Susan's Scoop

My $400,000 Mistake

Something that we all have in common is that our financial lives consist of a combination of good decisions, bad decisions, and luck. And fundamentally our ideal outcome is to have the ‘good decisions’ and ‘good luck’ outweigh the ‘bad decisions’ and ‘bad luck’. In my workshops I often talk about how we need to set up our entire financial portfolio from the position of the House at a casino – there will be individual winners and losers in our investments, but overall we need to be positioned to profit.

Yet sometimes even the best of intentions go awry.

Back in 2021, I made a REALLY GOOD financial decision. Interest rates were at rock bottom, so I did a cash out refinance for $400,000 on our primary residence at 2.5%. Our mortgage payment actually stayed about the same, and I now had almost half a million dollars freed up to invest in other assets.

At the time, commercial real estate was also booming due to the low interest rates. Lots and lots of money was being made! And with inflation on the rise, real estate was also a great place to invest as an inflation hedge. I started hearing the buzz about ‘passive syndications’ that would allow you to easily 2x your money in commercial real estate with no tenant headaches or toilet plunging. It was a no brainer!

So off that money went - $200k into passive Self Storage/Mobile Home Park Funds, and $200k into two value-add apartment buildings in Houston. I just needed to sit back and wait for the 6-8% cashflow to start rolling in and then realize the 2x return on my money 3-5 years later. (I’m cringing now even writing that, ugh.)

As you can guess, that was a BAD financial decision. I poured all of the funds into one asset class (real estate) and didn’t dollar-cost average – I put it all in at one time. Had I taken my time investing the funds, I might have seen the effects of the impending interest rate spike and held back on more real estate. But alas, it was all locked up in an illiquid house of cards that had only been able to thrive due to the low-interest rate environment.

So where is that $400,000 now?

Self-Storage/MHP funds: Annual cashflow has dropped from 6% to 3.5% (worse than a high-yield savings account!) due to poor performance of the underlying assets, and the hold time has been extended to 10+ years to try to turn everything around.

Houston Apartment #1: The jump in interest rates pushed the property into negative cashflow, so the operators partnered with a Housing Finance Corporation (HFC) to secure affordable housing status for the property (which included a full property tax abatement). Unfortunately these arrangements were retroactively banned in the most recent Texas legislative session, so the property is now listed for sale and will be a total loss for us investors.

Houston Apartment #2: This property has struggled with tenant issues, particularly unsuccessful evictions. The operators were able to get approval for a loan refinance, but the asset value has dropped so significantly that there isn’t enough loan-to-value left to push it through. The property is now worth less than the loan amount and will most likely be foreclosed on later this year. Again, a total loss for us investors.

S&P 500: If I had just taken the $400,000 and invested it into an S&P 500 fund, it would be worth $712,000 now, up 78%. 🤦‍♀️ (Although just to be clear – dumping it all in the S&P 500 might not have been smart either. Diversification matters, and the stock market could also have ended up tanking.)

So I had good luck with the low interest rates, made a good decision to refinance, made a bad decision to invest all of that money at the same time in one asset class, and then had bad luck with rising interest rates.

My takeaways from this expensive life lesson:

1) Diversify, diversify, diversify. Even when one asset class looks hot, spread your money around so one downturn doesn’t wipe you out.

2) Pace yourself. Dollar-cost averaging protects you from the risk of “all-in at the wrong time.”

3) Liquidity matters. Illiquid investments can trap you when circumstances change.

4) Simple can win. Often ‘boring’ investments outperform the fancy opportunities.

If only my tears were tax deductible! 😭 😭 🤣

The stock market today actually reminds me a lot of how real estate looked back when I made that investing mistake - high returns that felt hard to resist. In early October we’ll be leading a discussion on managing those risks and how to navigate the current economic climate at our FREE Wealth Wednesday Mastermind – stay tuned for registration details!

What I'm Reading

📕 Why be an LP when you can be a GP? – Downtown Josh Brown

Reading Josh Brown’s take on the rise of private funds hit close to home. These deals are pitched as sophisticated, exclusive, and “too good to pass up”, which is exactly what drew me into my $400,000 mistake. The truth is, they’re often expensive, opaque, and illiquid, which makes them great (and very lucrative!) for the fund managers but not necessarily for investors like us. It’s a good reminder that simple, low-fee investment strategies often beat the shiny, complex ones.

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