In this episode of the Creating Wealth Simplified podcast, host Chris Seveney delves into the current state of real estate investing. He offers candid insights on communication issues in multifamily deals, presents a controversial take on accredited investor definitions, and shares a cautionary tale about the critical importance of due diligence. Chris doesn’t shy away from challenging topics, providing valuable perspective for both novice and experienced real estate investors alike. This episode promises to challenge assumptions and offer actionable advice for smarter investment decisions in today’s ever-changing real estate landscape.

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Real Estate Investing Mistakes And How To Avoid Them

 

Definition Of An Accredited Investor

I’m going to have a part episode that I’ll call Potpourri. I’m probably going to bounce around a little bit. I want to talk a bit about what we’re seeing in the real estate space for investors. I want to share a case study of a very hard lesson learned. Then I’m going to talk about a really controversial topic, the definition of an accredited investor. I’m going to get a lot of haters on this, I know, but I want to discuss it because I want to share my opinion and hear others’ thoughts. Mine is probably very different from many others.

Let’s get into it and start. I want to start with what we are seeing in real estate in general. As many people probably know, I enjoy being on some forums, especially BiggerPockets, providing content and education to people there. If you’re not on BiggerPockets, I get nothing for saying this, it’s a good site to be on. I recommend it. You can learn a lot. There are many forums on there. At times, I might be a little brutally honest with people, but I feel that’s necessary because I see people continue to make avoidable mistakes. We’re all going to make mistakes. I’m not perfect. I make lots of them, but certain mistakes are easily avoidable for those who might be inexperienced or just trying to take shortcuts.

There’s a lot of talk, a lot of rumble. They’re actually coming out with a website called Passive Pockets to provide limited partners with more information on investment opportunities and due diligence. I don’t know what it costs or what it’s going to be about, but there should be some good content because right now, a lot of sponsors are getting crushed on BiggerPockets. The main reason, honestly, is a lack of communication. A lot of the multifamily deals today, thankfully not multifamily, are losing and cannot preserve the capital. They’re doing capital calls. Distributions are being ceased. It’s an investment. Some investments go bad. 

Just because they do, it doesn’t mean the person is running a Ponzi scheme or is awful. That will all get flushed out. As a sponsor, certain things are out of your control. One thing that is 100% in your control is how you communicate. That’s one of the biggest problems we’re seeing right now. I’ve seen one sponsor who changed their name and is raising money for new opportunities while completely ignoring some of their other sponsors or limited partners. One even accused them of not being advised that the property had been foreclosed on and they got completely wiped out. 

 

In real estate investing, communication is key. It's the one thing you can control 100%. Lack of communication can ruin even the best deals. Share on X

 

The Role Of Investor Relations

Another offering where the CEO, who I mentioned in the past, is touting their new office with a private bathroom, has ceased all distributions. There were rumblings that they got a notice from the SEC to be reviewed, but this person is hosting conferences and training programs, and opening up new funds to raise money, but not communicating with their current investors. To me, this is not a good image. I think part of that boils down to a lack of experience and maturity, as well as the team you have in place. One thing I’ll brag about at 70 is that we have our investor relations team in-house. 

They know our product and what’s going on. They’re there to answer questions. Some people may not like the answers to certain questions, but they’re getting an answer. I wanted to share some knowledge on that because people who invested in some of these investments are now going apoplectic, claiming they’ve been lied to, saying it’s a Ponzi scheme, and lamenting their losses. I’ve read comments from people saying, “I gave this person $300,000, it’s my life savings. What can I do? How do I get it back?” Another person gave close to $800,000, another said it was their only $50,000.” 

This is where I want to get into the conversation about accredited investors. The first definition, don’t quote me on this, you can Google it, is an income of $200,000 per year for a single person, $300,000 combined, or a net worth over a million dollars outside your primary residence, or having a specific FINRA license. Let’s talk about the $200,000 income because that’s where I want to focus. Those numbers, where the government came up with that definition, don’t quote me on this, but they’re approximately 40 years old from the ‘80s. A little thought process, remember, I believe Nolan Ryan was the first baseball player to get a million-dollar-a-year salary. 

That was in 1980. Now the average player is signing $500 million deals and getting $50 million a year. When you look back then, an accredited investor was someone really wealthy. I was not even ten years old at the time. I can’t tell you how many types of syndications or if syndications were even allowed back then, but the whole intent of accredited investors in 506(c) fund offerings, which many people invest in, is that there’s a risk you could lose everything. It’s okay because you’re accredited, meaning you have a boatload of money, so it’s okay to lose. 

 

The Reality Of Accredited Investors Today

The reality is if I picked ten of my friends who make $200,000 a year, half of them probably wouldn’t even have $50,000 in savings. The ones that do could not afford to lose it. I’m actually a proponent of increasing the accredited investor definition. Do I know what the right number is? No. If you adjusted for inflation, I think the number would be over a million dollars a year in income and $3 million in net worth. Is that the right number? I have no idea. I’d probably go maybe $400,000 or $500,000 a year, where the government starts taxing everybody. I know that will tick off a lot of people and they’ll say, “Then only the wealthy get the opportunity to invest in some of these options.” 

 

Importance Of Diversification

True, but false because look at 7E. We run a Regulation A+ offering. The Jobs Act that came out allowed investors to offer products to non-accredited investors at a much lower price point. Our offering doesn’t have a $50,000 minimum. You can get in for $5,000. My friend who has $50,000 could drop $5,000, or some of these go down to $1,000 or $10,000. Drop some of this money in several different offerings because every scholar will tell you not to put more than 10% to 20% of your money in one investment. I truly believe that. You don’t want to put all your eggs in one basket because we’ve seen some of the downsides of that where people will have a hundred thousand, say, “Two multifamily deals, here we go.” 

 

A, that’s really not diversification because you’re investing in the same asset class. If it goes bad, if you have a market challenge, which we had, then you’re probably losing them both. I think people forget how hard it is if you take a loss. Now, if you have $100,000 and you make 15% on it, great, you made $15,000. If you took a 50% loss or even a 15% loss on that, to get back, you got to basically be at like a 25% return. Typically, when it goes bad, you don’t flip or turn that switch and get back to those returns. It’s usually, “Let me flatten and slowly build up.” Losses would probably take 5 to 7 years to recoup. 

Our people who are making $200,000, which I think there was a report coming out that like 30% plus of the economy would technically be an accredited investor by 2027. That is scary. What should they do? I know a lot of people think they should lax the rules to let more people take a test or whatever to be accredited because just making a lot of money doesn’t mean you’re a smart investor. What it does typically mean is you probably have more flexibility to handle a loss, which again goes back to my thought on this because they did come out with things like crowdfunding and Regulation A, which limits non-accredited people in how much money they can invest. 

There are avenues for both accredited and non-accredited who really don’t have a middle class right now, can get into those opportunities. What’s also beneficial about them being somebody who sponsors a Regulation A offering compared to having done a 506(c) is you have audited financials and there’s annual reporting. There are a lot more steps in the process that have to be taken to continue with your offering compared to a 506(c), which is, “You invest. Great. I don’t even need a PPM.” I can say, throw you a K1 every year, and that’s the only reporting I’m going to do. It’s very different. 

I don’t want to use the term lax, but there are fewer requirements on an investor, and personally, I think the people who are making, again, $200,000 should have more protections because I don’t consider anybody today with a $200,000 salary as wealthy. Now, is it a lot of money? Yes, don’t get me wrong. I know people listening to this might make a lot less. I’m not diminishing or saying anything regarding it’s a lot of money, but it’s not life-altering like it may have been 40 years ago compared to that timing where in a lot of places, what’s the average home now? $400,000 at a 7% mortgage, $300,000. You have to make like $120,000, I think, just to afford the average home here in the United States. 

 

Accredited investors need more protections. Making $200K a year doesn't make you wealthy today. Share on X

 

Back in the ‘80s, I think you probably needed to make $20,000. Think of it from that perspective. That’s the point I’m trying to get at is are we really looking out for investors’ best interests because of this? I know a lot of people will push back and say, “No, it should be less.” People should actually have to take a test or be more educated, but who’s going to initiate that test? Who’s going to provide that type of test? Is it going to be a specific license? Any time you get the government involved in licensing something, it just turns out to be extremely challenging, with a lot of paperwork, and you don’t know which way is up. 

Whereas, I already think they’ve created that path through regulation, CF, and Regulation A offerings. Going to share that with people because I see a lot of people upset that they’re losing a lot of money. Unfortunately, a lot of them put all their eggs in one basket. The last thing I wanted to talk about today, and it goes along with that, is understanding the due diligence. If you don’t know, ask for help. The reason why is I recently read an article where an investor admits, “I didn’t do my due diligence.” The first thing he says, he bought two homes, and this person was struggling to find properties on the market. He’s like, “I’m just going to buy him a foreclosure.” 

This is where ego is not your amigo. The person did not do their due diligence. They did not read the information. They did not pull a title report on this. Come to find out the foreclosures were on second mortgages. When you foreclose on a second mortgage, the first stays in place. As an example, let’s say my house is worth $500,000, I have a first mortgage of $400,000, and I have a line of credit of $200,000. My house is upside down. I pay my first mortgage. My second mortgage line of credit, I’m not paying. My line of credit will foreclose on me, and they’ll put a value of say up to $200,000. Whoever buys that, though, still owes my first mortgage $400,000. Most instances.

Now, some, you have to combine the values, but we’re not going to get into that right now. This individual paid $100,000 on a property that is worth $200,000, so they are like, “I am making a smoking deal on this paying $100,000, it’s worth $200,000.” The issue is the first mortgage has $170,000 owed on it. Literally, nobody should have bid on that asset because $200,000 is really probably worth $150,000. This person paid $100,000. Now let’s say they turn around and sell this thing, even if they sold it for $200,000, by the time you pay Realtor commissions and everything else, you’ll net $180,000. You got to pay $170,000. 

They make $10,000. You paid $100,000 to make $10,000. You lost $90,000. In this case, there’s a probably should walk away. The person did mention, “I’m going to have lawyers trying to negotiate with the lenders currently, but first-position lenders will rarely negotiate because they don’t have to. The next one’s worse. The person paid $280,000 for a $500,000 property. Great. This is awesome. I’m getting such a smoking deal. They owe over $350,000 on this thing. Again, each one of these has an HOA as well, which has significant fees. HOA tax insurance would be on the first property, probably chewing a $1,000-a-month hole into his pocket. 

The second one is probably close to $3,000 a month. What they’re probably getting eaten for $2,500 in both instances. First like, “Now, what do you do? You could pay off the properties. You could spend more money to pay them off and own them.” If you did that, the only recommendation I’d have is you hold them for a really long time. You start praying to whoever you pray to. The reality is this person would have to still put out another $500,000. They earn nothing. Is that the best use of your money? It’s not. You are really at a point where you have to eat your losses. In this case, it can be close to $400,000 in losses.

 

The Value Of Spending On Due Diligence

Now, people listening, that’s a lot of money. How would they have avoided it? $150 would have avoided that for property, $150. This is where my mind just always gets blown. People will get cheap and will spend $100,000 on an asset without spending $150. For example, for us in the note space, we put an offer in on a loan and it gets accepted. Our due diligence is we send somebody to look at the property, make sure it’s still standing, and put an estimated value on it. That costs us between $50 and $150. We also run a title to make sure there are no title issues and no title defects. Now, another $150. We’ll spend, call it, $300 plus we’ll have an attorney review it. 

We’ll spend $500 on a $300,000 asset. I cannot tell you how many people I know will skip over that process and just roll the dice. It blows my mind. It’s like buying a house without looking at it or getting a home inspection. I cannot fathom it, especially if you’re using other investors’ money. Now, if it’s your own money, “Look, you want to be an idiot? Go ahead and be an idiot.” No matter what business you’re in, it’s the little things that equate to the big things and go back to what John Fish, CEO of Suffolk Construction, always used to tell me, it was back to the blocking and tackling. You have to do the fundamentals. 

 

If you're investing other people's money, be diligent. Skipping due diligence is irresponsible and costly. Share on X

 

You have to do the basics. If you do that, you win more often than you lose. If you block well, you’re not going to get sacked a lot. You might not always advance the football, but you’re not having negative plays. In investing, you don’t want negative investments. We’re going to wrap up with that, and I hope everyone enjoyed this episode of the show. For more information about us, our offering, or what we do, or if you’re a buyer of loans or seller of loans, reach out. Our website is 7EInvestments.com. You can also reach out to us at Invest@7EInvestments.com. Take care, thanks for listening. Catch you on the next one.

 

 

Important Link:

• Invest@7EInvestments.com