Last time, we talked about jump starting your passive income by investing in rental real estate. Today we’ll look at what we can learn from a bankrupt business owner.
We came across an interesting article a little bit ago in the New York Times. It was about a young real estate speculator named Todd.
Back in 1994, after attending a seminar on buying real estate, 20-year old Todd found a property which he bought, fixed up, and sold for a $4,000 profit.
By the year 2000, Todd, now 26, was holding as many as 25 houses at a time. He had perfected his system – making up to $15,000 on every house. Eight banks were in line to provide him money when he needed it. Todd decided to start building new homes because prices had gone up so much on the houses he was buying.
Fast forwarding to May of 2006, Todd was living the American dream at 33. He had a 5,000 square foot house that cost $1.2 million. He had a BMW and a Corvette. An inventory of 89 lots was waiting for buyers. He owned an office building. Life was good!
Now, his marriage has collapsed. Banks have taken back his lovely house; he now rents a small one. His beautiful cars are gone. He’s driving a pick up truck. He’s lost everything else. He sells beverages full-time, and brokers deals to other speculators part-time.
We applaud Todd for sharing his story. And a big salute to John Leland for this excellent article – A Real Estate Speculator Goes From Boom to Bust.
So what can we learn from Todd’s experience? Here are some lessons:
Just because a bank will give you $$$, that doesn’t mean you should take it!
Todd had a banker who did him a favor, if he would have only recognized it. She told him “no”. So Todd went to another banker who kept the funds coming. If Todd had only paused to consider why his first banker said no, he may be in less of a mess now.
When you’re living on borrowed money, you may be living on borrowed time.
Todd was highly leveraged, in business and at home. Being levered in business may be fine. Piling on to that with personal debt is a bad idea. Borrowing money is a two-edged sword – it will make you rich, or poor, more quickly.
When it comes to your standard of living, keep your standards low.
Todd had the best of everything – the house, the cars, and more. Which is fine, if you have assets that will produce the income to pay for everything. But when you’re borrowing to buy status symbols, you’re bound to wind up in trouble.
Know how you’re getting out before you get in.
If Todd had done this, he might have noticed that it was getting more expensive for his customers to buy houses. He could have shifted his business model once – find a customer, then build it. That would mean he was “out” without getting “in”.
Fully analyze your situation by considering a number of situations.
Todd did this once – he shifted from flipping houses to building new ones. He didn’t contemplate how rising prices were affecting his customer’s ability to buy his product. He failed to consider how long it would take him to sell his inventory of lots. Had he done so, he may have prevented the major disaster that happened.
Todd learned the hard way – by making the mistakes himself. Hopefully, you can learn from his mistakes so you don’t make the same ones.
Our quote today comes from Jonas Salk, the developer of the polio vaccine.
“I have had dreams and I have had nightmares,
but I have conquered my nightmares because of my dreams.”
So shake off the nightmare and rest assured, your sweet dreams will come true.
Next time, we’ll offer some tips for starting over, for turning misfortune into fortune. Until then, here’s to your bigg success!