18 July 2008
Fail Forward
Posted by admin under: fail; Uncategorized .
As a quasi-autobiographical account of someone who’s been blessed with healthy success in sales and a well rounded life, I’d love to tell you it’s been all downhill. But it hasn’t. In the late 80’s, I decided to start investing in Real Estate instead of just acting as an agent.
Along with a few partners, my father, a few doctors and other clients, over a three year period, we bought over forty properties, highly leveraged, with very little down payment.
We were rolling along pretty well with $40,000 per month in mortgage payments, and $40,000 per month in rental income. I was working under the assumed premise that, with inflation, the four million dollars worth of property would be worth eight million in seven years. I was 34 years old, planning on being a millionaire by the time I turned 40, as long as the rents stayed even or rose as fast as the property taxes and expenses.
At that age, and being a bit cocky, okay quite a bit cocky, I was also not too worried about the other expenses owning rental property above and beyond simply covering the PITI (principal, interest, taxes and insurance). As far as predicting or making allowances for rents actually decreasing, well that was simply not a possibility. Or was it?
Sure enough, along came the Savings and Loan collapse, with foreclosures rampant and many of my nice rental properties going vacant. Rents dropped by…(drum roll, please)… 35%. So instead of rents of $40,000 a month, our rental income dropped to $25,000 a month. Guess what didn’t change? You guessed it, the payments. So, with $40,000 a month in payments and $25,000 a month in rents, our negative cash flow approached $15,000 per month. Ouch!
My primary income source was Real Estate brokerage, and nobody was buying. And if I wanted to sleep at night, with a clear conscience, how could I encourage clients to buy with prices still dropping?
Even my doctor partners were ready to ‘cry uncle’. So, we circled the wagons, quit making payments, collected what rents we could and began efforts to get the lenders to work with us. Seven months later, we were unofficially bankrupt.
I wondered how I could go from on my way to becoming a millionaire to not just being broke, but owing over $2 million, after being foreclosed on all our rental properties, in less than seven months. I felt terrible for myself, for my father, and for my partners. We were not alone. Yet that was little solace. I had a wife and three young sons. No longer the successful Real Estate whiz, I was in the depths of depression and financial ruin.
Yet, one thing I kept in mind was the adage learned twelve years before as a college student. I had to continue to ‘fail forward’. ”Every adversity carries within it the seeds of future benefit” and “This too shall pass” seemed to waft through my head often in those times. WhileI no longer owned any investment property other than my home, I had a loving, forgiving and understanding wife, three healthy sons, forgiving parents, understanding clients and partners, and a mindset learned from seven summers of hard knocking to “fail forward.”
Though the bankruptcy was hard on the lenders, I took some pride in that I honored all of my credit card debt and other bills involved in the living of life. Only the investment debt would be avoided in my bankruptcy.
By convincing creditors to let me pay on my debts at pennies on the dollar, I budgeted to send what I could as the market began to stabilize and commissions started coming in again. After a few years I’d paid all of my personal debt, and as a result of that forced budgeting, I’d began saving 10% of every commission I’d received. If I received $100 lease fee, $10 went to savings. The amounts were not as important as the habit.
As I look back on those turbulent years, I realized as frustrating, humbling and difficult as they were, the lessons were invaluable. When I was able to start earning fees and helping people make good decisions about buying, or not buying property again, I was much more grounded in the advice I gave clients. I’d learned that the “sword of leverage cuts both ways”.
I do not recommend you do what I did. I hope this chapter helps you realize what can happen in Real Estate, particularly the investing part.
To this day, I own my own home and the one next door, a rental property between my home and office (which is seven blocks away) and a small condo with my sister. And instead of 95% of my net worth being precariously attached to mortgages, I have most of my net worth in savings all because of the savings habit begun as a result of ‘failing forward’.
Just remember, like Josh Billings said in the 1990’s, “It’s no disgrace to fail, but to lay there and grunt, is”. The only disgrace might be in never having tried. Fear of failure stops us dead in our tracks. Having the philosophy of failing forward takes out a lot of the fear and allows you to move, and fail, forward, softly.
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