How do RE empires typically collapse?

[Alex Silang]

1) Not keeping enough reserves. Big expense hits and owner cannot handle it

2) Fix/flip - unforseen repair needed. Too many deals go bad.

I'm curious to hear how RE empires go down during recessions.

[Darrell Shepherd]

I lost a few mil in the downturn and pretty much went broke. In hindsight did a lot of things wrong to get there, but at the time was hardly thinking I was being reckless.

Some of it was the banks- I had about four mil out at prime +1 when prime was at 4 or so, the rate went to over 9 in about 18 months...tried to refi when it hit 6, the bank wouldn't do it- the lending environment had changed completely. Do that math on cash flow.

Some of it was me- like J. Scott said, I was highly leveraged. I got a bunch back needing repairs and was making payments on a LOT of empties. That makes you do dumb things to stop the bleeding like taking tenants you normally wouldn't, which leads to more expenses long term. I hadn't bought right (inexperience). My rentals cash flowed on paper, but not in real life. I was doing a lot of rehabs to L/P and had to re-rehab them when Id get them back, not the best model. Keep in mind the cost to rent ratios we have now are WAY better than they used to be.

There was a period there where it was REALLY hard to sell a house, I had one listed $200k under a $800k appraisal and only had 1 showing in a year...so my rehab business that was feeding my rental business dried up and it got kinda hard to cover the $30k+ negative cash flow each month...

Anyhoo, long story short is you gotta watch your cash flow and keep adequate reserves. This is not a risk free business. There are plenty of things that can sink a RE 'Empire' if its not set up right. It was a lot harder to get and keep good tenants (in Atlanta, anyway, St. Louis was much different) when anybody with a heartbeat could get a loan. I was running about 20% vacant when Katrina hit. I was about 100% soon after, but I dont think a single one of those people left without trashing my place and owing me money.

In my case I had a year's worth of payments on everything I owned in cash and it wasn't enough to weather the storm. Goes pretty fast when you're making big repairs on multiple properties...

I do much smaller volume these days and completely different strategy. I also read a LOT more on market trends than I used to. Lessons learned hard are lessons learned well.

It's easier to get into that downward spiral than you think with lots of properties and lots of leverage. It's not just the cash flow, it's managing that volume of stuff without the right help when things get tight...

That was me being aggressive and buying 8 figures worth of property in 4 years or so, by the way. My portfolio was at 70% LTV, but was closer to an 80 gross rent multiplier than the 50 recommended here. Not exactly the typical BP investor building a portfolio over time. It was pretty damn fun when the going was good, but holy hell did that fall suck.