Lief Simon Details The Most And Least Successful Property…

Lief Simon’s True Confessions—”My Biggest Losers”

A reader wrote in last week to tell me she was done with international real estate investing. She’s invested in four opportunities I’ve written about over the last 10 years, and none of them has played out as expected. She wasn’t upset, just matter of fact, writing to let me know that she’s going to stick with U.S. real estate going forward, as that’s something she feels she understands better.

Can’t argue with that logic.

This very reasonable lady lost everything on one direct-developer investment she made. I invested in that deal, as well, so we were able to commiserate. The developer, as it turns out in hindsight, was in over his head. He didn’t have enough experience or local knowledge to understand the complications he would encounter, and so these complications weren’t factored into his business plan or projections. Bottom line, he wasn’t properly capitalized and went belly up.

I’ve lost money on a few direct-developer investments. Others have played out well. I consider an investment of the kind I’m talking about, one where you’re getting in on the ground floor right there with the developer, comparable to investing in a start-up company pre-IPO. You have the potential for big reward, but the risks are great, as well. (My pre-IPO investments have a higher loss rate than my direct-developer real estate investments, for whatever that’s worth.)

You can minimize your risk with a direct-developer investment by asking for land as collateral—though that’s not always what it’s cracked up to be. Right now I’m invested in three direct-developer deals where the development isn’t moving forward but I have property as collateral. The truth is, though, should the developments be forever (as opposed to temporarily) stalled, the land I hold as collateral in each case isn’t worth much. What would I do with these little islands of property unless or until the planned developments they were meant to be part of play out?

In one case, the land is collateral for eight investors. If you’ve ever tried to get eight people from different countries and backgrounds to agree on a single path forward and been successful, please get in touch. You have skills I lack and could benefit from.

In another case, my collateral is an apartment. This is even more complicated. The short story is that the contractor walked off the job after having been paid a substantial amount of money for the construction but before finishing the work. Somewhere between the developer signing the agreement with the contractor and the contractor bailing, the contractor stopped paying on his insurance bond that guaranteed completion. The condo development is unfinished, and we who invested along with the developer are left holding the bag.

In addition to the direct-developer investment, the lady who wrote in to me last week has lost in other ways, too, though the other investments she told me about aren’t write-offs, at least not yet. One is a lot in a development where the developers haven’t fulfilled all the amenities. The lot has value but no real market right now.

The woman also invested in a renovation project in a colonial city. That didn’t work out because the architect she chose (on the recommendation of an attorney I recommended) turned out to be a scoundrel. She managed in this case, though, to come out a little to the good after all was said and done.

The nice thing about real estate is that, unless you’re leveraged, it’s difficult to lose all your investment. Still, holding property that you want to sell but can’t can seem the same as losing your investment.

I’ve been investing in real estate for more than 20 years and have bought in more than 20 countries at this point, more than 40 purchases and counting. Most have been positive and profitable experiences. Some are still playing out, and, for these open investments, the current values of the properties are greater than what I paid for them in every case except one.

The key is to manage risk.

To that end, I follow a few mantras. I break them regularly but do so knowing that I’m breaking them. When I do, I carry out more due diligence and I’m prepared to lose my money.

Mantra #1: I don’t buy property in a place where I haven’t been. The corollary to this rule is to visit any property before investing in it. That’s not always feasible. Further, visiting a place and seeing the piece of real estate you intend to invest in before you invest is no guarantee the investment will play out in your favor. I’ve visited properties and decided, as a result of my on-the-ground research, to invest only to have things fall apart.

That said, probably my best and my worst investments to date both have been in properties that I didn’t visit before buying.

The one that didn’t work out was a pre-construction project in the UK. Everything looked good on paper. The location was central in the town where the building was going up. A colleague had a friend involved in the project. Both assured me I couldn’t lose. So I acted without making the trip to see the place myself.

Unfortunately, thanks to overbuilding in the town, which I would have recognized had I gotten on a plane, the rental projections were optimistic, to put it politely. Worse, I bought with leverage. In the end, this was a total loss.

On the other hand, I also acted on an opportunity in Panama City without seeing the project for myself. Again, this was on the recommendation of a colleague. This investment, though, has been, you could say, the most successful of my career. I’ve made far greater returns in whole numbers from loads of other buys, but, on paper, by the percentages, this one is near-perfect. The property has appreciated nicely in value, year on year, and has generated a double-digit net yield every one of the seven years I’ve owned it. It has been occupied by renters better than 90% of the time.

Lief Simon

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