How to I Survived a Million Dollar Loss!!!

What do you do in real estate when you can't pay your debts or when a project is going sideways rapidly? We're going to cover the worst of the worst and how you make it through on this episode. Hey, my name is Christian. Welcome to the channel. If you are new, I bought hundreds of rentals starting with very little money. In fact, tons of people have been able to follow these same strategies to buy a whole lot of financial freedom starting with little to no money. I am sharing today specifically what you do when a deal goes sideways. Now, to be fair, I have personally not had a deal go completely sideways. I have had things not go to plan. I'm going to share some of those stories here as well. More importantly, I'm going to share some actual disasters that have happened to people, even within the Multifamily Strategy Mentorship Group. I'm going to share with people like my actual students, the things that have gone wrong, how they have recovered. I think it's really important to know every time you buy a property, every time you take on a venture, every time you take on debt, it all means that you are taking on some level of risk. I'm going to share. What it's looked like for several people as they've gone through this adventure, the things that went wrong and how they still made it out on top. First of all, I think it's fair to start with an example of my own 12-plex, Ephrata, Washington. We buy this thing, we had just done 3 other projects just like it. Rents were way under market value. It was a really great building and a great location. Every unit needed a little bit of touchup. But we were coming in and buying a fairly stable building in a great area. Now, what I'd done previously is we had had to do rent bumps where things were way under market rent. We came in, did renovations, did rent bumps. We're not slumming these things. You do the rent bumps and simultaneously you're making them a lot nicer. We have really high standards for our unit. What happened on this particular one that had never happened to me before, instead of having 1 or 2 people move out when we did the rent bumps, we had 11 people move out of a 12-unit building. When you lose all of the income, I'll tell you what happens. You don't cash flow. If you don't cash flow, that's what we call not good. Now, when the deal's bleeding money and you have to do light renovations, but in every single unit there's a, you know, little plumbing here, replace the flooring. We actually had a vision for what we wanted the flooring, cabinets, and walls to look like. We're doing the budget and I'm like, oh, we need more money. Now we had an investor on the deal who brought a majority of the capital. So we're looking at this going like, huh, I don't really want to go to an investor and tell them, hey, uh, bad news. We need a bunch more money. However, this is what we did. Came in and said, hey, the first thing you do, this is the most important thing. If you have investors, if you have partners, if you're on a team, tell everyone what's going on. I have seen people dodge this. Do not do it. Don't avoid it. Just something happened. Let's get out in front of it as early as humanly possible. Let's figure out where it's going to go. Otherwise, the stress is going to eat you alive and you're going to piss a lot of people off. In this case, went to the investor, say, hey, well, here's the bad news. Basically all the tenants left. Here's the positive news. We, there's a lot of upside on this project. We're going to reach that future upside a lot faster because we're going to finish renovating the units right now. And then we're going to get people in at market rate. Now we're going to accelerate our project. The problem is this is going to cost us like an extra $125,000 and I don't have it on me right now. I have half of it and I own half of it. So we're going to get together. I am willing to contribute the money. If you are willing to match me, let's go ahead and let's finish the project. And it's just a new project now. I was fortunate enough for them to say yes. They were not excited about it. But what happened is we did get through the project faster and the rents did come in. We made the money. If that didn't happen, the solution would have been find another investor who is down for the new project, have them buy out the other partner. And move on with the project, which is what happened on another deal. So a deal happened to one of my friends. This is in Texas, smaller building. I'm talking a 10-unit building. They bought it. They bought it right when interest rates are at their all-time low. Every day since they bought that thing, the real estate market has run away from them, which has been a huge bummer. So market timing wasn't their friend. Bought a deal on amazing creative finance terms, slightly, slightly overpriced., but amazing terms, bought a deal that was stacked really well for cash flow. Here's the problem that they had with this deal. They did not raise a reserve. You need to have a reserve account if you're going to be doing any renovations. They had an idea of, okay, well, the deal cash flows today out of the cash flow. We're going to go ahead and do one unit at a time. Problem if you're a seasoned investor is one, that slows down your project. Two, if you have anything that disrupts cash flow or slows down income, Someone moves out, you can't renovate the unit yet. You have to wait for cash flow to build up. In the meantime, someone else moves out. Oh shoot, we have to go fix a stove in here. Your positive cash flow goes negative and there's no way out. You never get back without injecting more capital. The mistake they made, mistake number 2, so they didn't have a reserve. They did not immediately tell the investors there was a problem. Instead, they started floating the problems themselves, which unbalances the accounts. You can't do that. At some point you have to tell the investors, wait a second, I've put in more money than everyone else because I haven't told you about a little problem we're having in the books. We're a little low on cash flow. They didn't address it early. So what they had to do was make a very uncomfortable call 6 months later saying, hey, this is what happened. It went a little negative. I thought I could just bust us through it and figure it out. I didn't bring it up. I really should have. Here's where the accounts are today. Here's how much I've overcontributed. Here's how the property is performing. Do you want to inject more capital? In this deal, every single partner said, no, we do not want to inject more capital. We're not mad at you. We, we understand. We understand what's going on, but we'd rather just be cashed out of the deal. He was very fortunate. Every investor agreed to be cashed out for their principal value. So they said, hey, if you can get me out of this deal without any damage, We appreciate you. We wish you the best. We all have other things that we can invest in. That was a very fortunate ending, but had he communicated earlier, he likely would've had all those people continue to contribute on the property. What he ended up doing was taking another investor. That investor came in, bought out everyone else and said, hey, just me. Let's go fund this project. I see the upside. You see the upside. Let's do this project right. They brought in the money he should've brought in the first time. They finish the project, it does cash flow. That is now a piece of his portfolio permanently. I'm going to share one more disaster, and this is about the worst thing that can happen to you. A friend, early, early multifamily strategy mentee, he came in right out of the gates, bought 14 units, side-by-side duplexes, 7 of these bad boys. This is in Oklahoma. Now a little thing about Oklahoma, occasionally you get some wind down there. Occasionally you get some really, really, really strong wind down there. He had a bunch of his roofs blow off in a tornado right after purchasing. Now here's the problem with buying side-by-side duplexes. When you buy side-by-side duplexes, they're all individual buildings. It's not just one building. So when you insure them, every roof is an independent insurance claim for an individual building. They had 4 roofs go, so they immediately have to file 4 insurance claims. It takes forever for them to get through this process. All the while they can't rent the units because they don't have roofs. They're trying to figure it out. They have the same thing. They get the partners together. They got on top of it early. Here's the problem. Here's where we're at. They had one partner decide to stay in the deal. One partner decided to get bought out. So they flipped 50% of the partners, brought in a little bit more capital. They had to all pitch in and pay for the renovations. Insurance eventually did reimburse, but it took about a year. So they had this cash crunch, and I am sure their insurance rates went up when you immediately file a large claim. When you buy a building, your hope is that things go reasonably well for a little bit of time. So you get your legs underneath you, get the books going, you get through your renovations. Sometimes things like this happen. I've had 100% of the building— well, there's actually one unit that was untouched, but I've had a building that 100% of the building flooded and insurance didn't cover. I mean, I've had every disaster. We got out of that one too. You know what? I can give that as a bonus story here in a second. Sometimes disaster strikes way too early when you're not ready for it. I will say this though, that was his first deal. He bought it a couple years ago. Had that deal gone perfectly, he probably would've left the 9 to 5 one year ago. Instead, I just got a text from him. He's leaving the 9 to 5 in January, going full-time in real estate. He's slaying deals. He just sent me a deal that if he purchases this thing, oh my goodness, it is a good-looking deal. It is like unbelievably good-looking deal. He probably could have got out of the 9 to 5 a year earlier if he rolled perfect dice. But you know what? He took the pieces, he didn't panic. He said, here's where we're at. Here's where we need to go. The encouragement here is you can always figure it out. The last one I'm going to share is another one of mine, water damage, where we got a construction insurance on a hotel we're converting into multifamily. So in the interim, as we're getting in, we're installing, they're called kitchenettes. We're installing kitchenettes, we're wiring things in, we've cleaned the hotel. And we did, like my business partner, I partner with Cody Davis on this. Came in, we cleaned a lot of these units ourselves. So we came in, I had just come in, taken apart mattresses, fixed flooring, painted walls. We went to town on this thing, like personally manual labor to make this thing work as quickly and efficiently as possible. Winter comes, coldest winter in 50 years. These pipes have never, never been tested against this. Turns out there's a small clause in the insurance that says if the pipes break due to freezing and your roof is over 20 years old, which it was 22 years old at the time, Insurance is null and void. No insurance for you. Total loss of a building that we just bought for $1 million. On this one, what is the fix? Number one, you go to all your partners. I had one other partner on this who'd flipped a lot of hotels. He's like, you know what? I think I can afford to sue the insurance and I think I can win. He's like, also, I can afford to renovate the building and I still love the fact that we bought this for a million bucks. He's like, for a million dollars, he's like, how about this? I don't think today— this was a couple years ago— I don't think today you guys can afford to just renovate a hotel. I don't think you can afford total loss of this building. I can. I have 50% of the building. How about this? You sign over your portion to me. I'll take on the note. I'll take the property. We had total loss of building and our financial loss was $0. Yes, we had some labor time over there, but that is the actual worst thing that can happen. The entire building got flooded. The electric is ruined. The walls are ruined. The ceilings have fallen through onto the floors. Like it was terrible. Worst thing that can happen. All good. And then guess what? He put about, I think he put about $400,000, $500,000 of renovation into it. His appraisal just came in at $2.5 million. Bought it for $1 million seller financed. That is a good deal. 10% down. He owed $900,000 on it. Put some money into it. He got it done. He was able to do this and he was able to survive the project. Because he was in a different position than we were. What is the common theme through all of this? Straight communication with all parties. You don't want to get sued. Don't lie. Don't cheat. Don't hide things. Address things head on. This goes under the category of stuff happens. You cannot control everything. Just be honest and let people know where the pieces are. Let them be part of the solution. Number 2, never come to anyone without some solution. If something bad happens, call people almost immediately. First, spend a second to think, okay, what are our possible solutions? Because when I tell them, they're probably going to feel like I felt when I first heard this. Absolute punch to the gut. Let's have a way to solve that. Let's strategize, but you don't sit on it for days and weeks. If I heard about this project, which I did, you know, and you get the call, we talked about it, Cody and I, for about an hour and a half. And we called all the partners and we said, here's where we're at. Here's our thoughts. We've already called insurance. Be strategic about how you present this. I'm not saying something bad happens and 2 seconds later, everyone, we have a huge problem. There's a fire. I don't know what the— don't, don't freak people out. But same day that you find that there's something detrimental, come up with a plan, come up with some ideas, present it to everyone as calmly as possible, and then work on a solution. Here's what I found. Total loss of building, total loss of roof, wrong deal structure, full tenant walkout. Those are all big problems. Those are all big cash flow problems. Deals didn't go to plan. They all cost money. We got through all of them. Everyone survived all of them regardless of their experience level, regardless of how expensive the project was. There's a way through everything and it doesn't take that much creativity. They're all pretty simple solutions. So if you're looking at getting started and you're like, man, I'm really worried about the risks of real estate. Basically, I think my message is just don't be an idiot. If your goal is to be somewhere else than where you are today. Imagine it as a portal. You're where you're at today. You're looking through this portal and you're looking at where you can be. You're like, man, if I, if I bought these rentals, if I built this business that I want to build, this is what my life would look like. If you were to walk through that portal, would you turn around and then walk back? I think for 99% of us, we'd go, no, I'd rather be on that side. And I'm willing to, I'm willing to risk something to be on that side. Now, my encouragement for you is that when things go wrong and, and it does get hard, I would still rather be on the other side of that portal. That's what I did. I made the decision to push through when it gets hard. I decided my goals mattered enough to me to build the business I want to build. Now here I am sitting on a little, about a little over 300 rental units at the end of this month. That's pretty fun. We've made millions and millions of dollars, but it's not just about the money. I actually have freedom, retired my wife, built my house. My kid is now supported. This is the type of stuff that we want to see. Like, I get to be the father that I wanted to be. I can provide and spend time with my kid. And I was able to do this because we took that step. So if you're getting stuck on like what can go wrong, I'll tell you one thing for sure. Your business will never go exactly as you plan and things will go wrong. And guess what? You'll be fine. Take the leap. I encourage you to do this. A disclosure, this is not financial advice to do something stupid.. But seriously, if you are considering taking an entrepreneurial risk, especially in multifamily, do it. I really truly think that you should do it. It was worth the journey for me. All right. Hope this motivated you. Hope this helped. Hope you learned something about how you can structure the problems that come up. If you're in the middle of a problem, maybe you can help apply some of this. If you haven't yet, like, subscribe to the channel. I have a free video below on how I bought a lot of these rentals. If you want to check that out, it's completely free. Link in the description below. We'll see you all in the next one.