While real estate investing can be incredibly lucrative, these investments come with the risk of moderate or even significant financial loss. Often, investing mistakes are tough lessons that come with a high price tag, but you don’t necessarily have to learn those lessons through your own experiences.
United Property Group Founder Dan Gorman has been investing in real estate for more than 22 years, and he has purchased more than $50 million in commercial real estate. Currently, he owns apartments, office space, and a few restaurants. While Gorman has enjoyed incredible success as an investor, he has also lost an extensive amount of money through mistakes with multifamily and commercial real estate. What can you learn from Dan Gorman?
1. Trusting Others With Skin in the Game
When Gorman reflects on some of his biggest financial losses and investing mistakes, he attributes them to not understanding the deals fully and relying on the advice of others. For example, many years ago, he was under contract to purchase a 120-unit apartment complex. The deal was complicated with financing involving bonds, low-income tax credits, and other unique sources of capital. Gorman admits that he did not understand the deal fully. He relied on the advice of others who told him it would be a profitable deal, but those individuals all stood to profit from the transaction. Gorman believes that they were advising him with their own agendas in mind.
Before closing, Gorman rightfully got cold feet. He tried to back out even though he stood to lose a large chunk of money at that stage in the transaction, but his attorney advised him that he could be sued for not following through. Ultimately, Gorman went through with the deal, and he lost a substantial amount of money for many years on end until he sold the property recently.
2. Failing to Understand the Transaction
Gorman recalls specifically asking his real estate attorney about one key aspect of the transaction, and his attorney could not explain that component of the transaction to him. In hindsight, Gorman realized that if an attorney who works with real estate transactions on a daily basis could not understand the structure, this should have been a red flag.
He warns others never to get involved with land contracts, lease options, bond financing, and other situations that are over their head. Take the time to understand all aspects of the transaction fully before committing to it.
3. Relying on Projections
This particular project was a rehabilitation project that involved putting $2.5 million into the property. The rents were below market value with a two-bedroom unit at the time renting for $650. The projection used by underwriting was $750 per month for these units. Gorman’s attorney advised him that the underwriting projections were too aggressive and that they may not be realistic.
Initially, Gorman saw dollar signs and ignored his attorney’s advice. However, he realized as the closing date approached that his attorney may have been right. This realization came too late because Gorman already had $250,000 of hard money invested in the deal. He has learned to use conservative, realistic projections that are based on actual market data.
4. Failing to Understand Contract Terminology
Ultimately, the 2008 real estate crisis led Gorman to go into default on the apartment complex. While he was not behind on payments, the lender backed out of the financing. The only option he realistically had was to file for bankruptcy. However, even though the multifamily property was owned in a protected entity, the bankruptcy triggered defaults in other investments that Gorman owned. Essentially, this one bad deal triggered the collapse of his investment portfolio.
5. Not Understanding the Tax Implications
In addition to dealing with the ramifications of bankruptcy and losing money on this 120-unit multifamily complex transaction, Dan Gorman was hit with a huge tax bill when he ultimately sold the property 15 years later. While he sold the property for exactly what he paid for it, he realized a net profit of $1.5 million. This was a surprise to him, and he states that he still does not fully understand how the calculation was made. Because of this net profit, however, he is now struggling to find a way to mitigate his tax liability with only a few months left in the tax year.
6. Overlooking Building Permits
This is not the only project that has provided Gorman with major life lessons. One of the more recent lessons that he has learned is tied to an office building that he rehabbed. He met with the building inspector and an official from the fire department to discuss his plans for the project, and they both told him to move forward with it. Through a miscommunication, Gorman believed that a permit was not required to do the work. Now, he is backtracking in an attempt to pull together all of the documents related to the permit. Unfortunately, this opened up a can of worms related to maximum occupancy, usage, and more. The project seemed fairly straightforward initially, but it has become overly complicated because he is dealing with the permit application process midstream.
Through his investing mistakes, Dan Gorman believes that residential real estate is easier to invest in than commercial real estate, but both require diligence. He is happy to discuss his investing mistakes with others in the hope that they may learn from them. At the same time, he acknowledges that he still has lessons to learn. Nonetheless, the mistakes that he has made have made him a more conservative, cautious investor.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.