Warren Buffett famously said, “The difference between successful people and really successful people is that really successful people say no to almost everything.”
I’m starting to feel like Warren Buffett in this regard.
Though I spent much of my career jumping at opportunities in front of me, I’ve become very cautious in the investment realm since I turned 50. (Yeah, I know… I don’t look a day over 40. Stop! You’re making me blush.)
My cautious nature was put to the test recently when I was partnering with approximately 40 of my company’s investors to purchase a profitable self-storage facility in a different state.
This is the story of how I flushed thousands in legal fees, sacrificed hundreds of thousands in profits, and risked having egg on my face in front of over a thousand people on my email list—all in the name of being cautious and protecting my investors and myself from potential risks.
Why I Walked Away From One of the (Potentially) Most Lucrative Deals of My Career
A few years back, I wrote a book. Attempted comedy alert: with great humility, I titled it The Perfect Investment: Create Enduring Wealth From the Historic Shift to Multifamily Housing.
But I’ve come to believe that for conservative investors, multifamily has gotten largely overheated in this real estate cycle. For many of us, it is hard to find a deal that makes sense.
(I readily admit that some companies are doing a better job than mine in sourcing deals, and some are getting good ones.)
As a result, my company and I have begun investing outside of multifamily—more specifically, in self-storage. I’ve detailed my logic for this expansion on BiggerPockets in the past.
In the spirit of providing low-risk opportunities for our investors, we have been carefully vetting successful self-storage and mobile home park operators. We’ve been looking for operators who thrived during the last few market downturns and who we have confidence in at this point in the market cycle.
We have now vetted three operators for whom we have great respect. We have visited each of them in person multiple times, and we plan to take advantage of more investment opportunities with each of them in the coming months.
One of the operators recently approached us with an opportunity to recapitalize an asset they’ve owned since 2012. Another investment group had long planned to exit.
This asset is in a great location, with strong population growth and high incomes. The risk seemed very low since they have been in operation for six years and are aware of the challenges, costs, and market dynamics. The market study and financials on the property were strong, and we were excited to do our second investment with this operator.
I was speaking at a D.C. conference, then flying out to L.A. to interview two more self-storage operators a couple days later. We decided to get the legal docs together and announce the webinar to our investors before I made a trip to see it in person.
I returned from L.A., then I immediately boarded a plane to see the asset. I spent a day touring the area, the asset, and each of the comparable properties. I visited the city’s Planning and Zoning Department and reached out to the neighboring city and the county building departments, as well.
When Visiting a Prospective Investment, What I Found Surprised Me
During my visit, I learned that two new permits had recently been approved for large self-storage facilities nearby. One was just a tad over two miles away. Upon driving to that location, this is what I saw:
I was alarmed—to say the least!
The construction of the two large facilities (about 80,000 and 100,000 square feet, respectively) verified our belief that the growing market would support more supply. Errrr… great news!
And it would be easy to justify moving forward and even bolstering our argument for the market’s strength. (There are always mental arguments to support what we wanted to do anyway, right?)
My first thoughts were something along the lines of:
- This is a strong, cash-flowing investment with an established presence in a market where the population has grown by 10 percent since 2010.
- Storage tenants are “sticky” and will rarely spend a Saturday to rent a moving truck and move their stuff down the road to save a few bucks per month (especially when they only plan to be there a short time).
- Our investors are hungry for more investment opportunities, and we’ve already announced this one! We stand to collectively make a lot of money on this deal.
- We’ve just spent several thousand in attorney’s fees preparing our legal documents.
What Would Warren Buffett Do?
But that’s not how Buffett thinks.
I don’t want to place our investors’ capital at any unnecessary risk. I have a lot of confidence in the operations team for this company, but we decided to pass on this opportunity.
The deal would have probably turned out fine. But our role is to carefully screen operators and opportunities and to protect our investors and ourselves from all avoidable unknowns and risks. This specific opportunity probably just isn’t good enough.
With the revelation of these new facilities upon my visit to the area, this investment became too risky for us. What’s more? I am genuinely convinced that the operator was unaware of these new permits. It is very hard to squeeze information out of building departments—even for pros.
What I Learned in This Instance—and What You Should Learn, Too!
5 Takeaways From Touring an Out-of-State Investment Opportunity
- Always do your own due diligence. Do this on the ground. It’s not enough to study market reports, Google Maps/Google Earth, etc. I learned this after almost making a terrible mistake in an apartment deal a few years back! And I know a lot of investors have been burned buying out-of-state turnkey homes sight unseen.
- Check everything with local planning and zoning/building departments. Be sure to do this whenever it’s relevant, but don’t limit yourself to that. Drive every significant road within a reasonable radius to see what’s going on yourself.
- Use the “grandma rule” for investing. Don’t allocate a dollar of your money—or an investor’s money—toward anything you wouldn’t recommend to your grandma if it was all she had to live on. (And, of course, never take any investor’s capital if it’s all they have to live on.) This was taught to me by my multifamily mentor.
- Don’t be afraid to walk away. The fallacy of sunk costs can lure you into moving forward. (i.e., “but we’ve already invested so much time and money!”), but this siren song needs to be passionately ignored.
- Sometimes the best deal is the one you don’t do. It’s just a fact: “You’ll never lose money on the deal you don’t invest in.”
We started with a famous Buffett-ism. Let’s end with Buffett’s first two rules for investing:
- Rule No. 1: Never lose money
- Rule No. 2: Never forget rule No. 1.
Have you ever walked away from a deal that looked good? Or have you ignored your instincts and plowed forward anyway? How did it turn out for you?
I’d love to hear from you in the comment section below!