How COVID-19 blew everything up and attempting to wind down with grace
COVID-19 changed everyone’s world, for better and for worse. As much as I’ve usually met obstacles in life with an attitude of hustling harder and hacking deeper, there are limits to this approach. In 2020, the limits of this approach would lead to the unraveling of the business that I had spent the previous five years building.
Entering 2020, I was at the top of my game. For every dollar invested in my company, I could turn it into two dollars within a year and a half. I had successfully scaled to over $1M in revenue in the last year and had a tried-and-true process of creating value. My operating thesis was to buy dilapidated buildings with a tremendous amount of potential, renovate them with an eye towards increasing occupancy in a quick time frame, and refinance the property into a long-term debt strategy after a couple years operating the properties.
After purchasing my first property in cash and operating it profitably for six months, I started my research process for a second property. Once I had a property in mind, I again started setting up meetings with the banks in town to see if I could qualify for financing. Even though I had experience (which was why I was rejected the first time) and my cashflow and rent rolls looked good, they now had two other reasons for saying I wasn’t qualified for a loan. Chiefly that I didn’t have a full year’s tax returns on the real estate business and that I didn’t have a stable source of income from consulting. It didn’t matter that I bought the first building in cash and could provide a 40% down payment on the next building I wanted to invest in. I simply wasn’t the type of investment they were looking for.
Instead I used a private debt method called “contract for deed” to purchase the property. What this means is that the person selling the building acts as the lender and I, as the buyer, make payments to the seller on a monthly basis based on an amortization schedule. This isn’t inherently a bad idea but for a newbie in real estate it can be terrible because the downside of purchasing property this way is 1) there’s a contract that you need a lawyer or someone with professional real estate experience to prevent “gotcha” clauses and 2) if you miss a payment there’s typically a clause that says the contract becomes immediately null and void and that any payments made (including down payment) are surrendered to the seller and you, as the buyer, no longer have a claim to the property. The people who offer a contract for deed generally do so at a higher interest rate than the bank and ask for a higher down payment. Knowing the risks, I used this method to obtain my second property.
And things went according to plan. I increased occupancy, rent, and overall was able to manage the business profitably. I continued this method for the third and fourth properties I purchased. After a couple years of managing these properties, I was able to convince the banks to refinance these now stable assets into long term mortgages. Based on my success, my financing strategy became to use private, unsecured debt to acquire under-invested, under-developed properties. Then I would turn them into cash flow positive properties over a period of one to two years with my sweat equity and operational expertise. From there, I would refinance into a stable bank mortgage. This process worked well until March 2020.
When COVID-19 hit in the US, roughly half of my tenants who were commercial were unable to pay rent because they couldn’t keep their doors open. Similarly, many of my residential tenants struggled to pay rent because they worked for restaurants and other businesses where they were laid off without further notice. Almost overnight, the bulk of my revenues from rents disappeared.
Everyone was applying for PPP, unemployment, and federal aid. Weeks, then months, went by where money was nowhere to be found. My PPP application was unfiled because my bank ran out of money helping other businesses. I qualified for over $100K in federal grants and received $4K. I was also in the process of refinancing the largest section of my real estate portfolio right before the pandemic and those conversations stalled when COVID-19 hit. In the middle of this once in a lifetime event, I felt stuck and that there were roadblocks every way I turned. There was also a feeling of fear on both sides of the conversation, with no one knowing what would happen in this new pandemic reality.
This fear transferred to tenants too. One of my tenants, the local federal courthouse, had an issue where their AC went out for ~24 hours. My HVAC contractor responded that same day and did his best to get everything up and running again, but the building didn’t fully cool down until the next day. In his frustration, the presiding judge personally ordered me to appear before him to explain what happened and threatened to hold me in contempt of court. As I was unable to make the court date due to being out of state, the judge issued a warrant for my arrest and another article landed on the front page of the local newspaper.
To be clear, it is highly unusual for a judge to personally hold a landlord responsible for any issue with a property. Typically the GSA, which represents the federal government as the tenant, handles these types of issues. The consequence being proportional in that a fraction of rent is withheld or rent is used to remediate the issue instead of being paid to the landlord. While the warrant was soon rescinded, this event coincided with some of my lenders deciding to proceed with foreclosure across my whole business. It was at this point that I knew I would have to apply for bankruptcy.
Bankruptcy proceedings took place over the second half of 2020. This undertaking involved working closely with the lawyers, bankers, and individuals who would be losing money through this wind down process. While this was going on, I began to fall into a deep depression. I was despondent at calling it quits and being unable to find a way to fix the situation while keeping everything I had built intact. Aside from doing the bare minimum to keep the bankruptcy proceedings moving forward, I began to isolate myself from almost everyone I was close to out of personal shame and fear of further judgment. I couldn’t stop thinking through all the ways that I believed I had failed. I had failed to keep the business going, I had failed to communicate proactively and most importantly, I had failed to recognize the vulnerability at the core of my business due to the aggressiveness of my growth strategy.
By January 2021, the bankruptcy was complete. For the first time since COVID-19 hit, I had the space to reflect on all that had happened without the daily demands of the business and I was finally able to start the process of healing. At first, I did almost nothing. I spent days in bed hiding from the world. Eventually as I felt less exhausted, I started writing about what I had done well and how I had grown from my first business to my second business. I began to really consider what could be next; another business, going back to school, or getting a job. I chose to reconnect with family and friends in spite of my fear of sharing what happened. I even reconnected with old hobbies like math and physics for the joy of it. Most importantly though, I started to feel happy again.
I came to realize that through the depths of the 2020, I had lost touch with my enthusiasm for life. Everything had felt so hopeless at the time and all I had wanted to do was to crawl into a hole and be forgotten. As the distance from the bankruptcy grew, I realized how hard I had been on myself and how I was not providing myself with the grace to fail so that I could move on and grow. Going deeper, I began to understand that my fear of poverty and scarcity came from within and that external success or wealth wasn’t going to fix this childhood pain. Sitting with myself, meditating and contemplating this poverty mentality, I realized that my biggest source of poverty was a poverty of self-love. I wasn’t willing to give myself love unless I worked hard, succeeded, and created value for others. I was withholding love for myself whenever I felt like I would fail, and this fear of not being worthy of love was what would motivate me throughout so many of my life endeavors. It also explained why in failure I felt such deep shame and unworthiness of love. I was treating myself the way I felt others would treat me, alienating and isolating myself in the process.
With this newfound clarity, the path forward became clear to me. Regardless of what happened next, I needed to practice self love. To me, practicing self love means that even when things get hard, I can approach the challenge with compassion for myself and others instead of fear and resentment. When I do experience failure, instead of shutting down, I can create space for grace and humility. To me this takeaway charts a whole new path for how I can build a life filled with love regardless of how exactly it unfolds.
