The goal setting and planning I’ve discussed previously is not theory. I put the plan in place and executed so well that, with the help of my family, I was able to purchase 36 properties capturing over $900,000 in unrealized equity and a passive income stream of just over $5,000/month. I almost became a millionaire in two years and had enough passive income to retire myself from corporate America! At the time I had accomplished, and actually surpassed my original goal of $3,000/month in passive income. I had secured my family’s future. All I needed to do, at a minimum, was manage my current portfolio. Well, just when you think you have it all figured out, and your ego inflates, God finds a way to humble you.
The goal setting and planning I discussed before is not new. It was taught to me by my mentors and from books I’ve read and studied like Rich Dad Poor Dad by Robert Kiyosaki. I just took what they were teaching and put it on steroids in a real estate vehicle. The problem was I put it on steroids. I essentially grew too fast for the capital I had to work with. If you’re a business owner, or have been thinking of starting a business, the golden rule of start-up is never go-in undercapitalized. Cash is king. I knew this, and although this is hard to admit, I got greedy and my ego took over. I was hell-bent on reaching my goal in two years and not five or ten, so I took a chance and invested my reserve capital. Bad move.
A year-and-a-half into building my business everything was going great. I had 26 properties I owned and managed with my family. I was actually ahead of my goals and could actually retire myself from corporate America. I had about $50,000 in reserve capital for emergencies with very little stress. The problem came when I was presented with a portfolio of homes to purchase.
I had a gentleman named Paul approach me, who heard I was buying properties, and wanted to sell ten he inherited… all within two miles of each other. At first I was not too excited about the deal. There are a lot of people out there that say they have a “deal” for you to look at that turn out to not be deals at all. I asked him to send me the addresses and I would research them and get back to him in about a week. During this time he kept approaching my Dad, Ken, and letting him know he really did not want to manage them. This indicated he might actually be motivated to sell and there might be a deal after all. Sure enough, I ran the numbers and it was not just a good deal, it was a complete home run! It got even better when he said he would owner finance them. They were also 100% occupied. The opportunity had two main problems however. One, it would take all $50,000 I had in reserves for the down payment, and two, it broke the rule of fix everything at purchase. When you buy a property and repair or replace everything that can essentially break, what kind of maintenance do you have to do? Try little to none (I’ll explain in more detail another time). The problem was that all of the properties Paul wanted to sell needed rehab except one.
Here is where I got in trouble. Even though I knew they all needed rehab, I rationalized that they were 100% occupied and I would just repair them when a tenant moved out and use excess cash flow to pay for it. I thought, “How many tenants might move out at once where I would have to do multiple rehabs?” I guessed one, but it ended up being FIVE! What I chose to ignore was that when management changes hands, whether it’s single or multi-family, you are going to have some turnover. I also had two other properties at the time that I was rehabbing. So, as you can see I had a MASSIVE problem on my hands. I had five vacancies, no money to do a proper rehab, and mortgage payments coming due. I went from being in a great financial position to about to lose my business in a matter of a month.
You might be thinking, “Why don’t you sell some of your assets to generate some capital?” I thought about that, but my aggressive personality, and the fact I didn’t want to sell an asset, didn’t let me do that. I instead went out and opened three lines of credit. Two unsecured (I had awesome credit) and one secured by a property. My rationale was that I could sell some assets later and pay the credit lines. I also knew that real estate is an illiquid asset… meaning you can’t sell it quick. A quick sale in real estate is 30 days… which didn’t leave me with enough time.
Well, the story has a good ending, but it did have its consequences. I managed to keep all my properties during this time. The problem was that I was late on a few payments, which shredded my awesome credit (it only takes a few late mortgage payments to take an 800 credit score to 600… YIKES!) I’ve since been able to get it back up, but it has taken almost two years. I have sold some of my properties to pay off the credit lines (I still have one with a balance), but without them I probably wouldn’t be in business anymore. They allowed me to survive that time and not lose the equity and cash flow I had built.
I learned a massive amount during this ordeal. The main thing I learned is DO NOT OVER-EXTEND! Know your limits. Expect the best but plan for the worst. There were a lot of sleepless nights during those months. One of the most painful effects being the strain it put on the relationship with my family. Although everything came out OK, it was a painful time in my life that I do not want to re-live.
I hope this helped give you an understanding of how you can get yourself into trouble if you try to grow too quickly and extend past your capital reserves. Although I lived to fight another day, I could have easily had to file for bankruptcy… all because I didn’t want to slow my pace to match my resources.
Although it can be argued I took too much action, there are some people that will never do anything at all to secure their financial future. Don’t let my story scare you from taking action. Go out, find yourself a mentor and buy just one property. After you go through the entire process of buying, repairing, and leasing I am confident you will want to continue… as long as you stay within your resources.
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