{"id":110600,"date":"2019-05-10T05:00:07","date_gmt":"2019-05-10T11:00:07","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=110600"},"modified":"2021-03-16T14:53:47","modified_gmt":"2021-03-16T20:53:47","slug":"real-estate-out-state-investment-due-diligence","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/real-estate-out-state-investment-due-diligence","title":{"rendered":"5 Lessons I Learned When I Walked Away From a $10 Million Deal"},"content":{"rendered":"

Warren Buffett famously said, \u201cThe difference between successful people and really successful people is that really successful people say no to almost everything.\u201d<\/p>\n

I\u2019m starting to feel like Warren Buffett in this regard.<\/p>\n

Though I spent much of my career jumping at opportunities in front of me, I\u2019ve become very cautious in the investment realm since I turned 50. (Yeah, I know\u2026 I don\u2019t look a day over 40. Stop! You\u2019re making me blush.)<\/p>\n

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.<\/p>\n

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\u2014all in the name of being cautious and protecting my investors and myself from potential risks.<\/p>\n

Why I Walked Away From One of the (Potentially) Most Lucrative Deals of My Career<\/h2>\n

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<\/em><\/a>.<\/p>\n

But I\u2019ve come to believe that for conservative investors, multifamily<\/a> has gotten largely overheated in this real estate cycle. For many of us, it is hard to find a deal that makes sense.<\/p>\n

(I readily admit that some companies are doing a better job than mine in sourcing deals, and some are getting good ones.)<\/p>\n

As a result, my company and I have begun investing outside of multifamily\u2014more specifically, in self-storage. I’ve detailed my logic for this expansion on BiggerPockets in the past.<\/p>\n

Related: <\/strong><\/em>The Multifamily Sector is Overheated\u2014So I\u2019m Turning to THIS Profitable Niche Instead<\/a><\/em><\/p>\n

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\u2019ve 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.<\/p>\n

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.<\/p>\n

\"\"<\/p>\n

One of the operators recently approached us with an opportunity to recapitalize an asset they\u2019ve owned since 2012. Another investment group had long planned to exit.<\/p>\n

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.<\/p>\n

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<\/em> I made a trip to see it in person.<\/p>\n

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\u2019s Planning and Zoning Department and reached out to the neighboring city and the county building departments, as well.<\/p>\n

When Visiting a Prospective Investment, What I Found Surprised Me<\/h2>\n

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:<\/p>\n

\"\"\u00a0<\/strong><\/p>\n

I was alarmed\u2014to say the least!<\/em><\/p>\n

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\u2026 great news!<\/p>\n

And it would be easy to justify moving forward and even bolstering our argument for the market\u2019s strength. (There are always mental arguments to support what we wanted to do anyway, right?)<\/p>\n

My first thoughts were something along the lines of:<\/p>\n