Legacy Wealth Holdings

The 1st Deal I Ever Lost Money On

What’s up, guys? We are in Cleveland, Ohio, and I thought I’d tell you the story of a property I bought early on in my career, the first apartment building I ever lost money on. 

This building was a 44-unit complex that I purchased back in 2017. 

I knew the guy who owned the property because I was the one who wholesaled it to him originally.

He was out of state, so I took a little fee on the acquisition side when he bought it a couple of years prior. He made some renovations to it, did some work to the property, and filled it all up with tenants. And because he was out of state, he had a hard time managing it. He hit me up, saying “Man, I want to sell this thing. You can assume my loan. I’ll seller-finance a small portion of it, bring some bucks, and then you can take it over. But you gotta cash me out in the next couple of years.”

At this time, I was starting to get rolling in apartments, starting to get a little bit of a name for buying apartment buildings. I had some people who I knew would buy a stabilized asset, so I was thinking maybe I could flip this thing in 3 to 6 months and probably make $500,000 or $600,000. 

So I’m all amped up about it. I looked at the numbers, and it turned out I could assume the loan. I could just take over the project from him.

The property was already 80% occupied. So 80% of 44 units means there were only 9 vacant units. I just had to turn those units and get rolling on leasing them up and then I could launch this thing. 

So here’s the lesson.

I bought the property, right?

I did a little bit of due diligence, walked all the units, but I didn’t check physical occupancy against economic occupancy. Two very different things.

Physical occupancy means how many people are living in the property.

Economic occupancy means how many people are actually paying rent in the property.

Although this property was physically 80% occupied, it was only economically 25% occupied.

Out of 44 units, I think there were 34 or 35 units that were occupied, and only 12 were actually paying rent.

So then we had to turn around and evict another 20-some tenants. We didn’t have the cash flow coming in, so we had to take on the cost in order to renovate and turn all those units.

Over the course of that first 3 to 6 months, I thought I’d make $600,000 on it. It ended up taking a year and a half for me to turn around and sell this property, and I had to write a check for $50,000.

Now I want to go back and explain something on the money side.

Although I lost money on this, my investor did not.

This was actually the first time I did a 50/50 deal split with an investor. They had said, “Hey, I don’t want a preferred return, I don’t want a little bit of equity. I want to do a 50/50 split on this deal. I’ll bring the down payment. You guys do the work, and then we’ll split all the profits 50/50.”

Since it was easy access to capital, I decided to do the deal.

But the downside for him (that he wasn’t paying attention to) was: what if the property lost money?

Technically, because I wrote a check for $50,000 to get rid of this property a year and a half later, he should have been subject to writing a $25,000 check to me, splitting the loss 50/50. And then we’d both go our separate ways.

But it wasn’t his fault that I didn’t cross-reference the economic and physical occupancies – that’s on me.

Although on paper I could have said, ”Hey, man, you’ve got to chalk it up as a loss. The way that’s all written out is you have to bring money, I have to bring money, and we get rid of this thing.”

 And I could have saved myself a couple of bucks. 

Instead, I said, “I screwed up. This is on me. Although the paperwork says that you’re responsible for half this loss, I’m going to eat 100% of it.” 

And because he didn’t make any return without having to put up any more money for another deal, I gave him equity in another property that I owned that would have yielded around somewhere around 10% per year for however long his money was outlaid.

There are a couple of lessons here.

First, don’t skimp on due diligence.

Make sure physical occupancy and economic occupancy are cross-referenced and they balance, and make sure that you look at all the financials, tax returns, the profit and loss statement, and rent rolls. Cross-reference all of it.

Secondly, always take care of your investors, right?

The deal was shitty. We lost money on it, but I  was the one who lost money. I didn’t let him lose money. And then all of a sudden, he’s telling everybody else that Tim does the right thing. That’s building my reputation. 

I’d have raised more money with him telling other people that I do the right thing and sending more people my way versus going to him and saying, “Hey, man, chalk up the loss” and trying to save $25,000. Not only is it the right thing to do, but it actually helped me grow my business.

I see people try and take shortcuts all the time. If you put that kind of energy into doing the right thing and operating properties the right way and treating your investors the right way, you will make far more money because your reputation will compound in a positive manner.

So although I lost money on this,  I learned a ton and it set me up for future successes – and mistakes that I wouldn’t make on future deals.

Let me know a lesson that you learned in some other deals that you’ve done similar to this one. Because there’s a lot of people who helped me out when I was getting started and I want to be able to help you out too.

I hope you don’t make the same mistakes that I made. Learn from my mistakes and hopefully it gives you some help on the deals that you’re taking down in the future.