PODCAST EPISODE 278 – How to Lose Money in Real Estate



  • 00:07 – Introduction to today’s episode.
  • 02:08 – What happens when you buy real estate syndicates?
  • 07:13 – The difference between a syndicator and an investor.
  • 12:07 – Investing in the Houston market.
  • 14:38 – Rent increases and benefits.
  • 19:11 – Investors want to see their money go to work.
  • 24:46 – What is depreciation and how does it work?
  • 26:40 – This is the best investment opportunity for you.
  • 29:57 – Top multifamily market with a proven track record.


[Tweet “That’s a real problem with syndicates, you’re trusting that black box to produce the returns for you, and then you just find out it didn’t work. So you experience all the volatility at once. #YourBusinessYourWealth”]

[Tweet “When you buy real estate, you are not buying an investment, you are buying a business. #YourBusinessYourWealth”]

[Tweet “Just because someone else says it’s a proven model doesn’t mean you have to believe that. #YourBusinessYourWealth”]


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Full Episode Transcription



Hello, and welcome to your business your wealth. My name is Paul Adams, I am joined on the podcast today by my friend, your friend, the nicest guide ever appear on this podcast, Corey Shepherd,


the nicest guy ever, haven’t we? We’ve had some pretty nice people, I’m trying to think of some of the guests that we’ve had, there must have been someone


in the comments below Name one person that’s been on the show nicer than Cory. And, you know, you can’t say me, because I’m not okay. And you’re gonna find out today because of the article that we’re gonna look at. Y’all, this is, this is gold, this is where you’re gonna see me probably get pulled back a little by Cory. So sit down, hang on, we’re going to talk about how people have invested in all these little real estate partnerships. And the promise for like the last several years for many of these is you can put in a small amount of money and own a huge chunk, or a little chunk of a huge apartment complex. Look, your income is diversified by all these doors, we handle everything property management, revamping, construction, remodel, revamping remodeling, and we’re gonna raise rents for you, everything’s gonna be great. And we’re going to double your money in a matter of years. And would you believe a quarry that that the promises didn’t quite end up like the results?


The way? And that’s? Yeah, that’s, I guess, lesson number one is be very careful who you listen to on YouTube.


Right, yeah, and if you and if you want, if you want some evidence of that, and how we’ve talked about that on the show before, go back and find our episode on Be your own fiduciary. In fact, Miranda, if you could pull that up and throw it in the chat, here, I’ll take a look at it, maybe grab that the Be Your Own fiduciary episode. Because you have to be your own fiduciary. Even though we are a fiduciary, we ask our clients make sure they understand their decisions before taking action. Now in this case, we have seen clients lose money in these kinds of deals. And I want to talk before we talk about this particular article, and this particular real estate developer down in Houston, or syndicator. In Houston, what happens when you buy these kinds of deals, so you put your money in, and the plan is they acquire the project, they may do some remodeling, they plan on raising rents, and then they will refinance and give you a cash out to give your principal back, and then you have income forever. Or they’ll say we’re gonna do this for three to five years, and then we’re just gonna sell it and you’re gonna get your capital gain. That’s the two major ways these deals go.


Here’s the pros out would be potentially great outcomes for Yes. Or folks.


Yep. And the way that people intended to work, Cory, because we’ve seen clients go through this, they, they go into it, and they say, Oh, I’m going to put in this money. And then I’m going to, I’m going to put in a quarter million dollars. And I think I’m going to get 450 to 500, in three to five years. And then you get maybe some updates, maybe not as many updates as you want. But here’s why people are attracted to these, they’re attracted, in part, because they don’t see the volatility. You see most of the other assets, you’re gonna buy, let’s say your 401 K at work, you can go online every day and experience the volatility for yourself. market goes up and down. We don’t know when it’s gonna go up and down. The people that do say, when it’s gonna go up and down. It’s just as hard to in fact more harder to predict which one of those people will be right than it is to predict when the market will go up and down. So you have people who want to get away from the volatility, so they go into this real estate stuff. And the only difference is these real estate syndicates, you just get your volatility all at one time.


Right, all unstuck, it’s like, it’s like that water balloon or like they turned off the hose. It’s the pressures building behind there, you just open the spigot and it


that’s it rushes out or sucks up more capital at the end, which I’ll explain in that is that we have one one client who had a deal that was supposed to turn out in like three years. And you know, because of building permits and some other things that didn’t happen, and then it went through COVID and now it’s been almost seven years and seven years over which the 250 they put in was supposed to turn into 500. And because of difficulties with the project, higher interest rates than anticipated and all of COVID cost overruns the entire equity that they have in the project might evaporate when they have to fire sell it. Because even though it’s almost fully leased, it’s still losing money every single month. That’s a real problem with these, because what you’re doing is you’re putting your money in. And then you’re trusting that real estate, syndicators black box to produce the returns for you. And one of the hardest things about it is they could tell you, it’s all going well the entire time, and then you just find out it didn’t work. And so you experience all the volatility at once and from our clients that have gone through it, it’s super difficult. It’s not like all the volatility at once feels good. Because you didn’t see the de Lehman moment in the slow progressive growth of say, the stock market over seven or eight years, you just assume it’s going well, and then you find out all your capital is gone, or 50% of your capital is gone. And that’s the case here with these projects we’re going to talk about and when I saw this article, Cory, I at first thought this article had to do with individual investors like buying ones, you know, one or two unit, individual apartment homes. But it was been all


over the news. Like lots of people trying to do that with Airbnb helping you rent things out for


you, I just say apartment homes, I meant rental homes, that people go in and buy an individual rental home, you and you write the lots of articles about that. But what they’re talking about is people that were offered the benefits of owning, owning apartment building and rentals without any of the work in real estate investments that have already left some people empty handed. So that’s the attraction, I’m going to get to participate in real estate and real estate like returns. And I’m going to do that. Through this, I’m not going to have any work. Now, there’s a lot of reasons that I don’t know, we’ll have time to get into today about why that doesn’t work. And maybe our next episode, Cory, we should just talk about the origin of returns and your capital involvement. We haven’t covered that in years. So let’s we’re going to visit this article and what went wrong in a different kind of way,


which is we talk about real estate syndicators for just a second for everybody. No. Right. So they, and this is in that article as well. But they’re going to buy the property, usually not with their own money, they’re getting financing, and then attract outside investors to help, you know, either, frankly, pay the debt service on this on the same part of it, but add money for upgrades to be able to increase rent and, and so they’re, they’re just sitting here in the middle, taking fees from either like upfront fees for getting your money in and ongoing management fees, just like they were managing some kind of investment fund on this property, whether it’s going up or down, and I think that is a big difference, they can actually make money make a lot of money, even if this property is going under and failing. Not to mention


many of them will keep an interest in the overall general partnership for the work are putting together. So they have say quote unquote, 20% of the deal, they might say, but they got 20% of deal for putting the deal together, not like they necessarily put in 20% of it with their own money.


They could have they could do and in fact, there if someone had put their own money into the deal at the front end, it would lead me to have more promise and then it’d be less vicious. But you know, a mutual fund, say some company is putting together a collection of stocks to sell you a mutual fund at least, if the value is going down, they’re making less and less money. At the aggregate a syndicator. Like this could be making the same


making rent cashflow on, say rents or something like that, and may not even have to have profitability. So you got to read those syndication agreements closely.


Yeah, so let’s look at your example of Ron Paul.


So this is Jay. Gotcha Valley, I think is how I say his name. He’s gonna say here in a moment. And he’s going to walk us through this apartment complex. He’s having people invest in now this was made early 2022. So this video is a little over a year old. And I’m gonna give away a spoiler alert here, Corey.


Good. I was gonna ask you a little for it. We’ll call it foreshadowing.


Foreshadowing. There we go. So for shadowing, this has already been foreclosed on. investor money gone, like foreclosed on by the lender already sold to an investment group. Okay, but let’s see what Jay has to say about it. We’re gonna


pay extra nickel again real quick.


Nope, we’re gonna get to that when he shows the pool. Oh, I guess he’s got it right here, doesn’t he? Yes. Okay. Yeah, I see,


like, that’s my pool is the same pool and his picture as this


one. This is the pool around the time of foreclosure. And we’re going to talk more about some of the things said in The Wall Street Journal article and some of these others about this asset that he is saying people should buy into. And we’ll see what his plans were for it versus actuals. And how you can kind of pick up on some of this. For instance, I don’t know that I would want to put a lot of money, sight unseen. For somebody that only been doing it for a series of years and not like decades, when they’re using like literally the what must be the the least expensive green screen chroma key system I’ve ever seen. And you’ll see that as he starts talking.


Hi, my name is J gudja. Willie, I’m a founder and CEO of atmosphere investment group. And we invest in cash flowing apartment buildings. And also we provide passive income toward investors ongoing passive income. Today I’m going to talk about an excellent passive income opportunity for you. That property name is is timber Ridge apartment, you see the pictures on the screen. And


now just so you guys don’t think I pulled this just from the pictures. Let us show you guys in this article. That it is the timber Ridge apartments and thought they would double investor returns by raising rents. Okay, so it’s the same apartment complex. It’s not just like Paul’s really crafty and Cory are super good at picking out how apartment buildings look from a distance.


Seven out of 14 complex but we allocated savings Houston market. As a matter of fact, Houston is one of the top 10 markets in the nation. We are investing in great market and properties built right across


one of the top 10 What markets like top 10 most expensive markets, well then that’s not a great deal to buy. I do like it. It’s things that sound like they should be good things. But when you think about the entire definition of like, there’s no context for what he is for what he’s saying like he’s going to talk about I remember doubling income watch for. For that one.


One of the things you’re picking up on to Cory is it’s the difference between he’s not giving us facts. He’s got some facts he’s referencing, he’s giving us his opinion or assessment about that fact. But he’s not sharing the fact. So back to our video,


that highway exposure, easy for candidates to get across the highway from Highway exposure,


which I know some people would say that means it’s near a highway. So you’re going to hear that all day long. But we’re we’re gonna spin in that a little bit. Like it’s super easy for people to park


a few things. And first thing is property comes to the classic interior. They’re not updated. We’re putting money around five to $6 each unit, we upgraded interiors, and we raise the red one $50 more than what


color you brought up an interesting point on this part of what we’re gonna put $6,000 per unit


Yeah, so what was that like? $1,600.12 Yeah, something like 218 100 A year 100 Yeah, 1800 a year. Ah, so if you’re spending five or 6000 Like just that right away is like a like three year breakeven


three year recapture. If it’s your money doing now maybe it’s a better ratio. If I’m borrowing money to do it. That’s Roa. That’s yeah, right. But I do love I mean, it’s just classic. These have a classic interior they’ve not been upgraded. Like that’s another reason these things are old. Okay. Yeah.


What is now increasing rent, but we increase other income also like providing payment for tenant amenities sports, we build them to Dallas, we charge them per month, and we build parrot backyards we charged them $75 And then also we put we rent washer dryer to the tenants which are the $50 so together this this


So we’re going to add some benefits and charge for them. So we’re going to charge these washer dryers, we’re going to charge for private backyards, we’re going to try to charge for carports. But what he’s kind of late, he’s like, we’ll be more profitable. And we’ll have more revenue. Yes. But he said nothing about the cost of all those things. Right? Yeah, so is $75 a month, the appropriate amount to charge for a backyard? I don’t know, because I don’t know what it’s going to take you to make them. Now granted, this is a promo video guys. So we’re not smashing on anybody should have this level of detail at this point. But we do have the benefit of hindsight, in this case that this one flat failed and got foreclosed on. And so we have the hindsight to realize that now he’s saying these things, and this is how it’s gonna go. And it doesn’t necessarily go that way.


Because the abilities that we our property income increases every month, month after month, not only increase income.


So right there are property increases month after month. Now, again, a softer way to say that would be, we plan on making these changes over the next two and a half years, and we should see consistent rent increases until then the remaining leases will probably be nine months on average, we’ll get the remaining lease increases that you’re following that. But to say, the rent rolls and profitability goes up every single month, is naive at best. Because any, we’ve talked about before, when you buy when you buy real estate, you are not buying a investment, you are buying a business. And in this business, this guy’s running it. And your job is to put the money in and hope he makes all the right decisions. But it’s a business and businesses do not get more profitable dependably every single month. Cory You sound like you’re gonna say something. The


article. Well, the article talked about his property manager trying to fix the fix things. And oh, yeah, I was just wondering how to expect this go down every month. Kim?


Yeah, the former asset manager of Apple way, said Jeff Kelly, gotcha Valley, refused to buy new air conditioning units when old ones broke down. So Alexander said she ferried working AC units from vacant apartments to ones where family with children were living without air conditioning. So they were trying to drive it up every single month, this is one of the units boarded up.


Number one, they’re not at full capacity. If they’ve got vacant units to steal a C’s from then they weren’t fully leased. And this is the underside of this that I saw in the article like this was a lower income, neighborhood, lower income housing. And so one of two things is happening here, either these tenants are just moving out when all these increases are going going up. Or he’s just, you know, squeezing people that didn’t ask for this to to increase. Yeah, and there is market forces at work for for rent. But you know, what this article made it sound like is a rise in syndicators looking for opportunities to find under market places and just


Well, yeah, fast. And the article talked about it first, when there was mispricing in class A property Class A apartment rentals, then those got maxed out then people went to B and then people went to these C level apartment complex and that’s just the nature of it is there was more appetite for these investors saying I want to throw money in real estate now if this had been a wealthy person’s own money, I don’t think they would have touched this deal. And the reason is how they got wealthy is they got wealthy by not extending themselves inappropriately in class C projects they sit around and wait till they find one. And for some people that’s years and years of looking for a new real estate project before they buy one. Well you can’t do that if you’re taking a bunch of investor money they want to see their money go to work somewhere. So you roll the dice and you hope it works and it doesn’t always so let’s go back to our video we’ll keep going back to the article when we hit something that’s nails the article


expenses that is dead today the the value the property down the road, for example, we do water conservation, we change the old toilets with the new toilets, they take less water consumption and villages the water bill 25 to 30%. And also not only that we do what electricity conservation we change all the old bulbs with new LED bulbs we cut down electricity bill by 15 to 20%.


Now I’m not


a cut out electric cut out AC units will reduce the electricity


No You’re Jagger right Yeah, literally they are cutting out the AC and okay, but the there is no way LED bulbs in a Texas summer, save you 20 to 30%. But if you’re listening this wanting a syndicate to invest in, or your friends have just invested in, it’s so easy to overlook that, especially if you watch some other videos where he talks about I was a engineer and working these big corporations and I wanted the passive income and all that and it’s compelling. And it’s it’s kind of a cool, like self made immigrant story, all that just turned out to cost people millions.


So that so that by cutting down water expenses, and also electricity expenses, we increase the income of the property, and also other income, the terrific combination, in this way the property value will go down the road, because we’re increasing net operating income month after month.


Okay, now, one thing you have to ask yourself in any of these syndicates, when you’re considering buying something, and then this indicator is going to improve this and the other thing and raise rents, you want to ask yourself why the prior owners not do this? Like this makes it all so much better? Why did the prior owners not want to do it? Well, it might be because the prior owners are finding it’s not as profitable, as all these people say, or their current owners. Now, it could also be situation like, hey, it was inherited, the kids don’t want it, they want to sell it. But there is some reason why the prior owner didn’t do all of these things. And that’s a relevant question to ask if you’re gonna put your hard earned money into a deal like this.


And with a syndicate kind of deal, it would be one thing if it was a single family home, and it’s Oh, the kids inherited they don’t want to deal with it. Absolutely. This is institutional level, it’s a bigger investor. owning this, like someone is treating it like a business. So they’re more thinking about it that way. Usually, it’s not just one Kid and Parent. I mean, it could be but the other. The other question is, why didn’t someone you know, if the owner wanted to do that, maybe they didn’t have the money, but why didn’t the bank lend them the money to make those improvements?


Exactly, exactly. They’re gonna lend it to you, why would they lend it to the guy who already owns it? Right, I think those are all relevant questions. And of course, one of his other money saving ideas was putting no chlorine in the pool. Alright, is they sent 100% on their chlorine bill, and I don’t think it helped. Okay, let’s get back to I wish I could do his accent I would do an impression of him. But I’m just not good. He’s better we don’t know if we have a sub neuron here. I’m gonna make fun of them because I can do me some serious southern accent. So yeah,


amazing enrichment opportunity here and we have great track our track record with our company we bought for the multifamily property so far and out of the 6000 units portfolio out of 30 properties we already sold three properties and


okay so let’s now I’m going to go to a little bit around some of these other articles. So this is the family multi dive and one of the things that talks about is that these four properties that is the height at Post Oak Redford apartments reserve at Westwood in timber Ridge apartments have all been foreclosed on. Those are a total of 3200 units. Now though,


half of what he said he had,


and three of them had already been sold, he said, So however many that was, I don’t know how much this apple weighs got left as a little bit of a preview. While we’re at it, and this is kind of fun, we just go through his own video and that’s guiding us through showing you guys the rest of this information. This is the website currently Apple’s way group appears to be down and then I tried his calendar link and it didn’t work either. So they are shutting down at least outward communication. But let’s keep going on our video


portfolio how to put the property beyond it is for three properties and within less than three year hold period and we doubled the money for investors is a proven business model we same thing we do for these profit dials


okay just because someone else says it’s a proven model doesn’t mean you have to believe that some proven model


three three property trend does not equal the outcome you wanted yeah I think is the the lesson there now. So let’s get back here and see what he’s got to finish say we’re almost done with this guys is just too much gold


visa depreciation on each property. These borders depreciation, you money will depreciate more than one person in the year one insight 2020 to 2021. We have been bonus depreciation this year along the way so you can depreciate and benefit the paper law Is it tax? Is it like is illegal tax free investing.


Okay. So, when you take depreciation, you that means that like in commercial real estate, I think it’s 37 and a half years, you can straight line depreciate commercial property. But you can do something called Cost Segregation analysis. And if you own an apartment complex or even a regular house, you can say things like AC units depreciate more quickly, outlets depreciate more quickly, and the pool might depreciate more quickly. And as a result of those things, you can take faster depreciation


did happen.


Yeah, that pool did depreciate, I don’t know, the IRS agrees with the poor, the poor families. I mean, listen, I’ve been in Texas, that thing is breeding some mosquitoes the size of chihuahuas health hazard. So they’re bringing up all of these tax write offs, which is really where we’re going to end today is on these tax write offs, because we’re going to tell you, this gentleman is a big fan of these tax write offs. Mike is


happy. I’m so excited about the depreciation benefit, and tax advantage for this property. And this together, if you if you add all the things right, gross income, current expenses, and depreciation benefit in a tax advantages, amazing enrich property, if you really want to money work for you, if you’re really looking to truly passive income, if you want to create a legacy for your family, and ongoing income for your children, and this is the best investment opportunity, I please click the link below and get more info.


I’ll just say on that part. If anybody ever says this is the best investment opportunity,


run, run.


And the reason you need to run is that they couldn’t possibly know a can’t see in the future be they haven’t looked at every single investment opportunity out there. See, you’re watching this video that is just floating around the internet from December 16 2021. Sorry, I thought it was early 2022. This one was December 16 21. And the best he has no idea what your demographics are, what your family is what your situation is, it’s the best for you run. That is only a technique to get the most amount of people to invest with the lowest possible understanding of the investment process, or accountability for him as the general partner. That’s the only people that are going to get connected to it. So some of the other things from this article that really kind of go ahead.


We haven’t even talked about the main reason why this all went south, which is his financing strategy. Oh, wait right


before his financing strategy. I gotta show everybody these comments. Oh, investment highlights. Now I want you guys know if you’re listening on the podcast right now, I’m going to do my best to describe the emoji next to all the investment highlights. This is so bad. It literally says like, Miranda, can we do this as a short and have them like put Koreana at the bottom here. And then we’re going to explain each of these with durian. You don’t need to take this out of the podcast, I think our audience enjoys some of the stuff, put it right above our head. So when people flip through their phone, it’s all these investment highlights above our heads. So we’ll start and try to describe see appears to be money with wings. And it says 17.9% tyg, target IRR 100% Target.


Target. That’s what they would like that was we would like to hit that look, but it’s not what they did. But I see this all the time. We have that target rate of return. Like that’s your expectation? No, I’ve been in lots of business planning sessions with lots of business owners and entrepreneurs and huge targets are all real exciting. But they don’t always.


Yeah, they don’t work. Yeah, target targets of the future have no correlation with our results in the future. And that would be a great, that’d be a great disclosure. So that’s the flying wings on the 17.9% target IRR. Which by the way, no investment advisors allowed to say over 12 Without getting themselves in trouble. 110% Target total return in five years. 22% Target average annual returns. So 22% cash flow 10% Target yearly cash flow. I’ve no idea what they like how they would calculate one versus the other. None of their math is showing you Notice, then there’s a very strong arm. And it says top multifamily market in the nation proven track record with 6000 Plus units of multifamily. I think his next video is going to say something different. It’ll say, track record, instead of proven like that just take the proven out, and then accelerated job and population growth with a very small graph next to it, then you could schedule a free strategy call. I think you should, because that has the fire emoji next to it. Oh, also, I did try to click on that book, a free strategy called that’s the link that didn’t work. And then none of their website works out. So of course, you’re going to tell them how this all ended up this way? Yeah.


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