Are You Playing a Game You’re Destined to Lose?

You’re not a loser, are you? 

After all, you’re here on BiggerPockets, so I’m confident you’re not. Seriously. 

But I’m writing to help steer some of you clear of a pitfall that has caused many losses and much pain in the real estate investing world. And I hope you’ll give me some leeway as I construct a crazy analogy to help make my point. 

Charlie Munger, Warren Buffett’s legendary partner, reportedly said something like this: 

“If you’re 5’ 3” tall, you should probably not play in the NBA. The odds are stacked against you. You should choose a game where you can win.” 

Have you counted the cost? 

Most real estate investors can make money investing while enjoying a full-time career or retirement. It can be stressful for sure. Dealing with toilets, tenants, and trash is never fun—but thousands in the BiggerPockets community pull it off every year. And I applaud each of you who do. 

But many who start in single-family residential set their sights on commercial real estate at some point. Our own Brandon Turner took this path. And so did BiggerPockets author Brian Burke. I traveled the same path myself. 

It makes sense, after all. Most of the Forbes 400—America’s wealthiest—invest in commercial real estate to protect and grow their wealth. So, it’s tempting to follow this path. 

Most of us played sports at some point in our youth as well. We dreamed of playing in the big leagues and fantasized about the fun and fortune it would bring. 

But a closer look at what it really takes to be Michael Jordan or Michael Phelps shows us a life of rigid discipline. A life that skipped most of the world’s pleasures from a young age. A life fanatically dedicated to their craft. A life of much pain and loneliness that led to fame and fortune a very long time later. 

There’s nothing wrong with being short. I have two beloved family members who grew up to about the 5-foot level and stopped. But it’s important to know where you fit into the world so you can play to your strengths. I believe that honing and playing to your strengths, rather than working on your weaknesses, is one of the essential disciplines in life. 

As Charlie Munger reportedly quipped, a person who is 5’ 3” can enjoy shooting hoops in the gym and might even beat out the tall guys. But that guy or gal should probably not set their sights on the NBA. The fact that only one 5’ 3” NBA player (Muggsy Bogues) has ever done this attests to its rarity. 

The 5’ 3” NBA starter

This short parable is not about Muggsy. It’s about a fictional character named Johnny Nepotist. Johnny’s dad, Stan Nepotist, came from a long line of very wealthy sports fanatics. His grandfather helped launch America’s first baseball team, the Cincinnati Red Legs, in the 1800s. 

Stan was slow, so he never played. But he always dreamed of having a son who starred in the NBA. Stan perused the country clubs for years to find just the right wife (this was before He was looking for a 6-foot-plus lady with hopes she would help produce a 7-foot-plus son. (I know it’s silly…but it’s just a parable.) 

Fast forward 25 years. Stan got married to a 6-foot-plus lady, and they had several kids. Each one disappointed Stan. One was too slow. Another chose a career in art. 

But Johnny was different. Johnny was fast. And smart. He loved his dad, and he loved basketball. Things were looking up for the Nepotists. So much so that Stan acquired an NBA franchise, the Columbus Bucks, when Johnny was only 12.

Then disaster struck for the Nepotists. 

Johnny stopped growing at 12. He stopped at 5’ 3” tall. He went to doctors, he took supplements, and he juiced. He even hung from the top rail of a swingset trying to stretch out his stalled body (like the Brady Bunch kids). Nothing worked. 

Johnny played high school ball, and he was pretty fast. He played at a Division III college, and he did pretty well. Though he was certainly not NBA material. 

But that didn’t stop his dad, Stan. 

Stan put him on the team anyway. (And he didn’t even have to waste a draft pick.) Stan ensured Johnny started in every game. 

You can imagine how the rest of the story went. It ended miserably for Johnny, Stan, the coaches, the players, the fans, and the Bucks franchise. 

The ramifications and lessons here are too numerous to detail, but here’s a quick list: 

  • It was unfair to Johnny, who could have been much happier in another profession. 
  • It was unfair to the coaches and teammates, who were forced into this awkward position. 
  • It was unfair to another player who could have joined the team but was squeezed out. 
  • It was unfair to the fans, the investors, and everyone else involved. 

Maybe I’ve taken this parable too far, but I hope I’ve made a point:

Don’t choose a game where you’re destined to fail. 

Pick a game you can win. Especially when you’re dealing with other peoples’ money. 

How does this apply to real estate investing? 

As I said, this rising real estate tide has invited scores of eyeballs. Which has led to lots of new capital. Lots of new investors and a lot of new syndicators. 

I applaud this wave. Commercial real estate used to be the playground of wealthy insiders. When I started in real estate over 20 years ago, I often wondered how to get into the commercial real estate realm. But the barriers to entry seemed high. And syndication wasn’t widely known. 

But a new wave always brings new challenges. And new operators. Some of these new operators are now self-proclaimed gurus. I call these new gurus “newrus.”

When the tide is rising, everyone is making money. And this can result in hubris. 

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It sure did for me. In my younger years, I entered multiple fields I had little chance to win. On my recent BiggerPockets podcast appearance, I told David Greene my story of trying to be a builder. After building multiple houses, I concluded it’s not smart to be a builder if you don’t know how to tighten the doorknob on your own home. 

I co-hosted a wealth-building podcast called How to Lose Money for four years. We spoke with 238 business owners, entrepreneurs, and investors who lost money, time, health, and relationships along their path to success. 

Trust me; there are a lot of ways to crash and burn in business and real estate. Don’t let everyone’s recent success fool you. 

If you’re one of the many real estate investors who want to expand into the commercial realm, I want to be sure you’re not one of the casualties. Before counting your future millions, consider Warren Buffett’s most famous quote, his most important rule:  

Rule #1: Never lose money. 

Rule #2: Never forget rule #1.

In that spirit, I circle back to his partner’s attributed quote about not playing in the NBA if you’re short. Let’s take a brief look at four ways to increase your risk of losing money in commercial real estate. 

Four ways to play a CRE game you can’t win…or at least have a higher chance of losing

  1. New operator: There’s nothing wrong with being a new operator. We were all there at one time. But think hard about what size and types of projects you take on. You should also think long and hard about who is on your team—and what experience they have. How much leverage are you using? And are you overpaying for assets? If you’re passively investing with an operator like this, beware. You should think hard about giving capital to a team that has not been through both up and down real estate markets. 
  • Weak team: No basketball star got there alone. Though it is certainly possible to operate a single family—or even small multifamily—residential business on your own, it is exponentially harder to operate most commercial assets this way. Who is your team? What is their experience? Do you know how to delegate to them? How confident are you that you have the right people in the right seats if the market takes a shock? Because the reality is that a market change is always on the way. And, if you’re passively investing, have you carefully assessed the team you’re giving your capital to? 
  • Part-timer: Please don’t even think about doing most commercial real estate operations part-time. Sure, it could work. But you will often be competing against an obsessive team of full-time players who could outgun you in good times and gobble you up in bad times. Can you imagine Michael Phelps winning 23 gold medals as a part-time swimmer? Similarly, I can’t imagine you or me investing in a project run by part-time operators. (I admit there are exceptions. For example, investing in cell tower leases is a commercial enterprise that is highly passive.) I wrote about the dangers of real estate as a side gig here
  • Overpaying: Don’t overpay for overpriced assets that will result in razor-thin margins, which could be further complicated by a plethora of new players causing fierce competition and even thinner margins…before the inevitable market shock hits. Market values are based on a complex ecosystem of factors and dependencies. These issues are highly unpredictable. (Who could have predicted COVID?) The solution? Position yourself prudently when others throw caution to the wind.        
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Everyone knows real estate investing can be a powerful way to build wealth and achieve true financial freedom—but because each person’s journey is different, knowing the first steps to take can be challenging.

Final thoughts on playing the real estate investing game

Most importantly, each person should consider how these lessons apply to your specific business or market sector. This is not a one size fits all lesson. And it could apply to many areas of your life. 

It could even be a set of tasks you need to offload to someone who does them better. I made money on almost every house flip and new build because I delegated well. I’m in the process of hiring an executive assistant now, and I plan to offload a lot of the stuff I hate and am not good at.  

But I can’t offload the most critical tasks. Tasks like loving my wife and kids. Being kind to others. And writing these blog posts. 

Thank you for bearing with me and my fictitious parable. I hope this post helps you along your journey through investing and life. Let me know your thoughts below. 

2022-02-10 16:31:00

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