The Biggest Real Estate Investing Risk Most Beginners Underestimate

Jonathan Spitz (00:00)
Yeah, I mean, I think to the extent you can think about multiple exit strategies, make sure you’re underwriting. You any time I’m underwriting, I look at what is a, I underwrite three scenarios, right? We do this at Lightstone too. What is our base case? What is our optimistic case? What is our pessimistic case? Can you live with the pessimistic case? And so I think that is, I think it’s really, you also don’t want to cheat your numbers. I think it’s really,

So sometimes too when you get into underwriting, you’ll underwrite it a certain way. Okay, I can build this for 160 bucks a foot. And then you’ll get your quotes back and it’s 180 a foot. And then you’ll start moving around other numbers to make your math work. And it just can’t go down that road.

Cody Crabb (02:11)
Hello and welcome back to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel. Today we’re talking to Jonathan Spitz with Lightstone Direct, leading capital formation for a $12 billion Real Estate platform focused on multifamily and commercial investments. I’m very excited to get your perspective here, Jonathan. Thanks so much for joining us.

Jonathan Spitz (02:30)
Yeah, thanks for having me, Cody. Appreciate you having me on.

Cody Crabb (02:32)
Yeah, so before we dive in too far, I’d love to know kind of a little bit about your background, how you got involved in this industry and kind of what brought you to this point today.

Jonathan Spitz (02:43)
Yeah. My journey really started. so I graduated from the University of Central Florida in 2011 and at the time I was living in Tampa, Florida. And, you know, I honestly didn’t know a ton about Real Estate and I joined a firm called Marcus and Millichap.

and it’s a commercial real estate brokerage and investment sales firm. They’re one of the larger firms out there for those that aren’t familiar. it was honestly, so I came on really as what’s called a sales intern through their sales internship program.

And it was honestly, it was a great learning experience. And it’s funny when I talk to people that are asking me today that want to get into the business, like I say, mean, not just Markets and Milchap, but in general, like investment sales is such a great way to learn the business. Just being around.

senior brokers and just seeing a lot of different types of deals and underwriting them. you know, that was so it was foundational for me. And I worked in there.

Triple Net. So basically retail property group for you know it wasn’t very long I was there for less than a year. And then I moved to Chicago joined a firm called Invitation Homes. I was an analyst for them for those of you that don’t know who they are they’re large. Now they are large publicly traded single family home REIT. But at the time they were they were just a subsidiary of Blackstone. I then got into banking where I did commercial real estate lending. So and I guess the point I’m trying to make here is that I sat at a lot of different

parts of the spectrum. Right. So I was on and I’ve worked in brokerage. I’ve worked in as an analyst on the principal side briefly. I worked as a lender on the banks on the lending side. And then, you know, more recently, what I’ve spent the last six years of my life doing is working on the capital raising side in the real estate private equity space. So, you know, I currently I head up capital formations for

⁓ Lightstone Direct. So we work with high-net-worth individuals, registered investment advisors, family offices that are looking at private real estate allocations for their own portfolio. And so, you know, we work with investors that, you know, primarily looking for individual deals.

Cody Crabb (04:41)
Okay, cool. ⁓ I always like talking to people with a kind of multifaceted background, because what you tend to get is like a kind of unique perspective, sometimes ones that you don’t really expect. So how do you feel like your experience has helped you kind of navigate the industry in general?

Jonathan Spitz (05:45)
Yeah, it’s a good question because, being able, what I do mostly is I am educating investors.

about our investment opportunities. And part of that process is being able to articulate what the value propositions are, what the risks and potential downsides are, being able to talk about the macro to a certain extent, being able to talk capital markets. So everything I just mentioned, I gained that experience in my professional career. Being a lender taught me how to underwrite risk. Being in investment sales taught me how to sell. It taught me what

what different lease structures were. In my previous firm at Origin, I was doing what I do now at another firm as well. I learned the risks, all of the potential risk, basically just learned the capital stack to a different level of detail. to your point, all of that informs what I do, and I think it’s what makes me good at what I do today.

Cody Crabb (06:44)
So when you’re kind of explaining risk to people who are potentially wanting to invest, what risks do people kind of tend to underestimate or maybe not take as seriously that they really should that you see kind of popping up?

Jonathan Spitz (06:58)
Yeah, I think the biggest one is leverage debt. Like, I think that is by far the biggest risk that people do not underwrite enough, both from as an owner operator and as a… ⁓

as an investor. So people that are looking at deals, because oftentimes in my shoes, I’ll have investors send me deals that they’re looking at. Hey, what do you think about this? Right. And they’ll be like, great, it’s showing a 22 20 % internal rate of return and you’re showing a 15 % internal rate of return.

This is a much better deal. When you peel back the onion and you look at an offering on Mirandum, you see they’re levered at 85 % longer cost, and it’s ground up development. I think leverage has this ability to magnify returns in both directions, both to the upside and the downside. And the problem with too much debt is if.

one if there’s one little issue that happens in your business plan or a big issue like it can it can sink you you know and so I think failing to realize or failing failing to properly account for the risks of too much debt is the number one biggest risk I see and the other one I would say more broadly is the risks in ground up construction and development especially you know I know a lot of the listeners are newer to

a newer to the business. And I would say, know, especially if you’re out and you’re flipping a house or you are building a spec home, I think some, I think in general, and we see this actually on the institutional side as well, in general, investment capital is very, is much more, they want the big new shiny thing, the new development, the brand new $2 million house that you’re building, right?

But

like, you know, construction and development can sometimes be death by a thousand cuts if you don’t know what you’re doing. And so but I think it’s easy for people to not properly underwrite, you know, what are the entitlement risks that can happen? Cost overruns. We saw a lot of people getting in trouble in twenty twenty one for not properly underwriting costs. So there’s so many interest rate risk is another one. So a lot of things can go wrong in a in a in the more

speculation that’s involved in the project. I just think that some people fail to properly account for those.

Cody Crabb (09:10)
And in what ways, like what can people do to kind of prepare for that? Like I said, we’re kind of dealing with some of our listeners are on the newish side. I’d be curious to know what you would tell them before kind of diving in.

Jonathan Spitz (09:22)
Yeah, it’s you know, I I think I think if you’re entering this business, you want to try to eliminate as much uncertainty as you can. So how do you do that? If you’re entering your first deal and it’s a let’s say it’s a flip as an example. So you don’t have a GC lined up like maybe you’re trying to figure out a GC or that side of it like.

I think I think it’s I think it’s hard to not just swing for the fences right. Number one I would start in a city in town that you know that creates certainty you know exactly like if you I live in Tampa Florida. So my first deal I’m not investing in you know Miami right. I’m to be investing in South Tampa where I live. I know this area like the back of my hand. The second is rather than go develop a two million dollar home. And again you can go on Instagram and watch people develop and make all this money and you can get a lot

of FOMO, but maybe I’ll start with like a condo, right? And I’ll go learn cheap to the best because, you know, you’ll have contractors that don’t show up. They’ll underbid your project. You will likely go through some subcontractors in this journey. So, so so fail cheap, right? I some some advice I got early on, which was. Yeah, yeah, I want you to fail.

Cody Crabb (10:31)
That is amazing advice. Fail cheap is such good advice.

Jonathan Spitz (10:36)
Custom advice I got early on was I want you to fail fast, fail cheap. And then also secondly is

It’s such a good one. on the first on the first two deals, two to three deals, your goal as a real estate operator, investor, developer, flipper, et cetera, don’t lose money. Don’t think about it like I want to. Again, it’s so easy in the world we live in today to go on your phone. I’m sure if you’re in this business and you’re new, you’re probably following a lot of accounts of guys that been in this business five, 10, 15 years. And what you didn’t see is all the work and failure that went in.

before that. And so I would say on your first couple of projects, your goal is to not lose money, learn as much as you can, to the best extent, if you can, find somebody that’s experienced that will work with you on a deal. So I would say all of those are, that’s what I would say.

Cody Crabb (12:03)
Yeah, there is so much like trust me bro in this industry as well. Like even if somebody’s even if somebody’s not as experienced, but they have a really flashy social media that’s like I did this in six months by my course and like there’s so much of that. I think that it’s really important to remember like none of that matters. What matters is like what you’ve actually done. So having a mentor like that I think would be so

incredibly helpful for people that are just starting out for sure. ⁓

Jonathan Spitz (12:31)
Yeah. And I mean, the one thing I’ll add to that, too,

is what’s so beautiful about today that, you know, really started even when I got into this business in like 2012. mean, Bigger Pockets had really just kind of what was was sprouting up all over the place. But now, I mean, even today, you can find generally probably in many markets a lot of investor communities that, you know, within whatever city or region that you’re in. And I just encourage anyone like they’re here in Tampa.

Most people that have been in the business for a while understand what you’re going through and want to help. But you have to kind of go out there and put yourself out there. So I’d say that’s another thing, piece of advice that I wish I

Cody Crabb (13:13)
That actually brings me to my next question, which is, you talk about learning these things early on and in a cheap way. Do you have any stories and experiences like that that you could maybe share about you learning something the hard way in this business?

Jonathan Spitz (13:26)
I have.

I have a ton. Yeah. I everything I just said not to do. did. Right. So I lived in Chicago, did projects in Tampa myself, got burned by some contractors. But like I got very lucky in that if you were if you were in that and this is on the professional side, too. But the same the same thing applies to, you know, people that are flipping and building homes.

because from 20, let’s call it 2010 to 2022, the market was just up and to the right. You could make mistakes and they would get masked by appreciation that would happen in the market. So the market bailed a lot of my mistakes out where I honestly should have lost a lot of money and didn’t because values went up a ton, right? And I promise you, there are a lot of very…

Cody Crabb (14:04)
Yeah.

Jonathan Spitz (14:18)
other experienced and professional investors that that has happened to. Right. That is not a me phenomenon. Right. So, yeah, I mean, I’ve I’ve done I think the biggest thing is that early on is just not is just trusting having too much trust, not vetting people enough, getting too enamored with cheap construction costs. Right. Some guy tells you he can renovate this whole condo for 20 grand. Right.

and not asking.

Cody Crabb (14:45)
I bet he

can, but the question is really what’s that gonna look like when he’s done? Yeah.

Jonathan Spitz (14:49)
100 percent. What’s it going to look

like? Is he going to be able to do it on time? And honestly, can he do it? Right. Like that’s yeah. So, you I would say any time you’re vetting construction, ⁓ whether it’s subcontractors, get references, see if you can go to our projects that they’re currently working on. Have a very if you’re working with a G.C. that’s going to be doing an entire project for you, make sure you have a really strong contract out there. There’s there’s I’m sure even whether it’s

Cody Crabb (14:55)
True, yeah.

Jonathan Spitz (15:15)
through your podcasting network or just online, you can find plenty of resources to talk about what information you’d want to have in that type of agreement. There’s different ways to structure deals, right? Like the way I’ve structured a deal recently, just personally, was entirely incentive based, which was a profit split. So, you know, I think early on just don’t get enamored by cheap construction costs, focus on quality in the beginning, because again, goal is don’t lose money.

in just learning what your processes are. And again, I was investing from halfway across the country. It was silly in hindsight.

Cody Crabb (15:46)
Yeah, I think the one thing that I hear that in common, I I do a lot of these interviews and the thing that comes up the very, very most is I made some dumb mistakes, but I’m really glad I did because I would not have, like I wouldn’t change them now because now that I know what I know, it’s prevented me from way worse stuff later on. Would you agree with that sentiment?

Jonathan Spitz (16:04)
You

Yeah, I think I think generally speaking, that’s accurate. Like, and I think that but I think it goes back to, you know, had I been working on much bigger projects, it could have been catastrophic. But yeah, I would say I’d say, look, I think any lesson you learn the hard way and usually the hard what the hard way generally means is losing money or time or some combination of both is going to teach you the best lessons. And like me personally, I am unfortunately hard headed and

Cody Crabb (17:02)
Yeah.

Jonathan Spitz (17:17)
So I like to go out and learn things the hard way. Even though like in hindsight too, people gave me all of the right information. I guarantee you, you have listeners that are going to listen to this and not do exactly do any of this. And that’s all right. Like we all have our own ways of learning. And for me, that is always been go out and try it and just fail and fail and fail and fail. And fingers crossed to this point, none of it’s been catastrophic.

Cody Crabb (17:32)
Yeah.

Jonathan Spitz (17:43)
But look, I’ve heard horror stories about, know, as a lender, I saw more catastrophic type of stories of people taking on too much debt, people taking on too many projects at once. That’s another big one. This was really prevalent with developers and GCs is, once you find success on the first deal, that confidence then goes from being

I can do this. I can do 10 of these or five of these. And then people bite off more than they can chew. And then mistakes happen. Sub they lose one of their subs or sub commits fraud or whatever. And then that has a downstream impact on all of their projects. And that’s how people can can really have catastrophic type of consequences.

Cody Crabb (18:27)
So what’s something that you see that’s kind of an early sign of things are heading down the wrong path? So if you kind of notice these things, it’s like, you if we can triage this, if we can do some early intervention, we may have a chance at avoiding this big issue.

Jonathan Spitz (18:41)
I think the biggest one is communication with a subcontractor or contractor or partner. Partner is a big one too, right? I think that’s probably the big… And then when people are not doing what they said they were going to do and the signs are early and you’re seeing the signs of it early.

⁓ And I think that’s why it is everybody’s and everybody’s best interest to try to set and manage expectations with your counterparties, whether it is partners, whether it is subs along the way. Because again, like I think I suffer from this. I just want to see the best in everybody. And so I remember one time I got into it. I did a deal with these guys. I owned a condo in Tampa and these guys were doing work on a condo.

down like down like down the hallway for me. And so I went I saw their product and I was like wow this is actually fantastic you know. So I kind of like checked one box saw proof of work right. So we get started and you know I had to pull permits at at one of my jobs and I remember I remember us showing up to the city and there.

basically we were going to submit these in person down in Clearwater. And like these guys had clearly never submitted permits before ever. And clearly I hadn’t either. I, but I didn’t know what I was doing, but it was very clear that they didn’t know what they were doing. Right. And rather, yeah. But like I didn’t, you know, and so, but I just kept going back to that one, oh, well, I mean, they did this great kitchen and bathroom with it. So we’ll figure this out.

Cody Crabb (19:59)
I was gonna say I don’t know whether that’s comforting or not, but that’s not comforting. Yeah.

Jonathan Spitz (20:12)
And it just ended up being an absolute disaster. know, like I got saved by by COVID and what happened to Florida real estate at that time and you know how quickly values went up. Otherwise that would have been a.

Cody Crabb (20:24)
How do think people should think about knowing that appreciation is not going to save them? What’s something that people need to think differently about now that that’s the case?

Jonathan Spitz (20:35)
Yeah, I mean, I think to the extent you can think about multiple exit strategies, make sure you’re underwriting. You any time I’m underwriting, I look at what is a, I underwrite three scenarios, right? We do this at Lightstone too. What is our base case? What is our optimistic case? What is our pessimistic case? Can you live with the pessimistic case? And so I think that is, I think it’s really, you also don’t want to cheat your numbers. I think it’s really,

So sometimes too when you get into underwriting, you’ll underwrite it a certain way. Okay, I can build this for 160 bucks a foot. And then you’ll get your quotes back and it’s 180 a foot. And then you’ll start moving around other numbers to make your math work. And it just can’t go down that road.

Sometimes it’s really easy to get married to a deal. You just have to know when to let it go and move on and to go do something different. So I would say that’s the big one.

is like don’t get married to any deal. I promise you another one will come along even though it might feel like you’re getting this very unique deal like once in a generation, especially early on every deal feels like that. It feels like it your it is going to be your only deal. If you don’t like there will be others. Right. So you have to learn how to say no and then underwrite multiple exits if you can. And I think early on that’s a big one, which is OK, if this doesn’t sell, can I rent it?

If so, if I can rent it, am I breaking? Can I refinance this? That’s a big one. Can I refinance it? Can I rent it? Because if you are doing a flip, right, or even a single family home development, like you’re likely going out and getting hard money. So you’re paying one to two points on the front. You’re paying 12 to 14 percent and maybe some exit points and exit fee on the back. So if you don’t have an out, if you’re not able to sell that

that interest will start to really hurt you really quickly. And so can I refinance this? Can I rent this house out and cashflow it on a 30 year mortgage? think like understanding or can I Airbnb this? Right? Like what are like what are my exit strategies if I can’t sell in a timely manner? So I think I think that’s how you can mitigate some of those risks is.

you underwriting conservatively, underwriting what your sales price is. Don’t say, don’t think, especially in this market right now, if you are doing single family homes, one, it is your job to understand what’s happening in the market, right? Depending on where you live, like I have a buddy that develops property out in Long Island, like Long Island’s doing fantastic. Florida, pockets of Tampa are doing well, pockets of Tampa and St. Pete are not doing well.

So you need to know your market, understand directionally where values are headed and underwrite accordingly. Don’t think you’re going to go set the market in at a new price, a new record price in this market. If you do fantastic, but you shouldn’t be underwriting to that in this market given directionally where values are headed, which is they have been headed lower for the most part for the last 12 months, maybe even longer. So ⁓ again,

That’s very situational. I’m sure you might have a listener and be like, well, that’s not happening in Chicago. And that’s true. It’s not. It’s not happening in Long Island, but it is happening in Texas and Florida and the Carolinas. So that’s something just to be aware

Cody Crabb (23:38)
I feel like a lot of your advice works really well for both real estate and relationships. I’m hearing a lot of, know, make sure you communicate. I’m hearing a lot of, ⁓ make sure you, ⁓ you know, there’s other fish in the sea. Don’t rush into things. Make sure you, so good to know, good to know on many fronts. ⁓ So tell us a little bit more about Lightstone and what you do for ⁓ people that are, like people like our listeners.

Jonathan Spitz (23:43)
You

Yeah.

Yeah.

Yeah.

Yeah. Yeah. So what we do, I mean, we work. So Light Zone, are we’ve been around since 1986. So we manage about 25000 apartments, over 16 million square feet of industrial retail and and life sciences space. So we we’ve been around for a really long time. But what we do is we provide an opportunity for individuals to co invest alongside of us. So I know a lot of the listeners on your podcast are thinking about.

how to get into this business and be very hands on. And if so, that’s great. We’re probably not the best fit for you. If you are looking to invest passively and candidly, what I’ve learned in working with investors is that oftentimes it’s after maybe some people have gone out and tried to do this themselves first and then they decide, you know what, this isn’t for me. Like maybe they have a full time job and they thought it would be something that they could do on the side and it just doesn’t work out for whatever reason.

⁓ couldn’t stomach the risk, would rather outsource that management and capabilities to a firm like us, that’s where our platform would make sense. Is, you I want exposure or you just want to invest in some place maybe different or an asset class maybe you don’t have exposure to. That’s also a lot of it, is that we have a lot of investors that own single-family rental portfolios or they do development, but they don’t own any industrial and like the industrial story.

which is obviously, know, I’m sure you like name one thing that you’re not having delivered to your front doorstep these days, right? I think everybody understands that, you know, warehouse space is going to continue to be in very high demand as you know, more and more goods get delivered directly to us. And there are other things too. I mean, the reshoring of manufacturing and production in this country, that’s really, really was started during COVID and has really,

really taken off since then. So you have people like that story and there’s not really a good place to get exposure to the asset class outside of lightstone or investing in publicly traded industrial reads, which is another another way to do it. so so usually I know I’m being a long winded long winded here, but ⁓ but it’s really if you are interested in investing in real estate but want to do so passively.

Cody Crabb (26:08)
no, this is a good answer.

Jonathan Spitz (26:15)
we might be a potential fit for you. And what makes us unique, other than the fact that we’ve been around for 40 years, is that we are the largest investor in any deal that we do. So we invest at least 20 % of our own capital in every transaction. So most GPs, general partners, and managers, they’re investing 5%, plus or minus a few percentage, in deals where with us you have a partner that has significant skin in the game.

invest across multiple property types has a very strong track record. And so that’s usually where we get get people comfortable. And so what and I’ll say that to people as well as you’re thinking about maybe you’re getting started. Maybe you’ve done a few deals and you want to start raising outside capital. That’s something that becomes really important as you’re pitching to your prospective investors is look I’m putting a lot of my own money in this deal. I am an expert in this market in this property type.

So if that’s something that listeners are considering as well, those are things to lean on if you can.

Cody Crabb (27:13)
I think, mean, talk about putting your money where your mouth is. that’s how much confidence can you, how much confidence are you going to have if someone says, Elvis, there’s this really amazing deal and it’s, it’s really cool. mean, I’m not going to invest in it, but you totally should. that, that, yeah, exactly.

Jonathan Spitz (27:26)
And that’s super common. You

wouldn’t believe how common that is. Or they put 1 % that they put no money in. They’re literally just managing the asset. That’s very common. Yeah, and to your point, imagine trying to invest with somebody that doesn’t have any skin in the game. But it’s out there.

Cody Crabb (27:44)
For sure, well, if someone wants to kind of get in touch, they think they sound like a good fit. What can somebody do to reach out?

Jonathan Spitz (27:52)
Yeah, I would say first you can go on our website, lightstonedirect.com We’ve got a ton of content on there that talks about everything from 1031 exchanges to mark to market leasing strategies. So even if you are investing directly, I think you’ll get a lot out of our education center. You can also go you can also email me directly. My email is JSpitz J S P I T Z at lightstonedirect.com. And yeah, you can follow us on LinkedIn.

We’re usually posting a lot on there. We’re usually hosting webinars. We’re going to be hosting a webinar ⁓ probably in about a month and a half. It’s really meant for real estate professionals and tax strategy. So encourage anybody to and check that out. Yeah, we’re always putting out interesting stuff. So we’d love to stay in touch with anyone that’s listening.

Cody Crabb (28:34)
Yeah, that’s we definitely love the whole We love the whole free education kind of get-to-know stuff kind of Feelings that’s what we do, too So thank you so much for joining us today and giving us this great info and and thank you listeners for joining us too if you got something out of this episode go ahead and give me a like subscribe follow comment review do all the things and Make sure you don’t miss another episode of real estate pros where we get awesome conversations like this. It’s been a real pleasure,

and thanks so much for joining us.

Jonathan Spitz (29:03)
Yeah, thanks. Thanks, Cody. Appreciate you having me on.