9 Expensive Commercial Real Estate Lessons Learned in the Real Estate School of Hard Knocks

9 Expensive Commercial Real Estate Mistakes (so you can avoid them)

(Recent Article I wrote and republished here)

 

As a kid, my parents told me that the key to success and wealth was to get good grades, get a good job, work hard, and save your money – that’s it.          

 

Although this type of conventional wisdom appears sound on the surface, it directly conflicted with my personal experience. When I observed the wealthiest individuals in my small town of Whitecourt, Alberta, I realized that many of them did the exact opposite of what I was told. 

 

Most of them didn’t work that hard. The wealthiest people in our town were always on vacation. 

Oddly enough, many of them were not even that ‘smart’. Several of the wealthiest individuals in our town did not even have a high school diploma. 

 

There was a fundamental disconnect.

 

Why had a few guys in our town created financial abundance, while my mom and dad had to work a combined 16 hours a day to survive?

 

Growing up, I did not have any wealthy mentors. I followed my parents' strategy for making money – i.e. work as many hours as possible and keep getting higher-paying jobs.

 

The concept of making money while you sleep sounded like a fantasy to me until my mom gave me a copy of Rich Dad Poor Dad by Robert Kiyosaki.

 

Upon reading Rich Dad, Poor Dad, I realized what separated the wealthy from the middle class was not their education, occupation, or even work ethic. 

The real differentiator between the wealthy and the middle class was how they invested their money.  

 

The wealthiest figured out how to invest their money safely and followed a simple 3-step formula:

 

1. Make Money
2. Save Money 
3. Multiply Your Money. 

 

Instead of trading time for money, the wealthy figured out how to make money while they sleep.

Rather than relying on one stream of income via a job, the wealthy built multiple income streams. Instead of playing addition and subtraction, the wealthy figured out how to multiply their money. 

 

There was no shortage of people willing to ‘help’ me with step 3 – i.e. take my money and reciprocate by ‘teaching’ me how to invest. 

 

The marketplace was full of gurus who were pitching all sorts of investment such as:

• Single-Family Rentals
• Fix and Flips 
• Wholesaling 
• Forex Trading 
• Cryptocurrency 

The options were endless. 

 

Although I was committed to becoming wealthy, I did stumble on several occasions and learned several expensive lessons along the way. This short article will explore nine things I learned throughout my career as a real estate investor. 

 

Below is a video I recorded on Guy Speir and his investing philosophy.

 

 

Lesson #1: Do not invest in anything you did not understand, control, or influence

 

I learned my first lesson while building logging roads in Whitecourt, AB. One summer, I was presented with the opportunity to invest with my boss in my first real business opportunity. 

 

I didn’t really understand the investment at all but I trusted my boss since he was a rich man by all measures.

 

Without asking any further questions, I handed over all the money that I had earned over the summer – $13,500 to be exact.  

 

To make things even worse, my parents followed me into the deal. They had just paid off their home, achieving their dream of being debt-free before the age of 50.

 

Upon hearing about the deal, they remortgaged their home to invest $100,000 into the deal.

 

Everything that I had saved that summer was lost. 

 

It took me 1,200 hours to earn that money and less than an hour to lose it all.

 

Tt took my parents ten years to pay for one fatal investment decision – each passing monthly payment serving as a cold reminder of their colossal mistake.

 

Lesson #2 – Do not invest without conducting proper due diligence

 

Losing it all on your first investment is an experience that never leaves you.

In my case, I saw how money (or lack thereof) impacted my parents’ marriage. It was my dad’s idea to invest despite my mom’s warning. To my mom’s credit, she never brought up the incident afterwards, but there was considerable friction about the loss for quite some time.

Looking back on the loss, it was not my parents' fault. They did not have any investing criteria or principles to base their investment decisions.

My parents were hard-working teachers. My dad was a principal while my mom taught
elementary school for 35 years. 

How could they be expected to know if an investment was safe or risky?

 

They did not know what kinds of questions to ask before investing in a deal. Nor did they know what to look for in an investment opportunity. Similarly, they did not know how to differentiate between a good deal from a bad deal.

 

Even a few simple questions like: 

• How much money is going into this deal?
• What is the money going towards?
• Are you raising additional money down the road?
• How much money will I get back?
• When will I get my money back?

These are simple questions, but you’d be amazed how few people ask these questions when investing. 

 

Although we didn’t know what to ask back then, I learned the importance of due diligence the hard way and learned precisely what questions to ask before deciding to invest in an opportunity. 

 

Lesson #3 – Do not invest on emotion 

 

The unfortunate reality is that my parents and I followed the herd and got caught up in the moment.

 

We saw a group of wealthy businessmen in our town invest in an opportunity and thought this could be our chance to get ahead. 

 

We did not want to miss out.

 

Without any due diligence or prior research, we blindly trusted my boss and then lost it all.

 

After that event, I vowed I would not let that happen to anyone around me again and spent several years learning how to evaluate and manage risk. More importantly, I learned how to manage my emotions when investing. 

 

As an investor, there is nothing worse than getting greedy and experiencing FOMO – i.e. the fear of missing out. 

 

Lesson #4 – Do not let the fear of failure paralyze your ambitions. 

 

When I graduated from the University of Calgary in 2003, I was still haunted by the failures of my first investment. As a student, I worked 3-4 jobs while taking a full course load and saved every dollar I could. 

 

It all went straight into my safety deposit box. My first investment loss left such a sour taste in my mouth that I was skeptical of anybody holding my money – including banks. 

 

I thought I was getting ahead by keeping my costs low and living in my best friends' basement.

Right before Christmas in 2004, I was dating my dream girl. She was five years older than me, had a great paying job, and owned her own condo.

She was over at my place visiting, and while walking past my two roommates, who were playing video games and drinking wine in the middle of the day, she just stopped. She looked at me and said, "I have to go". At the time, I didn’t think much of it.

 

The next day, I call her, and she tells me she cannot date a guy that still lives in his friends’ basement suite and that she was embarrassed to tell her successful friends about me.

I was devastated. 

 

I thought I was doing the right thing – working hard and saving money. But I was fooling myself. Cash in a safety deposit box is a worthless stack of paper.

The truth is that I was afraid. 

By choosing to be fearful and save my money, I was investing in a long-term asset that pays virtually nothing and is guaranteed to depreciate in value. 

 

Lesson #5 – Do not forget Warren Buffet’s First Rule of Investing 

 

As I started to familiarize myself with investing, I read about Charlie Munger and Warren Buffett.

 

Most notably, I became acquainted with Warren Buffett’s first rule of investing – ‘Don’t Lose Money’.

 

In order to minimize the probability of losing money in an investment, you need to have a set criterion for investing. Having a defined set of investment criteria allows you to narrow down your options quickly and focus on a few spots you know very well. 

 

After reflecting on my first investment loss, I made the decision to focus on investing in assets that I could understand and control. I decided to focus on assets that were tangible and indestructible. 

 

What this really meant was that I was going to invest in real estate. 

 

I had eliminated all other options, such as stocks and bonds since I had no influence or control over them. Furthermore, I did not understand how to create value through these investments. 

 

This is the exact approach that many successful investors, including Buffet and Munger, utilize when making investment decisions. 

 

Buffett does not strictly invest in the stock market like any ordinary participant. He acquires sizable interests in public traded companies, intending to influence the firm’s decisions and direction.

 

Although I am nowhere near that level, I do have the power to influence the value of a property I acquire. 

 

Over the past two decades, not losing money has served as the bedrock of my investing thesis as a value-add real estate investor. 

 

While I would like to say that I have never lost money again (I have) – I have not made the same mistake twice, and the losses have been minimal each time. But more importantly, this approach has enabled me to succeed in real estate and make millions for myself and my investors.

 

Lesson #6 – Do not rush into a deal without doing your homework. 

 

Three months after that embarrassing incident, I took my savings and bought my first townhome. I rented it to a roommate of mine and immediately thought to myself “Wow, this is great. I have an asset, and someone is paying for half of it.” 

Four months later, I bought my first fixer-upper. My first investment property was a 1948 1 ½ story wartime home that I had acquired for $180k. The property did not have central heating, so you had to use the stove and firewood to keep it warm in winter.

 

I had no idea what I was doing. My agent, who also happened to be my friend, also had no idea what he was doing. 

 

It was the proverbial case of the blind leading the blind.

 

For eight weeks, I would go to the house every evening after work and work on the renovations, including painting, cutting baseboards, and replacing the appliances and flooring. Despite my efforts, the house remained a complete disaster, and I was running out of cash.

 

I needed to get out of this deal.

 

The fear came back to me, and I thought I was about to lose all the money I had invested in this property.

 

My saving grace was that I had previously studied direct response marketing and was able to market the home better than most of the agents in the neighbourhood. 

 

I took out an ad in the local newspaper, which said the following: 

 

“Investor Wanted: Fixer Upper in Great Neighborhood. No Realtor Fees – Call Shane Directly.” 

 

I had 12 showings the next Saturday and ended up selling the property to a fellow investor for a tidy $22,000 profit. 

I had no clue what I was doing, but there was one thing that I did get right. 

 

I bought it in the right location.

But I could have very easily lost it all since I rushed into this deal without doing any homework.  

Although I did not know what I was doing, I still made $22,000 in 8 weeks, and I knew right then and there that there was something special about investing in real estate.

 

Lesson #7 – Don’t be afraid to think big  

 

This early success prompted me to hire a coach to help me learn the fix and flip business. Over the next four years, I bought and sold several fixer-upper properties. There were times where I was working on 7-8 properties at once. 

 

When I ran out of my own money, I relied on my friends to help me with down payments and obtaining mortgages.

I was making decent money, but I was working 16-18 hours a day. 

I was still trading time for money. 

There was no way I could retire renting out single-family homes to earn $100- $200/month in passive income.

Throughout this stressful period, I asked myself the following questions 

• How do I take my investing to the next level?
• How do I invest like the big boys in commercial real estate?
• How do I raise enough money to invest in multi-million-dollar properties?

In 2007, after a golf tournament at a local pub, I met a girl named Kelly, and we hit it off immediately.

Kelly is an interior designer who would later help me design, fix, and flip some of my properties.

Her father, Andy, was a commercial real estate developer. His family owned a publicly traded development company that has been in business for over 92 years.

As Andy got to know me and saw how hard I was working, he invited me on a trip with him to Palm Springs, CA to look at a few investment opportunities. 

On the plane ride down, we talked about what I was doing. Looking back, that flight changed the trajectory of my investing career. 

 

Andy had experience buying and selling billions of dollars in commercial real estate and was now willing to show me how to do the same.

I quit my then day job as a commercial lender and started working with him on a full-time basis. I was paid only on deals that we closed. Some of these deals took months to find and secure. 

 

But when we did find the right property, it would easily be worth over seven figures. 

Purchasing commercial properties was an entirely new world of investing that I did not even know existed.

I helped Andy's company buy 742 Class-A apartment units in Houston and Dallas between 2009 – 2011. They were able to subsequently increase rents upon acquisition and more than triple their money over a span of 5 years.

 

Andy and I also started investing together. We raised USD 2,000,000 to buy five homes in Palm Springs, CA.

 

We then raised another $2M to buy a portfolio of 1st mortgages on properties across Eastern Canada. Because we acquired the mortgages at 60% of face value, our investors earned over 22% annualized returns for 6 years.

 

• For example, if a property was encumbered by a $1,000,000 first mortgage – we bought the mortgage for $600,000.
• If the mortgage was paying 12% per year on $1,000,000 – i.e. $120,000/year – we earned $120,000 per year on $600,000 investment, which is a 20% return. 

As I started to see how large deals got put together, I witnessed firsthand how to make millions of dollars in a relatively short period.

 

These kinds of profits easily outclassed whatever income I was receiving from fixing and flipping single-family residences. Not only was the fix and flip model time-consuming, but it was also labor-intensive and non-scalable. 

 

Playing in the big leagues had its own set of advantages. 

 

With the right deals and investor network in place, the profits that could be made in commercial real estate are limitless. 

Lesson #8 – Real Estate is a Team Sport 

One of the biggest deals I was involved in was the development of two resort communities totaling 1153 acres in Muskoka, ON, Canada. 

 

Bonnie Lake Resort was a 1,100-acre site surrounding a private, 200-acre lake, and Shamrock Bay Resort, a 53-acre resort located along the Trent Severn waterway in the desirable Muskoka region. 

 

The area was a destination for well-off folks from Toronto, ON. 

 

In the Muskoka region, an average home on the water would be worth well over $1M+. 

 

Andy and I partnered up with two others to take on this ambitious project.

 

The purchase price for both resorts was $8.5M.

Andy and I raised $6,500,000 in cash from our investors and negotiated with the seller of Bonnie Lake to carry a $2.6M vendor take-back mortgage. 

 

The negotiation itself, which will be the subject of a future article, was a true work of art.  

 

Our game plan was to redevelop the sites, fix up the resorts, raise rents, increase the number of sites on which cottages could be built, and then subsequently sell these cottages off. We expected to double to triple the value of the properties over five years.

 

The resorts were land lease communities. In a land lease community, residents rent the land on which their homes are situated. 

 

For this property, we had three primary drivers of income. Our first source of income came from selling the cottages themselves. Our second source of income was from the lot rent paid by the owners of the cottages. Our third source of income came from the on-site marina, where residents paid anywhere between $500-$900 per season to dock their boats.

 

On the surface, this sounded like a great deal. 

 

But, we needed the right team to execute.

We needed a team that was competent and could follow-through with our business plan, which required expertise in the following areas: 

• Cottage sales 
• Marketing 
• Operations 
• Development 
• Leasing 
• Property management
• Setting up the cottages

We grossly underestimated the team we needed to execute our business plan. In our first year of operations, we had a husband/wife team managing both resorts. Working 18-hour days, they were burned out to the point they almost did not want to come back.

 

In our 2nd year, we were behind on sales, and some of the cottage owners were leaving. The cottage owners complained that we had neglected them. 

 

Cashflow was dropping, and we were behind on our investor distributions.

 

Over the next two years, we went back to our investors TWICE to raise additional money from them.

 

For this reason, I do not recommend pitching development projects to new investors. Developments are risky, take twice as long as you think, and may cost twice as much to develop.

During this challenging time, one of my fellow operating partners left in the second year of the project to work with a competitor. Like me, he was not making any money and realized it would be years before we, as General Partners, would make any significant money.

 

I was now directly responsible for the success or failure of this project.

 

Although sales eventually started to gain significant traction, the pace at which we had to keep reinvesting into the development was sucking up our cash.

 

Throughout this project, I learned a tremendous amount about the importance of cash flow management and, most importantly, working with the right people.

 

Lesson #9: Reputation > Everything  

 

In commercial real estate – things don't always go as planned. You need to know who is going to stick with you when things go sideways. You must be with the right guys/gals that will see a deal through to the end – even if it means you do not make a lot of money.

 

Why?

 

Because you develop a reputation. I wanted to build a reputation as someone who puts investors’ needs before his own and as somebody that does not quit. I wanted to be known as somebody who will make things right. 

 

I wanted to be known as somebody who was committed to building long term relationships. It was my willingness to do whatever it takes that made investors feel comfortable with me being a steward of their capital. 

 

Fortunately, we ended up selling both resorts for $17,000,000 – double the price we paid for it – and were able to deliver the returns we promised to our investors. 

 

During that time, I developed the skills to manage a team, overcome adversity, and treat investing in commercial real estate as a business. Most importantly, I built a reputation as somebody who gets things done regardless of the circumstances. 

 

More often than not, accredited investors will bet on the jockey (you) – not the horse (the deal).  

 

If you are the right person running the deal and you can demonstrate perseverance and good character, then you too can build a loyal following of investors that are clamoring for your next deal.

 

The reputation I built throughout this challenging project has allowed me to raise several millions of dollars from accredited investors on several occasions.  

Takeaways for Investors

• Avoid investments that you do not understand, influence, or control. 
• Do not invest without conducting proper due diligence. 
• Do not invest based on emotion – especially greed or FOMO. 
• Do not forget Warren Buffet’s First Rule – ‘Don’t Lose Money’. 
• Have defined investment criterion that allows you to narrow down your options quickly. 
• Do not let the fear of failure paralyze you. 
• Do not get into a deal without doing your homework first.   
• Do not be afraid of thinking big. 
• Real estate is a team sport. 
• Reputation is everything. 

 

Next Steps: 

From flipping homes and raising $40-50k from my best friend to raising $2,000,000- $9,500,000+ per commercial deal and earning $100k-$200k upfront (my acquisition fee) plus 35% of the profits, I learned the commercial real estate syndication game through the school of hard knocks.

 

Over the years, I have been invited to many lunches and coffees to help other real estate investors scale their businesses, structure deals, raise money, and evaluate opportunities that they are finding. My 12+ years of experience in raising capital and commercial real estate investing has saved some of my clients from fatal deals.

 

It is such a loaded topic, that even a few hours of coaching was not enough to truly help them.

So, I started sending them long emails and documents with principles on how I invest in commercial real estate.

 

Eventually, those emails and documents were organized into a series of articles and videos, which formed the basis of the Commercial Real Estate Syndication Mastery Program – a six-month-long program designed for active real estate investors interested in investing in commercial properties. 

 

By participating in this program, I can help you design your commercial real estate investing blueprint by showing you the exact systems and processes I use for my investments.  

 

On the other hand, if you are a highly paid professional looking to learn more about commercial real estate, then check out my article “Why Many Highly Paid Professionals Have No Idea How to Retire” and go ahead and download my free e-book “Club Syndication” – which you can find here. 

As an experienced and established real estate investor, Shane Melanson wants to help new investors succeed by getting on the right track and avoid these common mistakes.  He’s released a new book titled, Club Syndication, How the Wealthy Raise Capital, and Invest in Commercial Real Estate.

 

In the book, he provides his personal action plan that consists of the five steps investors can follow before putting money into commercial properties.  Such as finding the right properties in the right location at the right time in the market, where to find investors to raise capital, how to secure the right debt and how to build a team around you to help execute your deal and more.

 

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Shane has invested in commercial real estate since 2008 and personally completed multiple 8 figure deals.  He’s currently a developer in Calgary AB, with multiple retail, industrial and multifamily/townhouse projects underway.

 

One of his favorite deals, was acquiring an 1,152-acre resort property just north of Toronto for $8.5M and turning it around and selling three and half years later for $17,000,000.  It was not a smooth deal and things didn’t always go as planned.  It worked out in the end, and it was this experience that gave him a real-world MBA in investing.