"How Not to Manage Your Own Commercial Property"
Residential Real Estate Lawyer
Episode 29: "Bad Beats"
Listen to the Podcast Here:
On today’s Bad Beats episode of The Real Estate Nerds Podcast, Daniel Barli joins our host and real estate attorney Scott Smith. Just like Scott, Daniel is also a real estate attorney and investor. Though Daniel now boasts a diverse and lucrative portfolio of over 80 properties, he’s here to tell us about one of his early failures. His story is a lesson to investors who try to take on too much. In Daniel’s case, he is an extremely educated attorney and skilled investor, but learned the hard way that he isn’t the best property manager. Tune in to hear what happened and how you can avoid repeating his mistakes.
Daniel Barli’s Commercial Loss: A Cautionary Tale In Doing it All
Scott welcomes fellow real estate Daniel Barli onto the show. After briefly chatting about Daniel’s background, the pair dive right into the details of Daniel’s worst deal.
[1:00] Daniel is a practicing real estate attorney, just like our host Scott Smith. He entered the real estate game in 2013 with the goal of generating steady, passive income. He now boasts a portfolio of over 80 investments, but is here today to tell us about one of his worst.
[2:30] Daniel’s worst deals started with one of his earliest purchases–a commercial unit in New Jersey with four tenants. He decided to manage the property himself, which he now regards as a mistake.
[3:30] In hindsight, Daniel believes his property management failure was rooted in becoming too friendly with his tenants. He cites one particular tenant, a fellow attorney, who consistently fell behind on the rent. Daniel attempted to work with her, but she progressively fell further and further behind. He tolerated this behavior because he empathized with her personal situation.
[4:30] When the tenant fell four months behind, Daniel served her with a notice that she must pay half of her back-rent or face eviction. She failed to do so, putting Daniel in a bind: “New Jersey is very tenant friendly. It’s not easy to get a tenant out, even for nonpayment of rent.”
[5:04] The tenant, being an attorney, knew and exploited this despite having accrued over $14,000 in unpaid rent.
[6:04] Daniel showed up to retrieve the check and was met with a disappointment: “Of the $14,000 she owed me, she gave me a check for $100.”
[6:44] This incident became a lesson for Daniel, who no longer manages his own properties: “I thought I could save money managing property myself, but it ended up costing me quite a bit of money.” He was forced to evict the tenant–a process that took an additional 2 months because of New Jersey law. By the time she left, the tenant owed Daniel $19,000.
[7:15] Removing this tenant presented two problems. First, there was no good way to collect the tenant’s debt. Daniel would have had to take her to court, which would have been time-consuming, stressful, and likely fruitless. He also had to contend with having a vacancy in his building. Commercial property is more difficult to fill, in Daniel’s experience, than say multi-family or even single-family. He owns all of the above but has found commercial vacancies the most challenging to address.
Deal Post-Mortem: Lessons Learned From Daniel’s Property Management Loss
The two attorney-investors shift their focus from what happened with Daniel’s deal to why it cost him. Together, they conduct a brief post-mortem of Daniel’s property management failure.
[8:30] Daniel owned the building in a company name, but had become very familiar and friendly with the tenant who ended up costing him. He learned first and foremost he allowed this tenant to get away with too much because of their personal relationship: “Now when I use property management companies, it creates a buffer. People don’t need to know who Dan is.” He has resolved that “I won’t make the mistake of doing it all myself ever again.”
[10:30] The two investors observe that there was a personal, as well as a financial cost, to this mistake. Daniel faced property tax consequences, negative cash-flow, and a high degree of personal stress as well.
[11:30] Scott asks whether there were any indications that property management would be a challenge. Daniel replies that there were not. The previous owner had managed the property himself for almost two decades, during which he managed to secure multiple long-term tenants. These tenants did not stay through Daniel’s tenure as owner-manager.
[13:30] When asked what he does to prevent future situations like this bad beat, Daniel replies: “I try to do more homework and due diligence upfront, speaking with people who are more experienced than I and have gone through things that I haven’t.” In the years since 2013, Daniel has grown a substantial network of experts to call upon in times of uncertainty.
[14:33] Daniel offers some tips for growing a network: “Going to local meetings to meet investors in your area is one way. There are tools online for meeting real estate investors, and then you just build relationships…Most of these people are not only able to help, but they want to help. They don’t want you to make the same mistakes they did.”
[15:40] Scott and Daniel discuss some specific strategies for developing a high-value investing network. They address the age-old problem of weeding out the less helpful connections and finding those that will prove most helpful and useful.
[17:00] Scott points out that he often determines a connection’s true value when he has face-to-face time with them. Daniel agrees strongly: “When you have time to get deeper into conversation with someone, you find out they know much more than you thought. Conversations can open doors that you never even dreamed of.”
[17:54] Daniel cites a recent lunch that turned into a very valuable opportunity.
[19:30] Scott probes Daniel’s intentions when meeting other investors, and Daniel replies that he starts from a place of connecting and sharing information. If a deal develops out of that, fantastic. But he does not necessarily go in in with that expectation.
[21:00] Scott agrees with Daniel that some of the best relationships are unexpected: “When I’m connecting with an individual about more than just business, it forms those long-term relationships that are really impactful.”
The Takeaway: You Don’t Know Everything, But Your Network Might
Daniel and Scott conclude the show by sharing the major lessons learned from Daniel’s story. Each investor gives his opinion on the major takeaway for listeners.
[21:30] Scott sees Daniel’s story as one of the value of a strong network for preventing bad deals. In his view, if Daniel had some stronger relationships with higher-qualitty individuals, he may have been able to avoid this loss.
[22:18] For Daniel, the lesson of his story is simple: “Make sure you keep your education going. Don’t think you know it all. Don’t think you’re better than the stories you hear.” He recommends looking to your network for help so you’re not “kissing the same toads.”
[22:50] Daniel also believes a mentor is valuable: “If I could give one piece of advice it’s this: Find someone who’s been there and done that and doing it who can guide you.”
Connect with Daniel Barli
Connect with Daniel Barli directly by reaching out to him by email email@example.com. Daniel has learned his lesson and is always looking to connect with fellow investors. He’s also willing to give advice to newer investors and share free information.
Thank you for joining us on today’s episode of the Real Estate Nerds Podcast.
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About Daniel Barli
Daniel Barli is an attorney in New Jersey who currently runs his own practice. He has been a real estate investor for seven years, focusing primarily on buy-and-hold rentals. Daniel has successfully built a portfolio of 80+ units and and plans to growing, while also helping other investors achieve their own goals.
When making business decisions that affect your long-term goals, like what types of investments to make with your retirement dollars and which vehicles to use, it really is best to be aware of all of your options. We frequently talk about the Solo 401(k) and Self-Directed IRA as tools for funding your retirement. But what about life insurance? And what about the stock market? What if we told you there is a tool that allows to to reap some benefits of both? It’s called Indexed Universal Life Insurance–and some investors have found it a useful addition to their retirement plans.
What Is Indexed Universal Life Insurance?
Indexed Universal Life Insurance (IUL) plans are a variety of permanent life insurance plan that features a cash-building element. One primary benefit of these plans is that the policy holder gets some of the gains of being associated with the stock market without all of the risk Wall Street is famous for. This is in no small part because of how these policies are designed. IULs earn in part because they are directly linked to a market index, such as the Dow or the S&P 500. Any gains remain within the policy, albeit a cap rate will limit how much you can make. However, you are protected during a particularly bad year for your index with an IUL. The worst case scenario with these plans is that you make nothing, but you never actually lose money no matter how poorly your index performs. The protection of your principal is actually derived in part from the same cap rate that limits your gains.
How much money do policyholders stand to make? Historically, returns run between 5-9%. The S&P Index has actually returned at 9-11%, but the upside limit on UILs stems from the account’s cap rate. For this reason, many advisors argue that the UIL can make a wise addition to a retirement or estate plan once more traditional and self-directed accounts are maxed out.
Tax Benefits of Indexed Universal Life Insurance (IUL) Plans
There are three key tax benefits of IULs. First, you may pay into the policy with pre-tax or after-tax funds. Withdrawals from the policy may be made tax-free if you are under 59 1/2. Such withdrawals are regarded as loans, with your death benefit serving as collateral. Any funds paid out to the beneficiary are also tax-free, including normal benefits upon your passing. This is true regardless of their value.
Ask the Experts at Royal Legal Solutions About Your Retirement Planning Options
Regardless of where you are in the retirement planning process, Royal Legal Solutions an assist you. We have extensive experience educating investors about self-directed investment options. Many of our investor-clients love our Solo 401k information, product, and compliance services. Our Self-Directed IRA services can also be helpful for retirement planning, as the SDIRA is yet another vehicle that allows you to diversify and take total control of your investments. To determine which of the available retirement planning strategies are best for you, consult with one of our experts at Royal Legal Solutions. You may also contact us with any questions you may have about your options.