When to pivot from original exit strategy

This post goes into the decision making process that goes into deciding when to pivot from a real estate investment exit strategy.  

The example I'll share is on a townhouse I had planned to hold as a BRRRR - buy, rehab, rent, refinance, repeat.

More specifically, I talk about what went into my decision for changing a real estate investment exit strategy when something goes wrong.

South Florida real estate investment property

I purchased a townhome in 2017 in Jupiter, Florida as a BRRRR investment property.

It was by no means a great acquisition.

I purchased it at list off the MLS, over-improved the property and the governance structure of the HOA left me with considerable downside risk.

Roof replacement and repair required a consensus and equal contribution from 4 homeowners, the HOA had issues and the commercial insurance carriers had begun threatening to drop coverages in Palm Beach County in older developments.

With this renovation, I learned a lot of lessons.

Don't live and run a business from a home you're doing an extensive rehab on.

Or, if you do, work with a competent, trustworthy and reliable team and schedule out the project to give more time and respect to your day job.

I learned how to fire a contractor and dozens of other lessons working with contractors, plumbers, electric - you name it.

The fun and games came to a screeching halt a week before I was moving into another house I had purchased as part of an estate sale.

As I was packing to move, I opened a cabinet in a renovated guest bathroom in the townhouse and was shocked to find months of mold growth.

Mold damage

The mold was bad. 

It spread throughout the entire first floor of the townhouse and seeped into the frame of the townhouse that were redone to support the newly installed storm windows and doors.

Half the renovation, almost 1,000 square feet, had to be torn out and remediated.

The liability, the claims and the reimbursement for the water damage, over $100,000 across all the townhomes, due to another unit owner and the HOA’s negligence was a nightmare.

A profitable BRRR(buy, rehab, rent, refinance, repeat) real estate investment turned into a drawn out battle to recoup my money and minimize the damage of carrying a second mortgage on a townhome I couldn’t rent out.

All while trying to run my recruiting and staffing business and keep the revenue coming in.

For the next 6 months, I could barely keep up with my business and my new house.

My original plan to diversify my investments outside of my staffing business income with real estate investments - it all blew up in my face with the mold outbreak.

It had nothing to do with how I managed the rehab - the mold was completely out of my control.

Could I have done something different?

I could have not bought it in the first place.

I could have walked when I read the HOA documents and realized the potential liability I had when/if an insurance claim arose that impacted mine and another unit.

But each investment has its risk - I went in with both eyes open and, from the beginning, knew it wasn't a "forever rental".

But I did hope to keep it through the inflation explosion in South Florida I saw coming.

And then I started to get really sick and lethargic.

I had no energy, felt weak and could not stay awake during the day. I had a constant fever and brain fog.

I felt physically run down, all at a time when I really, really needed to be at the top of my game with work.

I thought maybe it was just me getting old.

I beat myself up for being mentally and physically weak and not being resilient to the challenges I was up against.

I rationalized it was a hangover from the stress of selling a townhouse and buying a home.

But with time, it just got worse. And I couldn't drag myself out from under what I thought was a major depression.

I fell asleep on the floor one Saturday while ripping up baseboards in my new house and woke up with my dog standing over me. I had never lost control like this before.

Something was clearly wrong.

Finally, in February of 2020, right before the Covid outbreak hit the US, I went to a doctor who referred me to a specialist who conducted extensive tests on me.

The hidden mold had gotten the best of me.

What had begun as a pinhead leak in another unit had moved to my unit some 100 feet through the walls and marinated for a couple months before I discovered the issue.

And so had the dust from the construction mess in the townhouse.

And the landscaping and trees and pollen at the new house wore me down.

Any time I cleaned up the mulch or cut down a dead palm in my new backyard, I'd be wiped out within hours, not to recover for a day or two.

And when I started replacing the old tile floors in the new house, I exposed myself to even more allergens that completely overwhelmed my immune system.

Add the business stresses, the townhouse, the buying, the selling, the lawyers, the negotiating and, well…..

My body finally just shut down.

If it were one thing on its own, it may never have gotten to this point. Heck, I’ve been fortunate to never have broken a bone or had a serious illness.

And I'd never put two and two together on how the pollen and grasses and molds in South Florida could team up on me - I used to think I just "overdid" things when I'd be wiped out for days.

Now I know my immune system was getting overwhelmed.

In the end, this was all a blessing.

Apparently Mother Nature and God decided I needed to know my way of going about my life was doing damage to myself.

If I had not gotten a diagnosis and prescription for what had overwhelmed my immune system when I did, I would have entered the worst part of the pandemic in a most vulnerable state.

It’s likely I would have been taken out by Covid given my compromised immune system; instead, I was given a chance to recover and a chance to reflect on all the things that were going to have to change.

But I still had a business decision to make about the townhouse, cash flow and whether my original exit strategy could hold up through my recovery and through the Pandemic.

Sell it now, all of it

Margin Call | Emergency meeting | Sell it now, all of it

I didn’t want to, but considering the pandemic had an immediate negative impact on my staffing business, I had to capture my equity in the townhome and strengthen my cash reserves.

I didn’t want to, but I had to take some risk off headed into an unprecedented time with no precedent.

What I love about this clip from Margin Call is, while in some ways similar to what we go through as real estate investors, the difference is MOST of us go through these big decisions alone.

We have to hear ALL sides of the story.

Then we have to wrestle with our ego - hear the voice in your head that asks how are you going to explain that you weren’t liquid enough to maintain your first rental property during a period when rents AND property value was rising?

And then you have to sell a property you over-renovated into a tight market where you’re not going to get the ROI you forecast..or planned on.

And we have to be decisive.

The last few years allowed for some indecisiveness and looser financial controls.

Today, not so much.

Looking back on the townhouse, I don't look at it as making the right or wrong decision.

I look at it as doing what I had to do.

I changed my exit strategy on the townhouse to protect my staffing business and increase my cash reserves, even if it wasn't the original plan.

In later posts, I'll dig into the formula for making difficult investment decisions.