it will absolutely be worth it.
Did you ever fall flat on your face starting out in real estate investment? How did you rebuild your business (and life) afterwards?
We’d love to hear your stories. Please share below!