“The ARV (After Repair Value) was not large enough to justify how much money we ended up spending to add this third story.”  

Reed Goossens 

Worst investment ever

‘Networking on steroids’ typifies Aussie engineer’s view of first real estate event in US

Reed moved the United States in early 2012 and was without a job, so he took the brave move of walking the streets of New York City to visit every engineering firm he could find, with his portfolio in hand and saying, “Hey, give me a job!” He quotes Tony Robbins, who says: “One ‘yes’ will change your life”. And it did. He looked at medium-sized firms, and admiring his spirit, one actually did employ him. Within two weeks of moving to the US, he was at his first real estate networking event, and he realized the Americans were on a different level than he was coming from Australia. He called the US experience “networking on steroids”.

Learning about US property

Realizing he had much to learn in his new home country, he spent the next six months doing just that. He realized quickly however how low the barriers to entry to the property market are in the US compared to those in in Australia, in that he could go out and buy a property for US$38,000. He was amazed, stating that you could never buy in Australia for under around $250,000-$300,000. He visited upstate New York and bought a number of properties but quickly ran out of his own money and banks were shy about lending to this new arrival. So he found a partner, and with him, started looking at properties in Philadelphia, as he wanted to try his hand at flipping houses. He was confident he could do so as a chartered structural engineer who had worked on many ground-up developments, including the London 2012 Olympic Games site.

Reed finds a partner and they buy a row house in Philadelphia to flip

So, he and his business partner bought an early 1900s two-story row house in Philadelphia for $110,000. Their goal was to add a story to match adjacent houses and make this row house similar to others in the city and those in New York, and thereby add value to the property. Reed did all the structural engineering drawings and they hired a general contractor (GC).

Contractor’s thievery and other horrors make for a lengthy and costly project

And here Reed explains the two main problems with the investment. The story he said is a very good lesson in After Repair Value (ARV) and underestimating the cost of carrying out the renovations. In the end, the ARV was not large enough to justify the amount of funds they ended up spending to add the third story. Combine that with shoddy GC work – the general contractor stole materials from them and Reed had to take over the GC work himself and handle all the subcontractors. There were other problems on the mechanical, planning and electrical sides, as the original GC had cut corners and sealed walls before the city had inspected plumbing and electrical wiring. They even found some of their stolen materials at project site a few streets from the house, as they had been networking and were invited onto another developer’s project site.

Extra pressure hovers nearby as investor’s father is also involved

The situation was also riding on some emotional issues. Reed’s father was also invested in their project and it was Reed’s first foray into syndication. They all thought the build was only going to take around six or seven months, but it ended up taking about a year. And they were holding it the more spending was happening on the debt, the soft costs, and just really having to try to get it out of a hole. One of the subcontractors also ended up being jailed over a bar fight. So, suffice to say, a lot went wrong. At the same time, Reed was trying to move to Los Angeles to be with his girlfriend, who was from there, and his business partner stayed to finish the job.

Heart of the loss was how much the home would be worth after repairs

The summary though was this and Reed points out the heart of the problem was in the ARV. They bought the house for $110,000, spent about $220,000 or $230,000 on it and sold it for only $375,000. Reed did take care of his father, and kept the promiser of a 15% gain on his investment. Personally, Reed took a loss of about $40,000, or he calls it a $40,000 lesson. He opines that if the ARV was going to be worth $500,000, they would have been very happy.

Quick sale but investor takes $40k hit

In the end, the house sold within 30 days, which showed there were no issues with what they produced but it just took six months too long. From the time they started looking at the property to the time that they exited and got paid, it was a full 18 months.

Some lessons

Never overestimate your After Repair Value. On paper everything can look great, but excessive time taken in undertaking renovations can eat into the ARV.

Do a lot of research on all possible hidden costs. These can take the form of regulatory issues, materials, builder errors, and contractor overruns.

Ensure you work with the right people. Obviously, try not to work with thieves, but build a great team around you, a team you can trust.

Never underestimate the value of time and timing the market.

Andrew’s takeaways

Opportunity cost can have a massive impact. Reed was drawn into a project that became much deeper and expensive in time than he had expected. He could have been working on another deal or bringing in revenue from some other sources.

It’s very hard to estimate what can go wrong. But that is part of risk management. And then Andrew discusses My Worst Investment Ever’s six common mistakes, particularly in reference to No. 2, failed to properly assess and manage risk. But also Andrew argued that sometimes we can do all we can and things can still go wrong.

Collated from Andrew’s My Worst Investment Ever series, the six main categories of mistakes made by interviewees, starting from the most common, are:   

1. Failed to do their own research  
2. Failed to properly assess and manage risk  
3. Were driven by emotion or flawed thinking  
4. Misplaced trust  
5. Failed to monitor their investment  
6. Invested in a start-up company 

Anomalies can scare us. They can also be misleading and some people get scared out of investing completely. But don’t build your career and investments around these anomalies. These will often happen and there’s not much we can plan to avoid them.

Actionable advice

Partner with the right people. Your team is everything. Making sure you have the right team around you, who have done it before, can go a long way toward avoiding such risks.

No. 1 goal for next the 12 months

In terms of investing, Reed would like to close on another 1,000 units in the United States.

On the personal side, he would like to travel more and spend a lot more time on business development, podcasting, book launches, which is the type of activities he is growing to love.

Parting words

“A fool and their money are easily parted. So don’t be that fool.”

What that really means to Reed is he recommends getting out there be educated, learn from other people’s mistakes, but at some point in your life, you’re going to have to take action. Invest in yourself first and foremost, and get yourself knowledgeable about whatever investment strategy you’re going into, whether it be stocks, bonds, mutual funds, investments, real estate investments, and be knowledgeable before you pull that trigger.

You can also check out Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points 

Connect with Reed Goossens

• LinkedIn
• Website (business)
• Website (personal)
• Blog
• Twitter
• Facebook
• Pinterest
• YouTube
• Email
• Phone: +13235191111

Connect with Andrew Stotz

• astotz.com 
• LinkedIn
• Facebook 
• Instagram
• Twitter 
• YouTube
• My Worst Investment Ever Podcast 

Further reading mentioned

Reed Goossens (2018) Investing in the US: The Ultimate Guide to US Real Estate