A few years ago, I invested in a large real estate conversion project that became a major financial failure. Due to poor management, or possibly even fraud, millions of dollars meant for the project’s completion disappeared, causing the deal to collapse. I lost a significant amount of money, and all the investors involved lost millions in total. We ultimately lost the property after attempting to negotiate a solution with the lender.
(FYI, This reflection is shared by a Financial Journey Member.)
Here are the critical lessons I learned from this experience:
1. Don’t Invest Just for Tax Benefits
I initially invested to avoid paying capital gains taxes, which clouded my decision-making. In the future, I will only invest in opportunities that make sense on their own merits and align with my long-term financial goals.
2. Listen to your Gut Instinct
I had an uneasy feeling about this investment from the start but ignored it due to external assurances and my own reasoning. Trusting your instincts can prevent costly mistakes, especially when red flags are present.
3. Ensure Partners have Personal Investments
None of the project leaders had their own money invested. Going forward, I will only work with partners who are financially invested in the project themselves. This ensures they are motivated to see it succeed rather than relying solely on investors’ money
4. Start Small with New Partners
It’s important to start with small investments when working with new syndicators or partners. Doing so allows you to evaluate their performance over time without putting too much capital at risk.
Most syndicators will make exceptions to their minimums to accommodate this, hoping to attract more investment in the future.
It’s crucial to be discerning when considering potential syndicators. If there’s any doubt that they don’t have the character, skill, and financial alignment that you’re looking for, it’s best to hold off, even if it means your money is idle in a bank account. A “bad investment” is worse than “no investment.”
5. Diversify Investments Across Partners
Spreading your investments across different projects and partners minimizes risk. Focus on projects where you have more control or oversight to protect your capital.
6. Partners Should Step Up During Challenges
When problems arise, project leaders should be the ones to take responsibility and provide additional funds if needed. In this case, the leadership did not provide the necessary financial support, which led to the project’s failure. Good partners ensure the success of a deal by being proactive, especially in difficult situations.
7. Be Cautious of Rapid Growth
Rapid expansion can lead to operational mismanagement. It’s important to partner with individuals who balance growth with strong business fundamentals and leadership skills. This experience has made me more vigilant about ensuring partners have the capacity to handle growth responsibly.
There will ALWAYS be growing pains.
8. Finding Perspective through Loss
This experience has reinforced the importance of focusing on what truly matters beyond financial loss. Learning from failure, building resilience, and maintaining perspective have been key to moving forward with more caution and wisdom in future investments.
Keith: I know many real estate deals have gone poorly this year. I encourage you to examine what happened to decipher whether the investment syndicator is to blame or whether it was simply a function of a tough real estate market with higher interest rates, insurance, and property taxes and stagnate or declining rents.
In Financial Journey, this tough market has caused us to refine our investing process and led to the the formation of our community led due diligence council.
Keith’s Reflections
If an investment goes bad, it doesn’t mean you’re a “bad investor.” You could do everything “right,” and the market could have a downturn, or a black swan event could take you to zero. Likewise, successful investment doesn’t necessarily mean you’re a “good investor.” On both sides, there is often an unacknowledged “luck factor.”
I find it important to ensure you’re taking the correct lessons from a situation. For example, if a child falls on a green carpet and then concludes that all green carpets are dangerous, that is obviously the wrong lesson, compared to his concluding that he needs to watch where he is going better.
I know many real estate deals have gone poorly this year. I encourage you to examine what happened to decipher whether the investment syndicator is to blame or whether it was simply a function of a tough real estate market with higher interest rates, insurance, and property taxes and stagnate or declining rents.
In Financial Journey, this tough market has allowed us to refine our investing process and create our community-led due diligence council. We now utilize a multi-step process with niche experts and due diligence checklists to help us identify and avert risks.
Growing with a community helps you avoid risks. Before you invest in anything, I encourage you to discuss the investment with other experienced investors.