Lessons Learned From Losing Everything During the Financial Crash
“What would you attempt to do if you know you could not fail?” – Robert Schuller
Kevin Bupp, a Florida-based real estate investor, top iTunes podcast host and serial entrepreneur with over $40 million in real estate transactions, is one of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th.
I interviewed Kevin on my podcast a few years ago and he provided his Best Ever advice, which is a sneak peak of the information he will be presenting at the conference. This advice includes:
- How to use partnerships to quickly scale your business
- Lessons learned from losing everything during the financial crash
Originally published in the Best Real Estate Investing Advice Ever: Volume I
Kevin Bupp’s Real Estate Background
When Kevin was 19 years old, he was introduced to real estate investing by a local investor, David, who he met through a mutual acquaintance. David told him what he was doing in real estate, how he spent his spare time, and provided an overall sense of the lifestyle he lived as a full-time investor. Kevin was very intrigued.
As a result of Kevin’s interest in investing, David invited him to attend a 3-day real estate seminar in Philadelphia. David had already purchased two tickets, but his business partner couldn’t attend, so the timing could not have been more perfect! At the seminar, Kevin was able to network with new and experienced investors and also learned how to invest in single-family residences as a wholesaler and fix-and-flipper. After leaving the seminar, Kevin was pumped up and excited about the prospect of taking the knowledge he had gained, and using it to get out in the real estate market to make some money.
Learning Through Mentorship
The first item on Kevin’s agenda post-seminar was to focus on how to do his first deal, so he reached out to David for advice. Since David had previous experience investing in real estate, he decided to take Kevin under his wing. David wanted Kevin to learn the ins and outs of real estate investing before spending any money so he didn’t make any (or as many) mistakes. Kevin literally followed David around for a year, gaining first hand knowledge on what life was like for a full-time real estate investor. Kevin went to his home office every day, and watched what David did, listened to him talk on the phone, went to see properties, and looked at some of the apartments that David owned.
After a year, Kevin decided it was time to pull the trigger and purchase his first property. He found an old, dilapidated property in Harrisburg, PA, purchased it for $26,000 and put in an additional $10,000 in renovations. Kevin funded the project with private money he raised from one of David’s investors. He sold the property for $59,000, making a profit of $5,000, which was about as much money he was making in a year working in his current job.
Advice in Action #1: Not only did Kevin learn the ins and outs of real estate investing from his mentor, but he was also able to raise $36,000 in private money from one of his mentor’s investors. Gaining knowledge is not the only benefit from having a mentor. If they are active in the market, they will also have a network of other real estate professionals they can send your way. Commit to finding or hiring some sort of mentor and you will benefit in a many of ways.
Scaling Quickly By Starting a Business and Partnering Up
Kevin continued doing fix-and-flips as well as a few wholesale deals on the side while finishing up the last two years of community college in Pennsylvania. Upon graduation, he decided to try his luck in a new market, so he quit his job and moved down to Florida. As soon as he arrived, Kevin started pounding the pavement and got involved in two real estate investing clubs. Through these efforts, he found the good areas of town, determined what he wanted to focus on, and discovered the best way to make money in this new market. It took about 8 months of research and networking before Kevin found his first fix-and-flip deal.
By continuing to fix-and-flip and network, Kevin became familiar with who the active movers and shakers in the market were and what types of investment strategies they were using. Through these experiences, he was able to form two partnerships, both of which allowed him to quickly scale his real estate business.
Partnership #1 – Mortgage Brokerage Firm
One year after making the move to Florida, Kevin partnered up with an entrepreneur who owned a mortgage brokerage firm that already employed 12 full-time loan officers. Together, they originated millions of dollars in loans each month, primarily within the sub-prime niche, and sent out 100,000 pieces of direct mail every month.
Partnership #2 – Investment Group
Kevin had also built a relationship with an experienced investment group in Sarasota. He knew this investment group because he had wholesaled and bought some deals from them in the past. Kevin and this group decided to put their brains together and ended up combining their efforts and partnering up. When Kevin initially met this group, they were doing 10 to 15 deals a month. After the partnership was formed, they were buying 20 properties a month. Their main strategy was long-term buy-and-hold rentals, with the majority of the homes being SFRs, along with a few smaller multifamily properties. By 2007, the partnership had a combined portfolio of 500 SFR rentals. Kevin was not a full partner because this investment group already owned a number of SFRs before he joined, but he was still able to amass a personal portfolio of 100 properties.
Advice in Action #2: Both Kevin and this investment group benefited from partnering up. For Kevin, he was able to scale his business to 100 properties, and the investment group was able to purchase an additional five to ten properties each month. It is extremely difficult to quickly scale a real estate business all alone, so if you plan on building a real estate empire, partnering up with another investor or real estate group is very advantageous. However, make sure that you perform your due diligence up-front, because choosing the wrong partner or entering a partnership at the wrong time can get you into a lot of trouble.
The Effects of The Financial Crisis
Up to this point, everything was going great. Kevin had two successful partnerships and was making a ton of money, but when the market crashed in 2007-08, it started to go downhill fast. First, Kevin sold off his ownership in the mortgage company. This was before the crash was at full force so everything was going okay, but he sold his stake to his partner, who ended up going out of business a year later. Kevin’s other partnership was the one that affected him the most.
Leading up to the crash, Kevin and the investment group wanted to mitigate their risk, so they committed to purchase SFR rental properties for no more than 65% of market value. When the financial crisis occurred, not only did property values plummet, but the rental market crashed as well. Homebuilders who had built brand new homes were unable to sell, so they were forced to hold on to them and rent them out. Unfortunately, these brand new properties were renting for the same price as the 20 to 30 year old homes Kevin and the investment group owned. As a result, they ended up giving 90% of their properties back to the banks.
One would think that someone purchasing properties at 65% of the market value would be able to sustain a crash. However, due to four main factors, this was not the case:
- The taxes and insurance rates are much higher in Florida compared to the relatively low rates found in the Midwest.
- Kevin and the investment group had 500 properties, mostly SFRs, spread across 7 different counties that stretched 200 miles north to south, so they had a large property management company with a lot of inefficiencies.
- Many of the markets in Florida had economies revolving around real estate. Once the market crashed, construction workers, real estate agents, and other real estate related employees lost their jobs and their source of income. Kevin and the investment firm were losing tenants and people were leaving Florida faster than they were coming in.
- Property values decreased more than 50%, and in some areas, as much as 65%. Properties they purchased at 65% ARV for $60,000 were selling for $35,000 in 2010.
The typical home Kevin and the investment group purchased was a 3 bedroom, 1.5 or 2 baths SFR that would cash flow $150 to $200 a month. Even though they were never paying more than 65% ARV plus repairs, after accounting for the four factors above, there was a very small margin to make a profit. A cash flow of $200 per month ($2400 per year) is very easy to lose, if there is turnover. If anything happens, even something as minor as a tenant tearing up the carpet, the repair expense alone would eliminate any profit expected for that year.
Advice in Action #3: Take a look at the four main factors that resulted in Kevin losing 90% of his portfolio and see if any of these apply to your real estate business:
- Are you investing in an area with higher than average taxes and insurance rates?
- Is your portfolio spread across a large region?
- Do you know who the main employers are in your market? Does your market have a few large industries or is there a diverse spread of different industries?
- When the market crashed, how much did the property values in your market drop?
If you find that one or more of these factors apply to your business, what can you do to mitigate these risks moving forward?
Looking back, Kevin believes experiencing the market crash was a good thing, although he didn’t know this at the time. After giving back 90% of his properties, he spent the next few years licking his wounds. He was stuck in a funk and didn’t see the light at the end of the tunnel. Eventually, Kevin took a step back, re-evaluated his life, and instead of being negative and saying “poor me,” he decided to put his focus on something else until he was ready to get back into real estate. As a result, Kevin started a few other businesses, a sports apparel company and a printing company, both of which are still running to this day.
Lessons Learned From Losing Everything
As time passed, Kevin began reflecting on his experience of going through the real estate crash and losing everything. He realized he had learned a lot about himself and about real estate investing in general, and figured out what he could have done differently. The answer: investing in cash flow rich properties. Looking back, Kevin wishes he had focused more on multifamily properties and learned many lessons, including:
- Invest in multiple larger properties that are closer together. This will spread out your risk and eliminate the inefficiencies of a large property management company. The amount of time and effort it takes to purchase 150 SFRs is also much higher compared to purchasing one 150-unit building with the same type of returns.
- Out of the 90% of the properties he gave back to the bank, not a single one was a multifamily property. They all survived the crash.
- Don’t get stuck in your comfort zone. Kevin continued to purchase SFRs because that is what he knew, instead of getting out of his comfort zone and pursuing multifamily investing.
- Don’t focus on appreciation. Kevin calls appreciation “funny money.” It is not spendable unless you sell it at the right time. Don’t buy based of the expectation that the market will continue to increase indefinitely, year over year.
- Understand your investment criteria before deciding to purchase. Figure out the return on investment you want and commit to only purchasing properties that meet your criteria.
- Don’t overleverage. Kevin and the investment group would wait until they had 10 to 15 homes. Then they would take a commercial line of credit, pull the money out, and purchase more properties. When the market crashed, they were unable to obtain lines of credit, so everything fell apart.
Advice in Action #4: The main takeaway is to focus on cash flow. If you are buying for cash flow, you are getting an asset that will continue paying you month after month, no matter what happens with appreciation. Buy for cash flow and have the appreciation be the icing on the cake.
Want to learn more on buy-and-hold investing and a wide range of other real estate niches? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit www.besteverconference.com to learn more!
Related: Best Ever Speak Brie Schmidt Sneak Peek How to Avoid the Shiny Object Syndrome in Real Estate Investor