David Campbell went from high school band director to real estate investor in 2005.
Money was good, his investments were successful, and the future was bright—until 2008 loomed ahead.
Listen in as David shares how he went from millions of dollars in net worth to negative millions in a matter of months.
Green Flag: Leaving the Band
I chose to leave my job as a band teacher because I had been successful at investing in single-family homes for some time.
Like everything, they went up in value in 2001-2003. I was doing what’s called “rabbit investing,” where you take the equity from one appreciated property and use it as the down payment on more properties. From 1999-2006 I did 11 deals—a relatively low velocity for an investor, but not bad for a band director.
It was an aggressive equity-building machine, but it wasn’t dependent on cash flow. It was dependent on finding markets and properties that were going to go up.
In 2005, I was 30 years old, and I had a net worth of close to $1 million and very small expenses. I had huge overhead from my real estate portfolio.
Life was good. I quit my job and started to think about what would come next. Up to that point, everything had worked.
Red Flag: They Need Jobs to Get Financing?
When I left my job, I got into real estate development.
I bought an apartment building in the suburbs of San Francisco and converted it into condominiums. They sold out the majority of the units, but then I had buyers who were struggling to get financing. I would bring what I thought was a qualified buyer to my lender because they had a pulse and a willingness to buy (all you needed in 2005).
Suddenly the lenders were saying, “Sorry, we can’t approve this because they need a job, a FICO score, and a down payment.” I was confused; those things weren’t required in the past. Now buyers even had to prove they had income! The times were a-changin’.
I realized I had to create velocity to get out of that project. In one of the strip malls I owned, my tenants were a state senator, a mortgage company, a hairdresser, and a hydroponic marijuana growing shop. At one time, only one of those four tenants was paying the rent. Bet you can’t guess which
I thought the state of California was a gold-standard tenant, but they stopped paying rent and were considering bankruptcy. They were issuing IOUs to landlords. At first my bank would take them, but quickly they stopped that.
I had a cash flow problem. But the disaster wasn’t over.
The vast majority of my net worth was in the city of Vallejo in California. The city declared bankruptcy and laid off around 80% of their police force overnight, and the entire city turned into a hotbed of crime. Vacancies went through the roof, and values declined 75-80%.
I knew a recession was coming and that prices were going to go down, but in my limited experience I thought, “A recession is a 10% price correction.” Bloggers were saying the sky was falling, sell everything as fast as you can. I thought they were overreacting.
By the time the market was falling apart, I had a $10 million real estate portfolio and $6 million in debt. Then the bottom fell out: I still had the $6 million in debt, but my $10 million real estate portfolio was only worth $2-3 million.
It felt so fast, like trying to catch a falling knife. It probably took 18 months, but it felt like two.
Black Flag: “You Don’t Know There’s Going to Be a Rainy Day”
It turns out that business in real estate is cash flow dependent. You make wealth in real estate from equity growth, but the day-to-day sustaining power has to come from cash flow. When rents go down and your operating expenses stay the same, that shortfall has to come from savings.
In 2008, I had some additional cash and I thought I’d pay off some of my HELOCs and draw on them when needed. I wrote that check to my mortgage company, and they said, “Thank you, but we’re going to shut your line of credit off.”
They were feeling insolvent, and the values had dropped so I didn’t have the right loan-to-value. I lost all that liquidity; it went down the toilet.
When you’re young, and you make money quickly, you don’t know there’s going to be a rainy day. It was like I’d walked into Vegas and hit the jackpot on my first slot machine pull, then expected that to happen every time.
White Flag: What’s Next?
In January of 2009, I had a brand new baby. My wife got really sick, so I was taking care of them both with no equity or cash reserves. The burn rate on our portfolio was so large that I couldn’t retreat into the occupation I thought was safe. Teaching band wouldn’t pay $30,000 a month, which is what we needed.
All the tools I had available at the time wouldn’t work, so we sold everything we could. We short sold most things and had a few foreclosures because the banks weren’t equipped to manage a short sale.
We moved in with family members and decided to just figure out what was next.
Checkered Flag: The Worst Thing Will Never Happen
Over the course of the 2000s, my high was a $4 million net worth and financial independence. Eventually, though, I went from positive millions in net worth to negative $2 million in the span of months.
One of the hardest things was the toll upon my relationships. At that time, I told my wife, “I’ve got this. You take care of the family and I’ll make the money.” When the money wasn’t coming in, I had to wrestle with my identity. Not only was I not the provider, I was the negative provider, responsible for creating giant holes in our net worth.
When you’re successful and you have a failure, it’s difficult to let people into that loss. Nobody really wants to hear your story of failure, and there’s the element of pride. You don’t want to say you tried something and screwed it up.
The amazing thing about starting with nothing is that you realize you can do it—it’s possible to start with nothing and create something.
I’d also created a lot of valuable relationships along the journey. I remember sitting down with my wife when things were grim and making a plan for safety. I literally got a piece of paper and wrote out a list of 100 people who would let me spend three days on their couch.
I thought, I’m never going to be homeless. I’ll never miss a meal. I looked at the worst possible thing to me—not being able to provide the basic needs of my family—and I realized that would never happen.
In the end, I got into real estate by necessity, and by necessity I stayed in it. I wrote a book about what I wanted my financial future to look like during a low point in 2009. And wouldn’t you know it: It was like a business plan for myself, and not quite a decade later, it worked.
In each episode of How to Lose Money, we’ll be asking our guests to answer a few questions about failure. Here’s what came out of this episode:
- Why did this failure experience happen to you?
I didn’t have a plan for failure, safety, comfort, and abundance. My only plan was for smooth sailing.
- What’s the single most important lesson you learned from this experience?
When you’re making important decisions, go to your mentors, especially when it’s bad news. Avoid pride: I wanted mine to be proud of me, but I started veering off course when I avoided help.
- How do you find mentors?
Have an abundance of mentors based on skillsets. I like picking a mentor who’s been through a place I’m about to go.
- What advice would you give someone in a similar position as you were in around 2008-2009?
If you find yourself failing, fail forward. Look at what you can take from the experience and reinvent yourself. Failure is a place in time, not a destination.
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