Season 1,
27:01

8: Why You Need to Do Extensive Homework Before Investing Your Money with Dr. Brian Robbins

December 01, 2016

Brian Robbins and his wife adopted eight kids back when he was in his 30s.

The financial pressures were enormous, and he was looking for an easy way to get some passive income. He bought into a commercial real estate dream—and it left him high and dry.

Listen in to hear the most important lesson Brian learned from an investment he never should have touched.

Green Flag: The Promise of Passive Income From Commercial Real Estate

Years ago, my wife and I adopted eight kids, all one sibling group, from Russia. At the time, it was the single largest adoption between the U.S. and Russia—not that that was our goal.

The pressures of trying to provide for the family were enormous. We could barely keep up with normal everyday costs, let alone begin to think about college educations and retirement. The entrepreneur in me was thinking about ways to generate passive income, since I was already working 60-70 hours a week in my medical practice.

I spoke to some friends who had the idea to start a satellite medical practice. They’d made great money doing it.

I started a few, and since I’m dense, it took a while for me to realize there was nothing passive about opening these additional businesses. I made some money on some and broke even on others, but after four or five I realized they weren’t meeting my needs.

I came across another idea when 25 and eventually 200 physical therapy patients asked to stay on after their rehab and keep working out. We outgrew the space we had, and my CPA, a friend of 12 years, “accidentally” mentioned one of his other clients had a building for sale. I’d never taken on a project like this, because it wasn’t close to being finished, but he assured me we could walk through it together.

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He kept talking about how some of his wealthiest clients had commercial real estate and said that was how they grew their fortunes. He told me that if I had tenants to pay for the space, it would be paid off in 15-20 years and passive income would flow. I leaned on his sage advice, assuming he was taking care of me.

The way he laid it out, it was very exciting. My wife’s and my goals weren’t just to help out our kids, but to help out some orphanages and do some real good in the world. I kept getting the go-ahead sign from my accountant, and it seemed as if we would be well on our way to accomplishing those goals.

Unfortunately, he left out one single, very important fact.

Red Flag: True Intentions

We made the purchase, and the very first red flag came when we began paying for the  completion of the property. The city was going to make us put in a $75,000 elevator that was never on the radar.

That was one small thing, but the cost of buildout continued to escalate and escalate. There were a host of things that I didn’t know about, not having been in the construction industry.

I learned things like the difference between a sewage pump and a grinder pump. I wrangled with inspectors over prices big and small. I learned that there’s a whole nuance to how you put in an elevator.

A completely different vocabulary, to be sure. If I’d had more experience in these things, I would have negotiated hard on the purchase price, knowing the project would take half a million instead of $100,000. I certainly could have negotiated with the subcontractors better as well.

That one detail my accountant had left out? He was much better friends with his seller client than he was with me.

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Black Flag: NAFTA

I began to get a sinking feeling when costs kept escalating. The accountant hadn’t given me an accurate assessment of the cost to finish the project.

The timeframe of the project drew on and on. Finally, I sat down and looked at all the money we’d spent to make the place whole, and I saw that it wasn’t full with tenants. It wasn’t as easy to find tenants as I’d believed, and I realized: I’d been had.

The reason it was so difficult to find tenants was because of a little thing called NAFTA. I’d never even heard of it at the time.

Southside Virginia was a manufacturing mecca. We suddenly lost thousands upon thousands of manufacturing job because of Bill Clinton creating NAFTA. That created a vacuum in this part of the country where we were losing tenants left and right. Our largest employer in the city was employing 10,000 at the time, but they disappeared after NAFTA.

For the tenants we could find, the rent went way down as the competition for the few remaining tenants ramped up. I knew the 20-year vision I’d bought into simply wasn’t going to happen.

White Flag: Making Due

As I look back over it, my accountant saw my desire to generate passive income, and he kept me focused on the 20-year, down-the-road numbers. I bit on it.

Once I was in the mess, however, I didn’t give up. I was raised to figure out why I made the mistake, learn how to grow from it, and put my nose to the grindstone. Handing the keys back to the bank years ago just wasn’t an option for me. I had to roll up my sleeves and put in some hard work, even if we went under on it. However, I did have to accept that my investment dream had completely dissipated.

It’s a lesson I painfully get to go through every month. I still own the building; I’m still paying for it. I was fortunate not to have to go bankrupt.

I bought too high, I put too much into it not to finish it out. I’ll be lucky in 20 years to break even. It certainly didn’t create any additional income. In fact, it ate up a lot of my current income.

It’s a lesson that’s ongoing. When I’m supplementing the mortgage because I don’t have enough tenants to pay it off, I feel the pain every month.

Checkered Flag: Do Your Homework

The running loss total as it stands is probably $3 million. When I sell it I’ll probably lose $500,000-$750,000. It’s also cost me hundreds of thousands of dollars and a thousand hours in time spent away from my business, as well half the hair on my head. My family’s felt the result of the stress.

We’re in the midst of the battle still, and we hope the outcome will be good.

Are we still friends, the CPA and I? No. I found that he pursued me more as a client and that’s what led to a friendship in the first place. Would I talk to him if he walked through the door? Sure.

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I don’t have a lot of bitterness over it. Half of it was my fault: the way I went into it was a way I’d never go into a deal again. I didn’t do my homework.

Now, if I go into any investment, I’m going to become a semi-expert in that field. If I don’t have time to become a semi-expert in the field, I’m going to pass on that investment. There will always be another one down the road.

I learned never to trust anybody to take care of your finances if you’re not going to become an expert yourself. “t doesn’t matter how much you pay someone: no one’s going to care as much about your business as you.

Failing Forward

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 do my homework, and I wanted to be led down a path for wealth and success.

  • What is the single most important lesson you’ve learned from this?

You need to become proficient in every deal. What I mean is, if you don’t have time to become an expert, you better say “pass.”

  • How do you keep yourself from failing in this way again?

1) Learn your own weaknesses. Your left brain and right brain are going to fight it out on any deal. It’s a skill to put your emotions on the side and logistically review a deal and be a pessimist with projections.

2) Ask your wife.

  • What’s an important skill for anyone to develop?

First, knowing your own weaknesses. Also, the Bible says that there’s wisdom in a multitude of counselors. The street answer for that is, when you don’t have answers you need to get neutral help. Phone a friend. It never hurts to get lots of neutral opinions.

  • What advice would you give someone in your similar situation?

Do your own homework. Make sure you become an expert. Ask 1,001 questions. If there’s smoke, there’s probably fire. Get out of there.

This episode is based on an interview with Brian Robbins from Wellings Capital. To hear this episode, and many more like it, you can subscribe to How to Lose Money.

If you don’t use iTunes, you can listen to every episode here.

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