Fail Files Real Estate Investing

Fail Files: Crowdsourcing A $30k Loss

“It’s fine to celebrate success but it is more important to heed the lessons of failure.”

-Bill Gates

After reviewing my first two posts, I realized I was getting braggadocious and wasn’t giving an accurate picture of my investment journey. It’s always more fun to talk about the ups than the downs and I was feeling myself a little too much. In reality, I’ve gone through a lot of pain over my career. In fact, I have so many L’s that I’m going to start a series of my fails and the lessons learned.

Fitting Into the Crowd

In the early 2010’s, Kickstarter and crowdsourcing were all the buzz. I liked the concept of pooling small chunks of capital to fund start-ups. It had a David vs. Goliath feel and the little guy could finally play in the big-boy game. Suddenly, everyone had access to alternative investments that were reserved for the uber-rich before. Unfortunately, I wasn’t ready to invest yet—I just started working and didn’t have money to invest.

By 2017, I was well into my legal career and was in the early stages of my real estate investing journey. I sold my first investment property and wanted to reinvest my profits. Up to that point, I only invested in residential real estate. And, everyone stresses the importance of diversifying investments to mitigate risk so I wanted to shift some of my money to the commercial side. Easier said than done… Commercial real estate is a completely different beast and there is a steep learning curve. I didn’t really know how to underwrite or evaluate commercial properties. I didn’t have time to manage projects or sufficiently learn about the industry because I was already working close to 80 hours a week. To top it off, I didn’t have access to deals nor enough money to invest (commercial deals require much more capital).

Lucky for me, real estate crowdfunding was exploding. A number of platforms suddenly popped up and the options were plentiful. It seemed like the perfect investment for me. The “experts” did all the due diligence and managed the investment, they offered a lot of investment options, it was completely hands-off, and they only required thousands, not millions, to get into the game.

Shoot Your Shot!

I drank the Kool-Aid and dove in. I decided to invest in commercial debt. I basically acted as the lender with a group of people and received monthly interest on my investment. I found debt attractive for several reasons. First, property values had increased for years since the Great Recession and real estate is cyclical so the general sentiment was that we were due for a downturn. Debt is supposed to be safer than purchasing a property since the payments for a loan are locked in. Second, the debt was secured (i.e. the property is given as collateral for the loan) so even if the borrowers couldn’t make their payments, we were supposed to be able to take over the property and sell it to get our money back. Finally, the loans were supposed to be repaid in a year or less. I was looking for short-term investments in case there was a downturn and buying opportunities came up.

I looked through about a dozen different debt opportunities. Each one had an offering memorandum that set out the details, objectives, and risks of the deal. It was like a bajillion pages of legal jargon so I just skimmed through and looked for 1) the minimum investment amount; 2) the interest rate; and 3) the loan term. I relied on the “experts” and hundreds of other investors, who were looking at the same documents, and still investing to do the heavy lifting. I figured, why not rely on those people who are smarter than me to figure it out? I piggybacked on their due diligence and went for it.

I started off slow and invested $10k (the minimum) in two debt deals at 8% and 9.5% interest rates. The first six months went smoothly. Both borrowers made their payments on time and these investments looked way better than the cash sitting in my savings accounts, which were earning less than .01% interest. I doubled down and invested $10k a piece into three more deals paying between 9.5% and 12.5%. That’s when everything stopped working as they were supposed to.

And It All Came Tumbling Down…

The first sign of trouble came when both of the borrowers from my first two investments requested extensions to pay off their respective loans. I knew it was common for projects to go past deadlines—that happens with crappy contractors—so I wasn’t overly concerned. I was actually unbothered because I continued to earn interest since the payments were still coming in… at first.

The first exit went relatively well. The borrower continued to make payments until a couple of months before selling the rehabbed property. Almost a whole year after the original maturity date, I got my investment back. I earned a 7.5% annual return on my money when it was supposed to be 8% so it wasn’t that bad.

But then, one by one, the payments stopped coming in on each of my remaining loans. All of them were way over budget and couldn’t make their monthly payments. There were plenty of excuses; the contractor ran away with the money, the planned tenant bailed, there were unpredictable increases in construction costs, etc. Really, it boiled down to the borrowers exaggerating their projections, having too little experience, being incompetent, and finding themselves in completely over their heads.

To make matters worse, the platform I invested on filed for bankruptcy shortly after so the foreclosure process got super complicated. Moreover, those properties that secured my loans were underwater and weren’t worth the amount owed. That’s even after the borrowers put 25% down and the commercial market was still healthy. When the dust settled I sustained heavy losses:

I lost over 55% of my investment and earned 1% in total interest over a 4.5-year period. I don’t know how to calculate my exact ROI but it was not good. That savings account interest—with FDIC insurance—was looking real nice at that point.

Let’s just say I got destroyed and this was a piss-poor investment.

Lesson Learned: “Laziness Is A Secret Ingredient That Goes Into Failure” – Robert Half

After losing so much money (not to mention the opportunity costs), I asked myself: “How could this happen?” At first, I blamed anyone and everyone. It was those idiot borrowers who didn’t know what they were doing and lied their asses off in the offering memorandum. It was the greedy platform that was full of B.S. and just took their fee without doing any real due diligence or properly supervising the project. It was the stupid millionaire blogger I followed who highly recommended the platform.

At the end of the day, I only had myself and my laziness to blame. I was too lazy to study and learn the intricacies of commercial real estate investing. I was too lazy to do my own research on which platform I should use. I was too lazy (and uneducated) to read through the offering documents and critically analyze the strengths and weaknesses of the deal. Ultimately, the money came from the profits from the property sale so I was playing with “house money” and too lazy to take appropriate steps to protect my money.

Moving forward, I vowed that I would never let my laziness or greed allow me to take the easy way out. Investing is hard enough and nothing is promised even when you take every step imaginable to protect yourself. I committed to putting in the work before I invest in anything ever again.

Lesson learned…

Thank you for reading!!!

3 thoughts on “Fail Files: Crowdsourcing A $30k Loss”

  1. You rarely come across honest stories about bad decisions or mistakes. Thanks for sharing this. But now am I being lazy if I don’t learn this lesson the hard way and instead just take your word for it 😉

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