From Facebook - Joseph Delle Fave

w w w .facebook.com/joseph.d.fave

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"This is BAD 3

More than 150 investors just lost $15 million.

On a deal that actually worked.

I think we need to talk about that.

This was Brandon Turner’s Heights on Katy apartment deal in Texas.

And before anyone thinks this is a hit piece, it isn’t.

Because what makes this story so important is that the property actually worked.

Rents increased by 33%.

Occupancy stayed above 95%.

Net operating income grew from $2.3 million to $3.6 million.

By almost every operating metric, the deal was successful.

And investors still got wiped out. Why?

The property wasn’t the problem. The financing was.

The deal relied on short-term commercial debt that eventually needed to be refinanced.

Then interest rates exploded.

Refinancing became difficult.

The loan came due.

The property had to be sold at the worst possible time.

And roughly $15 million of investor money disappeared.

These were business owners, retirees, families, and everyday investors who trusted the deal and hoped to build wealth through passive real estate investing.

And Brandon isn’t the only one.

We’re starting to see more and more syndications across the country suspend distributions, miss projections, issue capital calls, or sell properties for less than expected.

Many passive investors aren’t just missing profits anymore. Some are losing part or all of their original investment.

That’s what happens when a strategy depends on refinancing, cheap debt, and favorable market conditions continuing forever.

And this is exactly why I get nervous when I hear people talk about passive investing as if it’s easy money.

Everybody seems to be raising capital these days.

Everybody has a fund.

Everybody has investors.

Everybody has a presentation showing projected returns.

Everybody has a reason why their deal is different.

But very few people spend enough time talking about what can go wrong.

Here’s the lesson:

The ability to raise money is not the same as the ability to manage risk.

Before you invest in anyone’s deal, ask the hard questions:

• What’s the loan term?

• Is the debt fixed or adjustable?

• What happens if refinancing isn’t available?

• What happens if rates stay high?

• What’s the backup plan?

Most investors spend all their time looking at the upside.

Very few spend enough time understanding the downside.

That’s one of the reasons Jenn and I have always preferred creative finance.

Seller financing.

Subject to.

Lease options.

Instead of wiring six figures into somebody else’s project and hoping everything works out, I’d rather control the asset, control the financing, and control the exit strategy.

Could I still lose money?

Of course.

Every investment carries risk.

But when I buy a property with little money out of pocket and don’t depend on a future refinance to make the deal work, my downside exposure is dramatically different.

The biggest lesson from this story isn’t that Brandon is bad.

It isn’t that apartments are bad.

And it isn’t that syndications are bad.

The lesson is that blind trust is expensive.

The property did exactly what it was supposed to do.

The financing didn’t.

What questions do you ask before investing in someone else’s deal?"

Nice to see "everybody" going in a certain direction

while I stay successful on my boring but stable,

If you are financing anything, take the longest term at the lowest fixed rate you can get at that moment.

I never understand the folks who take a shorter term when a longer term is offered - why?? You can always pay a note off early - but getting a loan extended at a decent rate is NOT always certain, as we've seen time and time again...

This is a widespread problem. It's also the reason why the numbers don't work on just regular non-syndication deals. Higher interest rates have changed everything and that still has not been fully factored into what people are asking in terms of prices.

I was doing just a bit more reading on Brandon Turner. There are many people who were suggesting that he got paid with an acquisition fee as well as management fees while the thing was operational. If that's true, it certainly wasn't a loss for him. Although I'm not suggesting he's necessarily a scammer, at the end of the day some incidents of that are going to be found. The real estate bubble will pop at some point. When all the gurus disappear,that will be the time to buy

"projected returns"

"I never understand the folks who take a shorter term when a longer term is offered - why??"

Easy, that half a percentage point reduction for taking a 3 year ARM instead of a 15 year fixed shows up directly in the Cap rate. In many circles, the Cap rate is the gold standard for investing. Unfortunately, it doesn't account for these little things that pop up that can significantly change that rate over time (after you have invested).

Locally, a grass roots brewery that opened itself up to franchising about 10 years ago, just got bought. Local investors in our small town will lose over $500,000 in total.

The number is rather small, until it is your money in part. For me it is only $1,000. That small brewery was even selling its products over in Europe.

Not getting money back isn't good, but the local area had over 60 jobs for a few decades. Not sure what is going to happen with those. Where I might not know brewing, I do understand the value of investing local.

From Courtney Fricke on Facebook: BRANDON TURNER’S $15M LOSS AND WHAT THE AVERAGE INVESTOR CAN LEARN FROM IT

" From around 2017 through 2021/2022, apartment syndication became one of the most glorified strategies in Real Estate.

Multifamily was the sexy asset class.

Bigger was better.

Scale was everything.

Raise capital.

Buy bigger deals.

Refinance.

Repeat.

And to be fair, a lot of people made a lot of money during that run.

But this is not just a multifamily lesson. This is a leverage lesson.

Because the same exact patterns showed up everywhere:

Overleveraged Portfolios from Rampant Cash-Out BRRRRs.

No-equity Subject To deals bought in volume.

Airbnbs bought at high prices assuming COVID-level occupancy would last forever.

Bridge debt.

Balloon notes.

Hard money dependence.

Aggressive scaling with thin margins.

High overhead forcing deals.

Many investors normalized gambling while calling it investing.

One of the biggest takeaways from the Brandon Turner/Open Door Capital situation is that even a deal that reportedly performed fairly well operationally can still fail because of financing.

That should make every investor pause for a moment.

Here are the 5 biggest lessons I believe average investors should take from this situation:

1. A DEAL CAN SURVIVE OPERATIONAL PROBLEMS. IT OFTEN CANNOT SURVIVE FINANCING PROBLEMS.

You can improve occupancy.

Raise rents.

Increase NOI.

Manage the property well.

But if the financing structure is fragile, eventually the debt can overpower the operations.

2. SOCIAL MEDIA IS POWERFUL BUT IT CAN CREATE FALSE SECURITY

Social media has given us incredible access to information, operators, and investing strategies. But it has also created a dangerous illusion at times.

A large following does not reduce market risk.

Content creation skills, educational skills, and investing skills are not always the same thing. And most known does not always equal most disciplined.

The algorithm rewards offense:

Bigger portfolios.

Faster scaling.

Higher returns.

More doors.

It rarely rewards:

Patience.

Safe financing.

Reserves.

Defense.

At some point, many investors stopped evaluating deals and started evaluating personalities.

Never outsource your due diligence to someone else’s reputation.

3. YIELD SICKNESS IS REAL

A lot of investors became addicted to chasing high returns without respecting the additional risk attached to those returns.

Be careful to not gamble more than you invest.

4. MOST INVESTORS WERE TAUGHT OFFENSE, NEVER DEFENSE

Modern Real Estate culture often glorifies:

More units.

More leverage.

Faster scaling.

But very few people teach defense:

Safe financing.

Reserves.

Patience.

Margin for error.

Thinking long-term.

And bigger is not always better.

Better is better.

5. THE TWO HOUSES THEORY ABOUT FINANCING

Two identical houses can produce completely different outcomes based entirely on financing structure.

One investor survives difficult markets.

The other gets forced into a corner.

Why? Financing determines how much time you have to survive.

And in Real Estate, time cures a lot of mistakes.

I unpacked all of this in today’s podcast episode because I think there are some incredibly important lessons here for investors in today’s market.

For some, this may be the most important lesson that they learn from Brandon Turner.

Details to the episode:

Author Courtney Fricke

I still like small amounts of debt.

Controlled debt I guess could be the term?

While I still have two ARMs left they are small and not killing me at this time. Although they have crept up to 7.5%.

Had considered doing a cash out refi on one to pay both of the small loans off. It would increase CF by a bit, but not enough that I feel I have to do it right now.

Instead I am using the money I would have spent on paying them off to have a barn built. This keeps me from financing something at my PR which I own outright.

(yes, after I get it put into a trust I plan to tie it up with a mortgage on paper)