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Why I Just Passed on a 60% ROI Real Estate Deal

Why I Just Passed on a 60% ROI Real Estate Deal

7 min read
Paul Moore

Paul Moore is the managing partner of Wellings Capital, a private equit...

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Do you chase shiny objects? We’re all susceptible to them. Their allure is like a siren song for investors looking to boost cash flow and build wealth.

I spent years as a certified shiny-object chaser. You could call it entrepreneurial investing. As a serial entrepreneur, I loved starting companies. I got a charge from strategizing and planning and dreaming. As long as we were in the entrepreneurial stage, I got a thrill and it barely seemed like work.

As a two-time finalist for Michigan’s Entrepreneur of the Year, I was convinced I wanted to stay on the entrepreneurial path for life—but I wanted to be an investor too. When I sold my company to a public firm at 33, I moved from entrepreneur to entrepreneurial investor.

I hoped to get the same thrill from investing that I got as an entrepreneur. That was a big mistake. Now I know that great investing should be boring.

Paul Samuelson, America’s first economist to win the Nobel Prize, said, “Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

I thought I was a full-time investor. But I was really a full-time speculator. I might as well have gone to Las Vegas. And this life took a toll on my health, my relationships, and my ability to enjoy life. It wasn’t as much fun as it promised to be.

A reformed speculator

After years of pain from many speculative losses along the way (though there were some gains), I realized the error of my ways. I came to understand the difference between investing and speculating. And I chose the “boring path” of investing. I stopped trying to swing for the fences and started swinging for singles and doubles. And this has been the most successful era of my life, both as an entrepreneur and as an investor.

This reform also included a reform of focus. I read the now-classic The One Thing by Gary Keller and Jay Papasan. I realized I’d have to say no to a thousand or more distractions in order to say yes to what I really wanted.

This “one thing” for me is to build a carefully vetted portfolio of recession-resistant commercial real estate assets. My goal is to create safety, cash flow, and appreciation, with meaningful tax savings along the way. And to invite as many people as possible who want to come along for the ride.

My other thing, which is really part of the one thing, is to create meaningful educational content to help others in their real estate investing journey.

As part of this effort, I get to learn about many powerful investing strategies. This includes strategies I would have chased in a heartbeat in my younger years, like David’s strategy (keep reading for more on this).

And I get to meet powerful investors and operators. Operators who use their entrepreneurial prowess to create new systems and strategies to generate cash flow and build wealth, and have a lot of fun along the way.

Enter David

I recently attended The Real Estate Guys Investor Summit on the Sand in Belize. I was surrounded by brilliance for eight days, and it really seemed like an investor paradise. Robert Kiyosaki, Ken McElroy, Tom Wheelwright, and G. Edward Griffin were among the respected faculty.

But the 200+ real estate investors in the room were just as intriguing. The conference was charged with ideas and strategies that would make a real estate investor’s head spin.

I met an intriguing guy named David. Like me, David had an engineering background and had worked at a major Detroit automaker. He had strategized a path to quit his job by assembling a unique portfolio of mountain cabins he could operate on Airbnb and VRBO. In 2017 he made a goal to quit his lucrative job within about three years.

Because of his strategy, he pulled it off in only 10 months.

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I had to know more. David and I talked for a few hours. I took notes. I did my own calculations. And I excitedly told him what a great strategy this could be for someone with a 1031 exchange ticking time clock.

David’s projects were especially interesting because of the way he utilized debt. The availability of 90% loans on highly appreciating assets gave David a chance to put down about $100,000 on a $1 million mega-furnished mountain cabin. It was in an area with constricted supply due to an unusual natural disaster a few years back, so such cabins were in high demand.

David reported net cash flows of $60,000 or more (up to $90,000!) annually, which is a 60%+ cash-on-cash return. Furthermore, he had worked out a system to make this investment semi-passive using virtual assistants. To top it off, the location was within hours of my home, and my family vacationed there quite frequently.

I was hooked. And his promise of semi-passive activity for me, as a future owner, sealed the deal. I could certainly invest an hour (or two, tops) weekly to attain a 60% ROI on cash flow alone, not to mention annual asset appreciation of over 10%, adding another significant cash-on-cash return when I would refinance or sell.

This would likely be the highest ROI asset in my portfolio. In a place my family loved to vacation. With virtually no effort. And it would provide substantial diversification to my portfolio of commercial real estate assets.

So why did I say no?

Something was bothering me. I conveniently delayed the decision. I referred others to David, who helped them locate and acquire similar cabins. I’m happy for them (and still a little jealous). But I didn’t move forward. I said no.

I had taken the necessary time to consider all the implications. My decision came down to several important factors.

  1. Distractions pile up. Any small distraction is still a distraction. And while I was 99% confident about the viability and profitability of this investment, I knew in my heart that getting the loan, closing, choosing a few replacement furnishings, and a hundred other “simple” things would add up. But I’m on a successful investing track already. My firm is doing exactly what we set out to do, and I’m loving it. At this point, I need to focus more on what is working and trim down everything else.
  2. Violation of the “one thing” principle. Authors Keller and Papasan teach that laser focus is the key—every hour, day, month, and year. The energy and brain space this would gobble up would matter. See point no. 1.
  3. Blinded by a vacation home. I’m all for vacations, and for vacation homes. My view was skewed by the fact that these cabins were the exact cabins my family loved to stay in. Great investors know it’s critical not to fall in love with their prospective investments. I almost broke that rule. By focusing on my “one thing,” I can make enough incremental cash flow to stay at any vacation cabin in that region—or any region. I don’t need to own one to enjoy it.
  4. Investing in happiness. In a 2018 paper titled “Happiness, Income Satiation and Turning Points Around the World,” Andrew Jebb, Louis Tay, Ed Diener, and Shigehiro Oishi found, using a worldwide sample of over 1.7 million people, that the income satiation point for experiencing happiness is $60,000 globally and $65,000 in North America. Above this level of income, people in the sample did not experience more happiness. This is tricky because I am trying to build a lot more wealth to do good in the world, like fight human trafficking and rescue its victims. But the potential of this investment to distract me from my main focus and to add to my weekly workload could easily work against this goal—without providing any more happiness. So perhaps it would only impede my happiness.
  5. Creating a meaningful legacy. I want my legacy to include investing in powerful causes, like ending human slavery. But my legacy also includes having time to invest in my wife, my children, friendships, and local community. I’m already struggling with this and have failed a lot over 34 years of marriage. I think this great investment could be the enemy of the best in my life.
  6. It sounds like entrepreneurial investing or speculating. It is exciting! But I’ve committed to boring investing. And this investment also depends on issues I know little about. Am I really an expert in mountain vacation cabins? Do I want to be?

 

Why did I walk you through this process?

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I’m in my third decade as a real estate investor and have nearly 30 years as an entrepreneur. I’ve been through a few cycles and I’ve made a lot of mistakes. I’m old enough to be a father to many readers. I’ve gone from making mostly mistakes to having mostly successes. I’m in the harvesting and legacy phase of my investing life and my goal is to help others in their process.

I wanted to give you a peek inside my brain to see how I went about this decision process. This doesn’t apply to everyone, and it doesn’t mean it’s necessarily right for you, but I thought I’d pull back the curtains on why I passed on a truly great deal.

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Take an investing deep dive

Want more in-depth analyses like this from Dave? Successful investing requires accurate, easy-to-understand information about your properties and the markets you invest in. BiggerPockets Pro gives you the information you need to find your next great deal and maximize your current investments.

My two-deal soapbox

I also want to get on my soapbox for a moment. Though the following may not apply to you, I’m guessing it will apply to many.

In this phase of my career, I know myself well. I know what I know … and I know there are many “easy” things I don’t know well. This means I can identify deals that I don’t understand well. Deals that would be a distraction.

I’ve concluded I only want to invest in two types of deals going forward.

  1. Deals in which I am 100% in. I assemble a team, the knowledge, expert due diligence, systems, and more. These deals consume the bulk of my time, attention, resources, systems, and team.
  2. Deals where I am 100% passive. I understand the asset and, more importantly, the operator, and I know this operator is obsessively doing no. 1, above, on my behalf. And I know that this operator is avoiding the same type of distractions I’m ruthlessly avoiding.

For example, if I invest with a mobile home park or self-storage operator, I want to know they are not actively buying mountain cabins on the side. Or that they are so successful they have someone handling all these types of distractions for them.

Note that I must spend a good deal of time on due diligence upfront to do this option. Therefore, in a sense, it is only passive after the initial due diligence effort.

Anything other than these two options is likely a distracting shiny object or risky speculation for me. And I’m making enough money that I don’t need to do either.

My family can’t wait to take our next mountain cabin vacation. But it won’t be in our cabin. We’ll be investing in happiness by vacationing—and by not being the owner of that cabin.

And I can’t wait for my next monthly payment as an investor in my own fund. It won’t be 60% annual ROI, but it will be predictable, stable, and strong. We’ll also have the joy of knowing we’re helping hundreds of other investors follow my two rules above—so they can focus on where they’re actively making money, on where they can add value, and on enjoying their lives and families.