RIP, LP's.

I thought this week I could respond to a few different replies to my tweet last weekend. 

I am really making an attempt to be transparent and allow people an inside look at a young developer and what I am going through to pull off my project.

Let’s start with this response from Scott.

The first thing I want to point out is that I’m the largest investor. I currently own 50% of the deal, and that was done through the same pro rata as all the other investors. I don’t have any pref on the deal. The only contingency was that the project covered the cost of my group.

I have also given a personal interest free loan to two team members so that they could own a significant portion of the project as they have made the sacrifice of moving their families there to build the business. 

It should be clear that I have the most to lose if the project goes belly up. 

That being said, I am selling 20% this month to raise capital, which I will sideline in case it’s needed.

Now let’s talk LP’s. I hate when LP’s feel a lot of pressure on a deal. On my first deal as a GP, I had an investor who invested a larger portion of their nest egg. He was also newer to investing in local projects. He was so nice, but I could see the stress in his eyes every time we talked. After that experience, I am very careful of who I bring in as an LP. I made sure that every LP I brought in at the beginning wasn’t over-extending. 

Now that being said, I am very confident in the safety of the capital I have raised. There are a lot of hard lessons being learned in the capital raising game right now. My heart goes out to the people who are in the middle of that mess, so I don’t want what I’m saying to come across as I’m scornful to those people.

When investor capital is wiped out, or huge losses occur, I’ve really only seen it happen personally under 3 circumstances. 

1. Excessive Leverage

2. Massive market shifts

3. Fraud/stupidity

I’m going to break down my townhome deal to use an example of 1 and 2. 

I built my townhomes for 13 Million in 2021. I raised 4 million in equity and got a construction loan for the rest. When the property was finished, it was appraised for 21.5 million, and I had reputable brokers in the area who suggested I could get that in a sale.

I refinanced the 9 million construction loan but didn’t take out much in the refinance. That meant that everyone’s capital had to stay in the deal for the most part. 

Since 2021 I believe the value of my property has gone from 21.5 M to 17-18 M. My investors and myself ‘lost’ a total of 3-4 million on paper. This loss was caused by #2. It was a massive shift in bond prices. Demand for the units hasn’t changed much from the rental side over those years. My cash flow hasn’t changed at all. It’s just the price of borrowing money that has changed. Psychologically, it’s easier to take a drawback after a considerable gain, especially if the fundamentals of the project haven’t changed.

Now, let’s assume that I sold at the top to a buyer who only placed 30% down upon purchase and had variable-rate debt. That buyer is in a situation where their investors are down 80%+ and are at risk of losing the asset without raising more funds. That’s an example of #1 & #2.

I don’t have to worry about #1 yet in Costa Rica, as the project doesn’t have any debt. 

The market shifts (#2) are the reason I chose to go to Costa Rica in the first place. You can read more about those reasons in previous emails. I won’t cover that here. At this stage the value of my finished product in Costa Rica has gone up since purchasing the property. The growth of the end product has outpaced the inflation in expenses. 

Now let’s cover #3

I’ll start with a quote from my favorite movie. “Tell me the difference between stupid and illegal and I’ll have my wife’s brother arrested.”

We are seeing the lines blurred everywhere in investing right now between what is illegal or not. Just last week, we watched the president of Argentina literally facilitate a rug pull on a new crypto.

To my knowledge, I have done everything legally. I have also made some mistakes. As I mentioned last week, I have had to hire people twice and double do some work. I’ve had to hire and fire multiple people. It has been a mess, but it’s been a mess that has been deliberately thought through at each stage, which has led to more knowledge and contacts being gained.

I can confidently say that in our next project, we will be able to eliminate a lot of those mistakes. If I had to try to put a number on the money lost through mistakes that a seasoned Costa Rica developer wouldn’t make, I might put that number around $300K. 

Even with the loss of 300K I believe our profit will fall between 2.5-3.5M on the project if we decide just to sell the finished lots as opposed to building homes. While losing 10% of the total profit through mistakes isn’t fun, it was something that fell within the realms of possibility when this project began. 

The bottom line is we currently own a property in an excellent location with no debt that is nearly finished being subdivided.

Overall, I believe my LPs will be very satisfied by the end of the project. 

The following tweet is actually impressive. 

I want to take Chris out to lunch because he’s been willing to follow my project along. I’ve just addressed some of his concerns (which are valid), but I want to address two more of the problems he mentions.

1. Capitalization

2. ICF

He is correct that I am not that well capitalized. I feel okay with my current balance, but I am stretching myself. I often get poked at for being a second generation real estate guy, which is true, but my Dad is not a real estate mogul by any means. He is not an 8-9 figure net worth guy who can write big checks and bail me out of any problems I run into. I also don’t have a close relationship with anyone who has that kind of liquidity. 

I do have a network my father created, which I can use to drum up some liquidity that would be sufficient for this deal if I needed to. Finishing my lots with amenities is only 3.5 million dollars beyond what we’ve raised. 

I will likely scrape together some funds by paying hard money rates, which isn’t ideal, but is the nature of doing deals in a country where credit isn’t readily available. Ironically, that is one of the very reasons I decided to begin doing projects in Costa Rica in the first place.

2. ICF

We have actually decided not to do ICF on this project, but we do have plans in the work to eventually be using ICF in the future.  

In 2024 I had some important personal epiphanies. I have 4 kids under 8 (7,6,3,1). The most important job I have in this life is raising those kids. Anyone who has been following me for over a year knows that I had much bigger plans than this project and that ICF was a part of that. In order to accomplish those plans, I was going to need to put in some serious hours and sacrifice.

 The first 9 years of my marriage, I had to work really long hours to move my life forward and get ahead financially. As a kid in my 20s, I had to gain experience in every field I entered and earn every ounce of trust I could because I was new and didn’t have any money. Every dollar I made had a big impact on my family's life.

Money has a diminishing return, though. I have realized that racing to get extra money stopped making sense as my capabilities grew. Instead, I needed to use some of that new experience and money to gain back time and attention that could be redirected to my family.

In exchange, I’ve shrunk the scope of what I’m doing until the team around me (who are all very young) grow in their own capacity. 

As a group, we believe that the affordability crisis will not be solved without changing the way we approach building houses and we want to play our part in helping solve that. We currently believe that focusing on learning to develop as well as pursuing ICF construction is currently the best route to do that but we are going to do it at a pace that’s sustainable for all of our families. 

While Chris paints a bleak picture, I believe we will rise up as a group and accomplish a great and profitable project. I have a team of very capable young men who are laser focused on this goal! I wouldn’t bet against them.