Navigating the Dark Side of Passive Investing: A Cautionary Tale
Investing passively can be a lucrative venture, but as with any financial endeavor, it carries its own set of risks. In this cautionary tale, we explore a timeline of events in a real estate investment gone awry, shedding light on the dark side of passive investing.
Timeline of Events
A sum of $43,000 in a Self-Directed Roth IRA (SDROTH IRA) prompts the search for investment opportunities. A deal offering a 9% return and a 50/50 profit split is presented through a referral from a Self-Directed IRA company.
Rumors circulate about the investment being orchestrated by a potential scam artist, but by this time, the funds are already committed. The investment involves another market in Mississippi (MS).
News surfaces that the MS portfolio has plunged underwater, with unpaid taxes adding to the financial woes.
Investors receive a letter indicating the impending collapse of the investment. Options are presented, including a Deed in Lieu, but complications arise due to a lease-purchase agreement.
The property, situated in the SDIRA, faces cosmetic damages and tenant-related issues. External funds cannot be injected to address the problems without jeopardizing the tax-sheltered status.
The city registers complaints about the property's neglected appearance. Lost Western Union checks, made out to the investor's personal name, further complicate matters.
The property is listed for $25,000, with a broker fee of $4,000. The average days-on-market for a retail-ready property in the area is 180 days.
The property eventually sells, yielding a mere $7,000 after sales commissions.
Key Takeaways and Lessons Learned
Due Diligence Matters: The investor trusted a referral without conducting thorough due diligence on the investment opportunity or the individuals involved. Investing with unknown entities carries inherent risks.
Beware of Daisy Chains: Deals passed through multiple layers of intermediaries, where individuals may not know each other well, pose a heightened risk. One should strive to invest with individuals they know, like, trust, or have a connection within one degree of separation.
Caution with SDIRAs: While SDIRAs offer tax benefits, restrictions on injecting external funds limit the ability to address issues promptly. This can result in prolonged challenges in managing the property.
Continuous Monitoring is Essential: Passive investing doesn’t mean a hands-off approach. Regularly monitoring investments, even those deemed passive, is crucial to identify and address issues promptly.
Learning from Mistakes: Failure can be a valuable teacher. Admitting mistakes, learning from them, and applying those lessons to future investments is integral to growth as an investor.
This cautionary tale serves as a reminder that even passive investments require vigilance, research, and a discerning approach. The dark side of passive investing lurks in the shadows of uninformed decisions, emphasizing the importance of due diligence and strategic decision-making in the world of finance.
About the author
Lane Kawaoka, PE, is the founder of The Wealth Elevator and the author of two Amazon bestselling books, The Wealth Elevator and Simple Passive Cashflow. He spent 12 years as an engineer, bought his first rental in 2009, and left his job in 2019. He built his base in real estate and today is a general partner, operator and fund manager working with a community of accredited investors across real estate, oil and gas, and private companies. His track record: $2.1B of real estate acquired, 10,000+ units acquired, 65+ projects, and $230M from investors like you.
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