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Never Waste a Good Crisis

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HIGHLIGHTS FROM THE PODCAST:

5:49 – #1: A lack of rules, skepticism, and discipline caused every mistake that we made.
6:28 – #2: Should I pursue this opportunity? Should I make this investment?
7:33 – #3: There is no way to correct without divorcing the story and marrying the truth. Facts do not cease to exist just because you ignore them.
8:48 – #4: You must keep a conservative strategy during the good times because you generally don’t know you’re in bad times until it’s too late.
10:26 – #5: Speed kills. True wealth is built slowly. Speed and greed necessitate aggressive leverage and increase the odds of catastrophe.
13:00 – #6: Success does not make you invincible or bulletproof.
14:03 – #7: The euphoria of a hot market usually results in ignoring marketplace fundamentals.

FULL TRANSCRIPT OF THE PODCAST AUDIO:

Spencer Sutton:
I made some investments in raw land. I made some investments in a packaged portfolios. I made some investments, but I didn’t ask the right questions. So the question should never be, “Should I pursue this opportunity,” here are the questions. “If I pursue this opportunity, how much time, resources, effort and investment, are required?”

Spencer Sutton:
All right everybody, welcome back to another episode of The Atlanta Real Estate Investor. I am your host today, Spencer Sutton. And this is going to be a little bit different because I am going solo today. I’m not interviewing a guest, I don’t have Matthew with me, I’m just taking this one solo and really because… And we have some great guests that are going to be coming on the show over the next several weeks, so please continue to come back, please continue to share the podcast because I know that everybody is enjoying the interview with guests. Also, let me just add this: if you want to hear other real estate investors, we have another podcast. It’s called The Birmingham Real Estate Investor, and we interview some great local investors in Birmingham. You can learn a lot from them. I’m going to encourage them to listen to this podcast. So we have some great guests on, we’ll have some more coming back. I know Matthew will be back and join us.

Spencer Sutton:
But today, I just really wanted to talk about something that stuck out to me when I was reading this book, and the book is called The Road Less Stupid, and it’s a great book written by a guy named Keith Cunningham. If you haven’t read it, make sure that you do. Put it in your collection. This guy was a real estate investor. He’s made millions and millions of dollars, but he also lost a lot of money back in 1989. So I’m in a chapter, and the chapter is called Never Waste a Good Crisis, and it’s all about what he learned, what he and his colleagues learned during the real estate collapse, their failure, in 1989. So you may be asking yourself, “Well, Spencer, why are you talking about this on this Atlanta podcast? I mean, why are you talking about this, it’s 2021…”

Spencer Sutton:
Real estate is hot as ever, we’ve just blown through this really 2020, which was setting up to be really, really tough time, but real estate never slowed down, never missed a beat. You’ve heard the guests that we’ve had on, they’re doing extremely well, but I think it’s important because as I was reading this chapter, Never Waste a Good Crisis, it brought me back to my time when I was wholesaling real estate. And I started thinking about what a great time it was when I started in 2003, all the way through 2007. Halfway, probably, through 2007. It was phenomenal. It was phenomenal. And we never thought it was going to end, and we thought, “Wow, this is going to go on forever.” Now, we may not have said that, but we were behaving, we were investing as if that were going to happen. So we started to buy a lot of rental properties. We started to use leverage for everything.

Spencer Sutton:
I mean, back then, lines of credit were so easy to come by. We had well over a million dollar’s access to us at any time, just to write checks and buy houses, and that’s what we did. And so when I was reading this book, I was like, “Wow, this is really powerful stuff.” He took the time to sit down and write out 50 of the biggest lessons he learned. I’m not going to go through all of those, I’ve just picked out seven key lessons that this author, of the book The Road Less Stupid, Keith Cunningham, learned through his really dark time of losing everything. Like, lost it all. Lost it all. And what he and his colleagues got together, and they said, “Let’s write down these lessons that we learned so we don’t have to repeat them.” I believe that these lessons could be helpful to you as an investor today when you’re looking at Atlanta, whatever area, whatever part of the country you’re looking into, this is just sound advice.

Spencer Sutton:
And so I want to go through them, I might add a little bit of color to them. This is not going to be a terribly long podcast but I think it may be short, but I’m hoping that it’s very impactful and gets you to think and gets you to write down some of your principles. I mean, I was literally just listening to Ray Dalio earlier today and one of the things he said was “Pain plus reflection equals progress.” That’s one of his principles. So get that. Pain plus reflection equals progress. And this is exactly what Keith Cunningham has done. He experienced the pain of a massive downturn in the real estate market and lost everything. So that was the pain. Then he reflected on it. And then that equaled progress. He came out of it much better than he was before that. He went on to be extremely successful. And this reminded me of my time. What did I learn when I’m reflecting back on 2007, 2008, what did I learn? And did that equal progress in my life? So I thought it was a great reminder.

Spencer Sutton:
So I’m going to hit the top seven, or seven of them that I thought that really stuck out to me. And we’ll talk about it a little bit, and hopefully they’ll mean something to you. You can write these down, you don’t have to write them down, you can read the book if you want to, great book. So number one is one of the things he learned, “A lack of rules, skepticism, and discipline caused every mistake that we made.” So think about that. “A lack of rules, skepticism, and discipline, caused every mistake we made.” And that is really… Being skeptical and having extreme discipline during a bull market is extremely difficult, but that’s why they call it discipline, right? So he talks about questions that you really should be asking. So I’m going to give you some questions you should be asking. It’s not necessarily, “Should I pursue this opportunity? Should I make this investment?” I mean, listen, I made some investments in raw land. I made some investments in a packaged portfolios, I made some investments but I didn’t ask the right questions. So the question should never be, “Should I pursue this opportunity?” Here are the questions.

Spencer Sutton:
“If I pursue this opportunity, how much time, resources, effort, and investment are required?” Number two: “Is this in my wheelhouse, my core competency?” Third one: “What could go wrong? What are the returns if I’m right, and what are the cost if I’m wrong?” And then the big question that people typically don’t ask is, “Can I live with being wrong?” So you need to look at the worst case scenario, and you need to look at, “Hey, what if I win but what if I lose? Can I live with losing on this investment?” So I think that’s a great one, that’s the first one.

Spencer Sutton:
The second one is, “There is no way to correct,” now get this, “There is no way to correct without divorcing the story and marrying the truth. Facts do not cease to exist just because you ignore them.” So get that. Everybody has a story in their head. Everybody has a narrative. Everybody thinks a certain about the market, they think a certain way about their investment expertise, and sometimes experience drives those stories, whatever the case is. But his point is, you can’t believe your own hype. You have to divorce the story and marry the truth. You have to deal with the facts. So just because your narrative about something, you think something should or could happen, it cannot take the place of the facts. You must be ruthlessly committed to the facts. I mean, this is one of the biggest ones. I’ve learned this. And I mean, this applies to every area of life. This applies to every area of life, is just, dealing with the facts. Right? Looking at your stories, examining your stories, are these stories true? So that’s a really good one.

Spencer Sutton:
The next one is, “You must keep a conservative strategy during the good times because you generally don’t know you’re in bad times until it’s too late.” Man, is this not a good one? Keeping a conservative strategy. How do you keep a conservative strategy? How can you constantly be thinking about, “Am I over leveraged? Am I taking to may risks?” Just believing that things will never slow down, there’s never going to be a downturn because when it happens, it’s way too late. I’ll never forget owning a $400,000 house back in 2007. Actually, I bought it in 2007 and I’m telling you, it was not a conservative move. I paid too much because I was thinking, “Hey, this house is going to appreciate over the next six months so much, I’m going to flip it. I’m going to do a little touch up paint, I’m going to change the carpet, just a very light light rehab, and I am going to make a killing.” Well, it was not a conservative strategy. It was a marginal deal, marginal deal at best. And I got hammered on that deal. The market turned. Before I knew it, it was too late.

Spencer Sutton:
Now, I say I got hammered. We lost, I think, probably $20,000. Which, that’s not what you want to do. That’s not the name of the game. But that was the beginning of a massive downturn, so ended up losing a lot more than that in 2007, 2008. So the next point plays into that point. And this one is, “Speed kills. True wealth is built slowly, speed and greed necessitate aggressive leverage and increase the odds of catastrophe. It is better to go slower and avoid the do-overs.” So get that. Speed kills. Speed kills. True wealth is built slowly. I talk to investors all the time. Not as much today as I did maybe a couple years ago or last year, but they would call me asking about advice.

Spencer Sutton:
As property managers, we tend to be very objective about areas of the market, what’s going, we’re going to tell you, “Hey, this is what you can expect to get for rent,” all of these things. But anyway, I was having a conversation with a gentleman. We were talking. He and his partner wanted to buy a lot of houses over the next, I’d say, four, five years. Which is great. And I say a lot, I mean, a lot is probably they wanted to buy 20 or 30. And I think that’s perfectly fine, but he started asking questions about buying packages. He’s like, “You know, I’ve got this opportunity to buy this package that could really speed up the whole process. Why do I want to wait for four or five years to buy all these houses when I could just buy this huge package?

Spencer Sutton:
Well, what I explained to him was, when yous tart looking at packages, more than likely, you’re going to start buying houses or properties outside of your buy box. I know that’s what I did. The very first rental house I bought, I wasn’t content to buy one house, I had to buy a package of ten houses. And most definitely, several of them were not in our buy box. Now, I was able to sell some of them, like one-offs after we bought the package. But that was only because the market was just… it was going crazy. It was a great market, and so I was able to do that. I thought that that was brilliant, but that’s not really the case. It was just a bull market. So true wealth is built slowly. Speed and greed necessitate aggressive leverage. Okay? That is a key, key point. I can’t tell you how many times we’ve seen that. We try to talk investors, if they’re asking us for their opinion, we will give investors our honest opinion. It’s typically never going to be just this, “Hey, you got to go hard, you got to go as fast as you can, you got to buy as many houses, leverage yourself as much as you possibly can.” That’s not what we’re going to suggest to you.

Spencer Sutton:
All right, next one is “Success does not make you invincible or bulletproof. What success does best is make you complacent and egotistical, which by themselves are sufficient to create disaster.” Now listen, he’s speaking from experience. And his experience told him that man, when I was killing it in the mid-80s, I thought I was bulletproof. Like I couldn’t lose. Instead, what he didn’t realize, everybody has blind spots, right? Dalio talks about this as well. Everybody has blind spots. What he couldn’t see was that it was making him complacent, probably very lax, not very disciplined in his buying approach, and egotistical. And ultimately, it ended in disaster for him. And so he had to start his career over from scratch. So not the best way to go.

Spencer Sutton:
And here’s the last one, and I’ll leave us with this one because this absolutely, we can relate to this because of the market that we’re in right now. “The euphoria of a hot market usually results in ignoring marketplace fundamentals, prudently gathering and evaluating market-based economic information is the only prescription for avoiding the mistake of smoking your own exhaust.” Okay, we’ll end on this. We are in an extremely hot market. We know this because there’s so much demand, not only do we have competition from wholesalers out there trying to buy houses, we have competition from massive funds who are out there trying to buy houses. They’re overpaying for properties. They’re doing all of this, so there’s competition everywhere you look. I mean, you even have real estate agents who are competing to try to capture these leads so that they can turn and sell them to their wholesale partner. I mean, there’s all kinds of things going on. We know it is an extremely hot market.

Spencer Sutton:
Whatever you do, don’t ignore marketplace fundamentals. Once you understand what you’re looking for, what you’re willing to pay for a property, what makes sense economically to you, what numbers make sense, then you want to stick to those. And you don’t want to ignore marketplace fundamentals. So if things start looking too good, seeming too good, then they probably are. There’s nothing wrong with sitting on the sideline with cash, waiting for the right opportunity. Grinding it out. Searching for the right property. Don’t make the mistake of overpaying or buying out of your comfort zone, buying in an area that you’re not familiar with just because somebody tells you this has great cash flow.

Spencer Sutton:
All right, so I thought this was good, as it was a great reminder for me. It really had a lot of flashbacks, a lot of painful memories, but remember: pain plus reflection equals progress. I can tell you, I am a better investor. I look at real estate completely different than I did back in 2006, 2007. And I definitely learned a lot of lessons from 2008. So that is the episode today. Listen, if you found value in that, I hope you share this episode and ake sure to subscribe. If you haven’t already checked out our Birmingham podcast, you can do that. Again, we’ve got a lot of great interviews with successful investors that you’ll probably learn a lot from. And we will be back next week with another episode of the Atlanta Real Estate Investor. Talk to you soon.