My Foolproof Guide to Losing Money in Real Estate | Ep 119

James: Over the years, I've spent a lot of time studying real estate and how to be successful at it, and that's oftentimes what we talk about on this podcast. Mm-hmm. But today what I wanna talk about is something that's even more valuable than that, and that is how to lose money in real estate in today's April 1st episode of the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing and um, and our mission is to equip people.

To invest wisely so that I can do this so that, um, in both property and residence, so that together we can lose wealth and destroy housing. I'm James and this is my wife, Jessi.

Jessi: This is the city named Pearl Fools.

James: What whatcha talking about. I'm so serious here.

Jessi: Is it opposite day?

James: Uh, no. Um, not at all. Today I'm sharing my fool proof strategy to lose money in real estate investing.

And since this episode, again is on April 1st, um, you're gonna wanna take notes, um, just to make sure. You do the opposite, so I'm gonna kick it off. By the way, did you know that if you lose money in real estate, it's a real bad loss?

Jessi: Real estate? Mad?

James: Yep. Yep. Okay. Strategy.

Jessi: Okay. I am gonna like this episode. I am a sucker for bad

James: jokes, so I, and these are some I've, I tried as hard as I could and some of them are really bad.

Jessi: Real,

James: really bad, bad loss. All right. Strategy number one, invest based on emotion.

Jessi: Yeah, I love

James: it. That sounds great.

Jessi: That is

James: fool proof. Yes. So there's one rule that I follow when losing money in real estate. It's this, never run the numbers. 'cause numbers are cold, numbers are boring. Instead, based on how the vest, based on how the property makes you feel,

Jessi: that seems perfect,

James: right? Yeah, yeah, yeah. It doesn't have grammar.

Counter great weight to lose money. Does it sparkle? Yes. Does the lobby smell like fresh paint? Is there poor underwriting? Dude? Who cares? Perfect. Who cares, right? The check if it makes

Jessi: me happy. Then I'll do it.

James: Yes. Yes. Um, here you go. I always say fall in love with the property, not the numbers. The numbers will break your heart every time.

The property will too, but at least it's pretty.

Jessi: You feel like quotes taken out of context from this episode? Real bad. Oh, detrimental real estate, man.

James: Yeah. Yeah. How about this one? My underwriting process has three steps, gut feel, vibes, and a spreadsheet. I never open.

Jessi: Uh, no.

James: No. All right. All right, all right.

All right. So here's,

Jessi: here's, I mean, if you have the foolproof wave to losing money, then yes.

James: Yes. A hundred percent. All right, so here's the real lesson. Obviously good investing, there's math Yes. Involved. Um, and so professional investors, they actually look at cash flow and debt cover. General reserves, like actual stuff.

Emotions terrible for underwriting.

Jessi: Terrible.

James: Terrible. Alright. Strategy number two out of, did I tell you how many strategies there were?

Jessi: Nope.

James: I don't remember how many I did. Um. As many jokes as I could come up with six strategies. Okay. Um, all right. Always trust the pro forma. Do you know what a proforma is?

Jessi: The proforma? That's like the initial,

James: yeah, that's the, that's like the underwriting numbers that the realtor who's selling you the deal gives you

Jessi: uhhuh.

James: You're good to go.

Jessi: It's fine.

James: You know what I mean? Yeah. If the spreadsheet says you'll make money, it's guarantee.

Jessi: Well, the

James: numbers are

Jessi: totally

James: accurate.

Right? Because spreadsheets have never been wrong before. Why know? Especially when it's the sponsor and the seller who created them. All right, so my favorite rent growth assumption is 10% annually, forever. It's basically a miracle, but it's a documented miracle, so it counts. Uh, or how about this one? Oh,

Jessi: word.

James: If the numbers don't work, don't panic. Just rename the losses column to future upside. That's not fraud. That's Excel optimism. Yeah, I think we're good. I think we're, I think we're fine. Mm-hmm.

Jessi: I

James: don't think so.

Jessi: No.

James: Okay. So in reality, uh, proformas, they're forecast, they're not facts and they're often very optimistic ones at that.

Yeah. Um, so you just wanna make sure that you stress test it well, what happens if there's lower rents or there are higher expenses or slower lease up, or just interest rates rise over time. Something like that.

Jessi: Yeah.

James: Again,

Jessi: on average, I wonder how much they are inflated or mocked up, or. It

James: depends on the person.

Hmm. Well the trick honestly, that I've found is you just leave certain things off.

Jessi: Hmm.

James: Like for example, this is especially true for smaller deals. Like you look at their maintenance cost and they're like, oh, it's super small.

Jessi: You're like,

James: like Yeah. 'cause you did all the work yourself.

Jessi: Yeah.

James: You know, you something the

Jessi: realistic cost is.

James: Um, and so, um. So, yeah. So that's typically what they'll do. Or they, they don't do a lot of the longer term stuff. Mm-hmm. And so that never shows up and they don't have that factor as like an expense saving over time. Mm-hmm. That's usually what you'll see.

Jessi: Yeah.

James: Um, is some sort of saving. Or the other one is they have the wrong type of insurance.

Oh. Over the place and it's underinsured.

Jessi: Okay.

James: It's actually super dangerous, but they go, oh yes. But when you the spreadsheet, yeah, it's fine. But Yeah. And then when you get a quote, you're like, why is my number twice as much as yours? Like, I don't know. 'cause they did something else. Okay. Uh, I'll let you turn that off while I do strategy number three, which is to use as much leverage as humanly possible.

Jessi: Right.

James: More

Jessi: leverage is better.

James: Yeah. If you want to lose money faster. Leverage is your best friend,

Jessi: Uhhuh.

James: Yeah, yeah, yeah. Debt is kinda like gasoline, you know, use carefully. It powers growth, but use recklessly. Oh man. It powers

Jessi: bankruptcy.

James: Yeah. Yeah. Okay. So my rule of thumb, if you can sleep at night, you're not leveraged enough.

Jessi: Okay. Yes. All right.

James: Yeah. Yeah. Or how about this one? Um, hopefully this works for you. I like my deals the way I like my coffee with a lot of grounds for concern. Yes. You're welcome. Wow. That's my favorite one of the bunch, by the way.

Jessi: Oh my word.

James: So, got that.

Jessi: Wow.

James: That's kind of, I peaked in the middle.

Jessi: That's good.

James: Know's good. I know. You're just, you're gonna tell that one later. You're just, you. I can, I can already feel that one's good enough to make your, your repertoire. All right, so here's the real lesson. Obviously smart investors, they use debt carefully. It's not that you don't use it, you just wanna be.

Mm-hmm. Like you wanna be good about it. What happens if rents drop, if interest rates rise, lease, you know, all this stuff. Sure. Right? You wanna stress test it. You just wanna be careful about. Strategy number four. Yes, I love this. Skip the legal documents. Who needs them. So next, this is next week, we're going to be talking about red flags, um, that you should be look out for.

Yeah. But. You don't, here's the good news. If you don't read 'em, you'll never see any red flags.

Jessi: I mean, done. Yes. That is one approach.

James: Yeah. Yeah, yeah. So private placement, memorandum, operating agreements, subscription docs, that's

Jessi: like 120 pages long. That's like, ignorance is bliss.

James: Right. That's you don't, don't.

If the investment were risky, surely they would've mentioned it in the first paragraph.

Jessi: Yeah.

James: It wouldn't, would be offering it if it was risky. Yeah. Um, how about this one? Um, I never read anything longer than a menu, and even then I usually, I usually just ask the waiter or, okay. I didn't land. That's cool.

Um, I once read an operating agreement front to back. Turns out I had very few rights and a lot of obligations. So basically marriage, but with works tax treatment,

Jessi: yikes. Allows

James: crickets on that one.

Jessi: Yikes. I mean tough. That's not how I view marriage, but

James: So in reality, like that's like that's the thing you want to read 'cause it explains all your reads and how everything works.

And no matter what's in the spreadsheet or the P fma or the pitch deck, like it's all about the legal documents at the end of the day. Yeah. So don't skip them, please.

Jessi: And if you listen to the very end of next week's podcast,

James: yes

Jessi: there might

James: be a there. The other reason is that recording things backwards.

Did it on purpose, but, um, so we, so we happen to know. It's a banger one. So

Jessi: banger,

James: stay around for next week. Okay. Strategy number 5 0 6. Here we go. Um, invest with people you barely know.

Jessi: Oh, right.

James: Oh

Jessi: yeah. I mean, you could just walk out on the street and find anybody.

James: Yeah, because if you're serious about losing money, make sure you invest with people you've known for at least five minutes.

Jessi: Maybe.

James: Maybe, yeah. Ideally someone you met on the internet.

Jessi: Ooh,

James: ooh. So if you're listening to this, I like that one. Why did I say that?

Jessi: Some, uh, prints in the money,

James: by the way. Obviously, hopefully, like you've seen this and you're like, I, I met James over the internet. Totally get that. Like, please set up a phone call with me.

Talk with me. I love meeting new people. It's all good.

Jessi: You'll do an actual video call with you,

James: you in person? Yeah, yeah, yeah. You

Jessi: in person.

James: Or even better, someone who says they're a real estate guru.

Jessi: Oh.

James: Oh dude. Self-proclaimed gurus are the best.

Jessi: Mm-hmm. Mm-hmm. Especially if they're gonna sell you like some series or.

Documents or, you know, strategies for Totally figuring it all out.

James: Yeah. Yeah, dude. Um, my rule of thumb, if they have a Lamborghini in their profile photo, I invest immediately. I mean, worst case, at least one of us is making money.

Jessi: At least enough to Photoshop it

James: or how about this one track record is overrated. What I really look for is energy, specifically the energy of someone who's never had to explain a capital call. Yeah. Um, there you go. So obviously sponsor quality, that's the, the biggest driver of returns. So get a sponsor.

You trust, read the docs, like do those. I know I just made that sound really simple, but honestly, that's at the end of the day. Um, like the spreadsheet. And you wanna look for someone who they've experienced through cycles, they're transparent, they're super conservative, or just conservative in their underwriting, and they just have clear communication.

Like that's the thing. So that's what you're looking for. And the sixth strategy for losing money in real estate is to ignore reserves. Okay, so if you really wanna lose money, never set aside reserves because nothing unexpected ever happens in real estate roofs. Yeah, those last forever tenants, they always pay and the plumbing never fails at 2:00 AM Actually, my plumbing always fails the day before a big trip.

Jessi: Ugh. Yes.

James: It's so annoying. It

Jessi: doesn't,

James: I don't, I don't get it. I'm so glad I now. Have a team of people to do stuff. I mean, I, I forget how many, like, it was like trips in a row and it was some sort of plumbing thing that wasn't like, oh, lemme go fix this little drip. It was leaking out on the ground and fix it.

Oh man, that was a pain. So,

Jessi: but why would you need to save for that? I know.

James: Who cares? I'm gonna do the work myself. No, because it's free.

Jessi: It's free.

James: Oh man. Maintenance

Jessi: costs are super low.

James: Exactly. So, uh, here we go. If something breaks, just tell investors it's adding to the character of the asset. It works on tenants too.

It works on nobody, but, you know,

Jessi: say it anyways. Yeah.

James: Yes. Or, um, or my other one is if something breaks, just tell the tenants. It's a historic feature.

Jessi: Uhhuh

James: Uhhuh. I tell that people with our line apartments because they're like, garbage cabinets. I'm like, it's historic.

Jessi: It's historic. It's garbage. You

James: can't put a full big plate in there.

Jessi: But it's his,

James: it's vintage. It's vintage. I know, I know. Yeah, it works. Some people they get into it. I, I'm not, but you know, I don't have to live there. So, obviously reserves, they protect investors from surprises and so you wanna make sure that you just, you have enough money in reserves. That's the end of it.

Okay. So April fools aside, that was fun. Uh, real estate investing, it can be a very powerful way to build wealth. Yeah. Obviously the idea isn't to lose money, so, but there is like some stuff behind there. So most of the big mistakes investors make are surprisingly predictable. Mm-hmm. Right. Um, there's someone, I think it's Alex Hermo, where he is always like, you know, if I don't know how to be successful at something, it's of good mental exercise to say, well, if I wanted to fail at this, what would I have to do?

Jessi: It's kind of true. 'cause it's easier to think of ways to fail. Right. And then you just do the opposite.

James: Yeah, yeah, yeah, yeah. Exactly.

Jessi: Yeah.

James: So like they trust projections too easily.

Jessi: Mm.

James: They underestimate risk. Yeah. They invest with people they haven't really vetted.

Jessi: Mm.

James: And so if you wanna avoid being a fool in the real estate investing game, remember a few simple principles.

Run the numbers, stress, test the deal, understand the legal structure, and then invest with people who have proven they can navigate both good and bad markets and mm-hmm. Honestly, like you'll do pretty well. That's the name of the game. Alright. And remember, if someone ever promises you a guarantee in real estate return, the only guarantee is that you should run.

I mean that literally like cardio is free. Unlike that investment.

Jessi: Uh, those were bad. Thank

James: you.

Jessi: Those were bad. I mean,

James: I,

Jessi: they were good, but they

James: were bad. Uh, yeah. I had chat help me with that and I said, I want some bad dad jokes and it came up with something and I was like, well, like those aren't even funny. Like, that's not the kind of bad I'm looking for. I was like, I just want funny, groan worthy, but it has to be funny, but I want something to groan.

And it's just like.

Jessi: Okay.

James: AI is not taking over the comedy space anytime soon. I think we're good there.

Jessi: Yeah.

James: But, uh, yeah, I, we did a lot of revs on that one and now was, I put it on all a bunch of different ones. I'm like, help me out.

Jessi: Oh my word.

James: It was bad. Nice. So anyways, half happy April Fool's day.

Hopefully you don't get pranked a whole bunch and you don't fall for a deal. That's just, that's bad, even though someone's not intentionally trying to April fool you. Um, but yeah, man. So. Ah, good stuff. Um, and if you wanna learn more about what it is like to invest with us, really not in a joking way, uh, you can learn more about, um, our investments and how we roll at furlo.com.

So with that, thanks for listening. Have a great day.

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