My $100,000 Was Here

In 2021 I put a hundred thousand dollars into a multifamily deal and never saw a single check come out of it. Not a reduced one, not a partial one. Nothing.

I want to be careful telling this, because the obvious lesson people take from a story like that is the wrong one.

It wasn’t a bad deal. The sponsor knew what he was doing, the market was on solid run, and the numbers worked the day I signed. Then rates spiked, and in 2022 the cost of debt roughly doubled, which pushed the building’s net operating income down and took the value with it.

Everything after that was arithmetic.

Here’s the part that many investors don’t think enough about.

Every real estate deal has a stack, and that order decides who gets paid and in what sequence. The senior lender sits at the top and gets paid first, every month, whether anyone else likes it or not. Junior capital sits in the middle, things like mezzanine debt or preferred equity, and gets paid after the bank. Equity, the actual owners, sits at the bottom and gets whatever’s left once everybody above them has been made whole.

When things go well, the bottom is a great place to be, because everything above you is capped and the upside flows down. When things go badly, you find out what “whatever’s left” actually means.

My money was at the bottom, and that’s the whole story.

The building didn’t burn down. The tenants didn’t leave. The market didn’t vanish. Rates spiked, the value compressed, everyone above me got paid first, and by the time it worked down to me there was nothing there. Same building, same tenants, same city, completely different outcome depending on where you were sitting.

What still bothers me is that I’d spent many months thinking carefully about which deals to invest in and almost no time thinking about where inside the deal I was sitting. Those are two different questions, and the second one decides more of your outcome than the first.

A few things changed after that.

I read every document before I’ll get on a call with a sponsor, looking for one thing, which is what would make me walk away. Every concern goes back in writing, by email rather than on a call, because things get smoothed over on calls and email leaves a record.

Then I get on a plane, spend a full day on site and a few hours in their office going through actual loans line by line. Honestly, a sponsor who resists that visit has already told me what I needed to know.

And I decide what would make me exit before I invest, while I can still think clearly about it.

On September 17th at 3:00 PM Eastern, I am holding a webinar to talk about how six things most people with a seven-figure retirement account have never been told.