Save Millions By Avoiding These Costly Mistakes

The purpose of this channel is to help you buy hundreds of multifamily units with or without money, just the way I did. I bought hundreds of multifamily units starting with $0 because $0 was in fact the budget. Along the way, you pay some stupid tax when you are new to the game. There's some things that you don't know, you don't know, and they can be really costly, both personally and monetarily. Goal of this channel and the Multifamily Strategy Podcast is specifically to help you save on those costs. If we can save you millions of dollars in your career, I think your time is well spent here watching a few videos on this channel. Today I'm sharing something that I haven't actually ever shared on the pod, which is what is my actual highest stupid tax. And I have two. One is personal and one is monetarily. I'm going to share both of you how they came about and how you can avoid doing the same thing in your business. So number one, I'm going to share one that is actually personal. I, as many people, do not partner with friends or family. That is common advice. People say that all the time. Don't borrow money from friends and family. Here's what it really comes down to. If you have a relationship that you really value, money changes relationships. Sometimes good, sometimes bad. If you don't want your relationship to change, if you're really happy with the way a relationship is with a family member, with a friend, don't change it. Don't add money to it. I invested with a friend. It was actually his father was the lender. He was someone who was really, really close to me through my entire childhood. And the deal went phenomenally. It was a hard deal. It was a lot of work where my team was very actively on site as well as myself. We got bit by dogs in the process. We got flea bites in the process. Solves homeless problems, sometimes manually showing up to the property and working to remove homeless from the property. We changed roofs, major renovations. It was a huge project, one of the hardest projects my team has ever done together. At the end of it, the partner asked us to reimburse him personally for all of the vacancy during the renovation. He also decided that he should have earned more money even though he tripled his money in 2 years. He made about $150,000 $50,000 on a $50,000 total investment. While we absolutely crushed it, they made a lot of money. He went ahead and got a lawyer and went after us for more money to try to drain our profit. And when we got into mediation, the actual conversation was, well, I don't care who's right, I want them to pay. That was the end-all be-all. We tripled his money. He did no work, never showed up to the property. We did all of the work, all of the effort, all of the accounting, all of the bookkeeping, all of the renovations. And we ended up spending a majority of our proceeds defending ourselves in court. Of course, we were correct, which does help in court. But at the end of the day, this person's goal is to do as much damage to us as humanly possible for no reason. We've gone over this a bunch of times. And yes, does this sound one-sided? Like, I feel like I'm only getting half the story. This is one where that is actually just literally what happened. They were wrong. We were right. We had a deal that was— I mean, it was a really, really, really hard deal on a small building, but it was a hard, hard project. Uh, we never got thanked. We spent a lot of money defending the LLC. It was a total waste. But the real cost is I lost a friendship over a deal that was successful, that made him a lot of money, uh, made us some money even after fighting, uh, each other in court. We still got out and, uh, made a profit. That's amazing, by the way, if you can fight each other in court and, uh, pay all the legal fees and still make a profit. We did phenomenally well on the deal. I mean, we slayed it on this deal. But we had someone who was upset that— and we never really figured out the reason. They just decided, hey, you know what, actually, I want more money and I want to do damage. That was his goal. He felt wronged that he only tripled his money in 2 years. Why that happened? I don't know. I'll probably never know because now we can no longer communicate or talk directly about each other. I can't say what his name is online. Huge bummer though. You don't want to burn friendships, especially when your friends are— I mean, that's someone who I've known for over 20 years. That's like losing a family member. That was really painful and it was unnecessary. We had a deal that was really hard that went well, that we made everyone money. It should have ended there. Huge bummer. So the stupid tax there— just don't add money into relationships that you don't want to change. It's that simple. I'll leave it there. But seriously, if you are considering this, you're like, oh, well, this one's going to be different. We've been friends forever. Going into business with your close friends is almost always a bad idea. I've seen it work, but more often than not, it doesn't. And when it doesn't, it's painful. That was actually the only time in my business I can sincerely say I had a lot of stress. I do not feel stress very acutely. I felt that one. That one sucked. If you can avoid doing that, you're gonna be really happy. Also, good news on this front. If you then have to go out and learn how to raise capital from others or find other partners or form business relationships without hitting your existing network, you're going to be able to scale your business better. 'Cause no matter what, even if you did partner with all your friends and all your family, If you have a successful business, you'll outscale them anyway. Start doing your business right. Start business partners with business partnerships. Structure them as business, not as friendships. And then if you become friends with some of your business partners later, it's okay because money has always been a part of your relationship. Some of my closest friends like Caleb Hommel, we started out, he was one of my mentees. He graduated, formed his own business. Later, we partnered on business ventures. Money has always been part of our relationship. It doesn't affect a darn thing in our friendship. Good times, bad times, stressful times, it doesn't matter because business has always been a piece of the equation. Food for thought. It's a better way to run. Okay. Number 2, most monetarily expensive. This was on a deal that also makes a lot of money. Robinhood Village Resort. There's 2 major mistakes here, by the way. It is a good deal and it is performing amazingly, by the way. For those who haven't seen a Robinhood update in a while, we had our best month ever. I believe the best month Robinhood has ever had in its 90 years of existence. Last month. We did absolutely fantastic. Excellent deal, bought at probably market price, but better than market terms. We've got excellent seller finance terms, $4.5 million purchase, $3.5 million of that was seller financed at 4.5% interest. Now, as rates have gone up and up and up since we purchased it, that debt product is just better and better and better. It is a great debt product on an asset that is doing, performing very, very well. Finally, while that is still good, we put something there that we really shouldn't have. Which is an additional principal paydown. We've done this on other deals, but originally we asked for less down payment in exchange, we would pay down like a quarter million dollars a year. So we'd put $250,000 down towards the principal at the end of every year in exchange for taking the down payment from a million to half a million. Well, the counteroffer was actually, we really like that paydown piece. We want to keep that, but we still want the million. We shouldn't have said yes to that. That was a huge tactical error because what happens is The Robinhood, every year that we've owned it, has made positive income. We have been profitable on the Robinhood. However, more than all of our profit goes towards that principal paydown. We don't have an extra quarter million dollars generated every year. So while it makes money, more than all of the money goes back into paying off the loan. So where does that leave us? We have a fantastic equity, a fantastic equity position that looks great on our balance sheets on a well-performing asset that drains our cash flow every year. So the rest of our business has to write checks. Last year, Cody and I each wrote about a $90,000 check personally to pay down the Robinhood. Does that increase our equity? Yes. Do we lose net worth? Absolutely not. Does that really hurt when you're trying to start your businesses? Yes. Having a six-figure bleed every single year during a note early in your career, that was idiotic. We shouldn't have done that. We thought it would cash flow even more than it does., but on a positive venture, we ruined it by really, we just over-negotiated. And then when we had a term that we really didn't like, this is how we justified it. I remember the meeting, Cody and I sat down and we said, well, if we can't afford an extra quarter million dollars, if we're wrong, our business is screwed because we make way more than that. Well, we do survive it and we do pay that check every year and it hurts every single year and it slows us down. And you don't get any tax benefits from paying off principal. So it's just money that gets thrown at a deal. We should not have structured it that way. If you have a lot of principal paydown, a lot of people think that that's a really good thing. When you're starting your business, interest only is your friend. Pay down as little principal as possible during the build phase because you are going to pay it down later after the stabilization optimize phase. You want as much cash in your universe during that time so that you can build the highest income possible as quickly as possible to pay down your debt as fast as possible. If your goal is to create a ton of equity, amortizing your loan is actually one of the worst things you can do if you're buying multiple properties. You want that free cash flow to pay down loans as you want to pay them down, or finish your project as you want to finish your projects. Control of the money is everything. Don't give all that money to the lender, which is what we did on the deal structure. There's another critical mistake with the Robinhood though. While it is doing well and it does perform well and the team is really good and we're having fantastic months there and all these things are going right, We made the assumption that we can just be great operators in hospitality because we do multifamily and we've succeeded in a bunch of our different business ventures. There's a lot we don't know that we don't know about hospitality. We're still learning a bunch and it's a distraction from the rest of our businesses. If you are doing multiple businesses or you're expanding your real estate empire, integration is everything. You want properties that go together, companies that go together. I have property management and I own multifamily. Those go hand in hand. The better I am at property management, the more income I have, which means I can buy multifamily. I can also manage all that multifamily, increasing my income even more by owning the property management company. They work together. Now, one thing that I think is super important is you should keep expanding and trying new things. So one thing that I'm doing right now is I'm doing more low-income housing. I'm doing a light tech deal and I have some additional tax benefits that are going along that work with the second organization. All of it is low-income housing though, which I am really good at. Low-income multifamily housing, value-add projects with renovation. That is my specialty. We're super good at that. Expand those things. Don't just jump into other businesses. Owning a resort is not the same as owning multifamily. We thought it was, you know, seller finance real estate was our thing. Wrong. We're much more specific than that. Those are the biggest stupid taxes I paid though. Robinhood took a lot of time. And it takes a lot of my cash flow even though it makes money. Was it a good deal? Yes. Was it a good deal for me? No. Do I love the Robinhood? Absolutely. Am I sad that I bought it? No. We grew so much by making that mistake. However, you can now grow from my mistake simply by watching this video or following my podcast or following this channel right here on Multifamily Strategy. Learn from people's mistakes. That is the goal. So if you haven't checked out the Multifamily Strategy Podcast yet, Every single episode, and we're on about episode— I think we're getting close to episode 30 now. Every episode we talk to owners of real estate, owners and operators. What's the highest stupid tax you paid? If you document all those and don't make those mistakes, you're going to save millions of dollars, which is the goal of this video today. Don't make the 3 biggest mistakes I did. Don't partner with friends and family. Do not buy properties that are outside of your wheelhouse or part of your core business while you're building. And 3, don't drain your cash flow to pay down principal. Don't write checks against your real estate while you're in the build phase. You can do that later. That's why we have the 4 phases of business. I hope this video is helpful. Give this a like or follow if you enjoyed this and you want to see more of this content. I really appreciate it. It helps me get this out to more people. And most importantly, I'll see you on the next episode.