In this conversation, Daniel Del Real shares his extensive experience in real estate investing, discussing the transition from active to passive investing, the importance of understanding operators, and the lessons learned from both successes and failures. He emphasizes the significance of diversification, control over investments, and the mindset shifts necessary for moving from a seven-figure to an eight-figure net worth. Daniel also highlights the importance of consistency in investing and the need to avoid group think when making investment decisions.

Losing $2 Million: How Bad Operators Can Wreck Great Deals with Daniel Del Real

Pat Zingarella (00:00)

All right, Daniel, thank you very much for joining me. I've been really, really excited to have you on. Before we get started, like I said before, you have a really awesome background. I'd love for you to introduce yourself and then we can jump right into it.

Daniel Del Real (00:12)

Yeah, Pat, man, it's a good day. Well, I've been investing in real estate for 20-plus years. I'm in the real estate space, so I actually operate a real estate team in California. We've been the number one medium and large-size team in California for literally probably 10 years. Very high in systems. For me, it was high income generation. So, figuring out what to do with that income is kind of why we're having this conversation.

But I started investing in real estate when I bought my first home at 22, built my own portfolio, and started investing in syndications and other people's funds in about 2003. I'm a father of three kids, been married for 18 years, and my whole world really revolves around some facets of real estate. I've also been part of this tribe called GoBundance, which has been part of my life for 11 years now. I actually serve on the executive board and I'm a host of a show called Seven to Eight where we're talking to a lot of investors finding their journey from seven figures, which is a million dollars, to eight figures, which is 10 million.

What we find is a lot of the GoBundance guys that are in this space—and this is why people are investing in other deals and horizontal income—is you're trying to figure out what the best route for you is to build to eight figures. What we noticed with a lot of people that we talked to that are worth two, three, four million bucks is they have this look of desperation. They're like, "Man, I thought when I became a millionaire, everything would be easier." It's actually more challenging. So our show talks about those challenges and in the route to eight figures, you start defying gravity, getting more help, investing in other things, and then your horizontal income starts defying gravity a little bit. So that's been a really fun project. We've been doing that for going on six years now. We've interviewed probably five billion in net worth in that one, including Richard Branson, which was really cool.

Pat Zingarella (02:17)

Yeah, that’s awesome. I'm very familiar with GoBundance. I've gotten to know Matt King really well. I’m pretty sure I've been on one of your calls when I was evaluating. I've gone up to a meetup in Boston that they had locally. It's an awesome program. What you guys do there is awesome.

So I would love to understand: you’re active in your real estate business out in California, you've got the brokerage team, and I believe I read that you've also run about five other businesses. What led you on the journey from active operations into passive syndications?

Daniel Del Real (02:59)

Well, you know, I think there has to be an involvement. For me, why don't I just take you to the beginning part where I was buying single-family homes myself. And honestly, you've got A-class, B, C-class, and then I have D-class, which is "dog shit." Like the stuff that you think is going to be a great return. You're like, "Man, this pencils awesome, home is 100 years old, cash flow is going to be great." And you're buying a lot of these, then every time you get your P&L, you're like, "Why am I not making any money on these things?" Because an AC's breaking, plumbing, roof issues, a tenant walks out, eviction.

So I started my journey buying real estate the hard way. I started learning the difference between D, the dog shit stuff, compared to C and B-class. As I was building my real estate portfolio, I had about 80 California doors. I realized it took a lot of work. It actually wasn't passive income; it was active. I was actively managing some of these things and I kept trying to figure out how to get better returns. The better returns I got, the more lift it came with.

Then I'm like, "You know what? What would it be if I focused that time in my business?" This is like 2013, so it's like 12 years ago. My business was taking off and my real estate was taking off; it was a demanding time. I was renovating properties, putting them on the rental market, doing all these things. As that list started getting heavy, I'm like, "Man, what would it look like if I had just spent all my time in my business?"

What I did is I diversified by allowing other people to steward some of my money, which gave me my time back. I knew it wasn't going to be forever. I'm like, "Look, this is something that I need to do because it's the best return on my time building my business. I'm going to have to serve others' wakes, focus on other people's skillset, and release control of my money." It allowed me to dive into real estate in my business and build it.

When I did that, I sold half my California real estate. Instead of buying other larger properties that I would have to operate—I bought a couple and I noticed the heavy lift of a 12-unit that you're renovating—I'm like, "You know what, I'm going to start investing in other people's things." Bigger, larger deals that I thought were great returns. I'm like, "Well, I don't have the two million or three million to put down, but between a pool of people and a great operator, I could ride in others' wakes." I'd rather have 10% or 5% of a great deal and a good operator instead of 100% of an okay deal.

That's where my journey started in releasing control of my money in 2013. I've been able to see things go full circle; 2018, 2019, we had some exits on some of those and we kept adding positions to those general partners. My initial start in real estate wasn't just straight into syndication. I went in and I was operating real estate myself, so I got to learn what underwriting looks like. What are the things that you don't underwrite, like an economic vacancy? I've experienced that before. The properties are 100% occupied, but only 95% of the tenants are paying, so you have a 5% economic vacancy even though it's 100% occupied. Little things like that you kind of figure out yourself, and then you're able to dive into their underwriting.

That was my journey into the syndication space. It didn't start right away. For me, it was stewardship. Now, yeah, I've invested a ton of money in other people's deals. I've learned a lot of lessons. I've lost a lot of money in some of those and with some of those operators. I learned that if you're going to release control of your money and allow somebody else to steward it, you have to diversify that risk.

I have a rule where I don't give any operator more than 10% control of my net worth. When I do that, even with that operator, I'll have two, three, or four different properties or funds that we're investing in. So if something were to happen—like you're seeing now where one operator goes down because they didn't underwrite something right or just straight fraud—it's not going to take away your full net worth. Yeah, it's going to sting, but the max it's going to affect you is 10%. Those are some of the rules that I put in place. I wanted to diversify that risk.

Then with some of those operators, I made sure there were different asset classes like industrial, storage, or apartment buildings. We even have some industrial triple net that's not doing the greatest, but it's an investor that knew that space. I'm glad I didn't give them more than 10% because, while the returns were fantastic initially, nobody expected the rates to go up like they are. Now they're struggling to make debt. They're selling certain assets to create liquidity. The fund's going to be okay, but the 12-13% cash-on-cash returns we were seeing initially are no more. That would affect me if it was all my net worth, but it's only a portion.

The other thing that I think a lot of investors do is they don't control a portion of their own wealth. When I sold half my California doors, there was also a portion that I knew I would release control of here, but at the same time, there's a portion of my wealth that I want to make sure I control fully. I have no partners on some; I own them. There's a portion of your wealth that you also want to be able to control.

Pat Zingarella (09:14)

Yeah, that's great. Because you often hear it used as a marketing tool: "Oh, why operate actively when you could operate passively?" You almost see it as a zero-sum where people are abandoning active ownership for strictly passive and aren't doing that diversification.

I'd love to dive into a couple of things you mentioned. You mentioned some lessons learned and that 10% net worth rule. Was that created based on an experience, or did you go into it like that? Did you have a tough experience where you said, "I'm not going this heavy again," or was it like, "My first investment was 10% and I'm never straying"?

Daniel Del Real (09:54)

Yeah, I think it was mentorship initially. For me, I was also used to living and dying by my own sword. My first syndication in 2013 was a hundred thousand initially. At that point, it was the first time I was actually releasing control of my money, so there were some nerves around that.

Sitting with a mentor, he's like, "Look, Daniel, if you're going to allow somebody else to get revealed knowledge on your wealth, then you need to make sure you diversify that risk." He told me about Enron—the people that had all their net worth in Enron and what happened. He's like, "Look, you want to make sure that when you start allowing somebody else to steward your wealth, there's not one operator that could take you down."

That just stuck with me because I built my wealth and my business out of fear. I was scared. Every year I had a good year in sales, I thought that was the last year. I started in 2004. The market was great. 2006, seven, and eight crashed. It was a horrible market for 10 years. As we were building up, we were catching falling knives—buying assets that were worth less and less every year. We were just going to have to stay consistent. The first property that I bought was $300,000, and by the time 2011 came around, it was worth $100 grand and I still owned it.

All my experience was out of fear. I remember he told me, "The only reason people lose their assets is because they run out of capital to service." It’s a capital issue. It's not that your asset's not good; there's a capital issue. I remember when I was like, "Man, should I short-sell my house that I bought when I was 22 because it's worth $200,000 less?" He's like, "Daniel, do you have a capital issue? Your payment's $1,800, you're renting it out for $1,400, you're losing $400 a month. Your principal's going down $250, you're getting a tax write-off; you're actually net neutral. Other than a line item on your balance sheet, you might save $200,000 on that balance sheet, but you're going to lose the ability to be able to invest in other things."

So those were the things that he told me that served me well when I was looking at other operators to say, "Okay, well, what kind of liquidity do you have to be able to deal with some of the hard times that we're seeing right now?" What's funny is that property, fast forward to today, is worth $450,000. 20 years later, it's almost paid off and the rent is no longer $1,400; it's $2,500. He was right; you give real estate enough time and it works. I think most operators are having a hard time because a lot of these loans are five-year terms. The investment cycle is five years. It's a different opinion and different advice when you're looking at a five-year investment versus a 20-year investment.

Another thing you mentioned as well: some people think it's easy to just give somebody the funds and be completely passive. Real estate is not passive; it's active. But the LP positions—those are truly passive positions. You have an active operator. One of the reasons why I tell people I think it's always a good idea for you to start learning how to invest in real estate actively is so that you're learning those lessons.

I call them—like Dan Sullivan calls them—the Four Cs. Number one, you have to Commit: "I'm going to buy this asset." Number two, you have to face and earn Courage. You need to face fear with courage saying, "Okay, am I going to be able to do this? I'm going to release, say, a $50,000 deposit." Once you face and earn that courage, you're going to find out what you're Capable of. Am I able to learn? What lessons did I learn about this property I thought was great passive income but realized was actually active? You learn what you're capable of, and then you learn your Capacity. For me, it was 80 California doors. That was my capacity. At that point, I learned a lot of lessons as I earned my courage, my capability, and my capacity.

When you release control of your money and you're investing in others' deals, you have to be very aware that you are releasing your funds to them and they are earning the knowledge. I wasn't facing fear or earning my courage in buying, say, a hundred-unit property—they were. As a passive investor, you have to understand that you are outsourcing the second and most important C, which is Courage. You're partnering to outsource that, which is fine because you're allowing them to build it. But you also have to be aware that if you start passive, you're always going to be that. You're never going to learn what it feels like to pull the trigger on a property, to renovate, to operate, or to look at a balance sheet. It's important for you to earn that skillset and not outsource it to somebody else all the time. You see some investors that have started and always have done that, which is okay, but you just have to be aware that you're outsourcing your courage, capability, and capacity of being able to operate a property yourself.

Pat Zingarella (15:47)

Yeah, I love that 4C concept. It's making me think of my origin story. When I bought my first four-unit, I got smoked. I had spent a year doing property tours and due diligence. Three months later, I sent all my money—I sold my employee stock purchase plan to buy the property. I went all in on this thing. The day I closed on it, the insurance company emailed me and said I needed to replace the roof or they weren't going to insure me. Then three months later, COVID happened and no one was paying rent. One of my tenants was stealing from my other tenant. I couldn't fill a vacancy.

When you think about that courage and that capacity, I put way too much trust in the wrong people when I bought it. The courage honestly led—it was almost over-courage. That had to get fixed. So that's fantastic. Now, you mentioned one of the key questions you ask operators is about liquidity. Are there any other "must-asks" when you're evaluating these operators?

Daniel Del Real (16:51)

Yeah, I think especially some of the lessons that we're learning now. Any operator that's going bad right now, what are they doing? They're doing capital calls. So let's start with the capital call. Everybody talks about how to get into a partnership; nobody talks about how to get out of a partnership. Let's talk about what it looks like if it's bad. Let's get that ironed out.

It's easy and exciting getting into a new partnership or buying a new property. One thing I say is, "Man, numbers never lie, but I can make them say whatever I want." All the numbers look great. But the magic is behind what happens if this thing doesn't go the right way. That's where I would start. "Okay, you're expecting rates to go up a certain amount. Is there value-add?" If there's value-add, are you raising enough for the half-a-million or million-dollar renovation? Are you investing enough to have the reserves to meet the vacancy factor as you're renovating these units?

Some people want to pay a distribution right away. Maybe that's not the best route. If you're a heavy lift on the investment and the vacancy, and it's going to take you two years, I'd rather have an operator that says, "Look, we're not going to pay a distribution for two years. This is the plan for this property. We have enough reserves to meet the vacancy, the debt service, and the renovations." I want to see that. Then say, "Okay, what if the numbers don't meet expectations? What does the debt look like? Is it a five-year? What do you have as the new debt in years six, seven, and eight? Do you have any extensions or rate caps? What's your game plan on capital calls?"

A lot of the investors even today that are losing their property, I guarantee you if they look 15 or 20 years from today, they'll be like, "Man, that was a good deal. I can't believe I lost that property." You see a lot of people right now that lost property during 2008 who are looking at this probably saying, "Damn, I wish I would have kept that property." So that's what I always want to look at. Know that a five-year investment deal, if it's heavy-lift value-add, you're probably not going to get distributions for a few years if it's done properly.

Pat Zingarella (19:51)

Yeah, that's fantastic. In our pre-call, you had mentioned some of the lessons that you had learned along the way—some of the losses you experienced, some quite large. Would you be open to sharing some of those stories in as much detail as you can?

Daniel Del Real (19:54)

Yeah, sure. I mean, it's no secret. I've lost over $2 million in bad operators. But I say it's never a bad investment; it's a bad operator. The deals are always great; it's whether the plan is executed properly. Remember, when you're releasing control of your money, you're giving the money to a jockey. You have to ask, "Is the jockey willing to die on the horse?" Because a good jockey is one that's willing to do what it takes to get this property going.

When I really look at all the properties or deals I invested in that lost money, I would say almost 100% of them was an operator issue. They just didn't... and if you peel that back, it comes to experience. Some of the operators, knowing what I know now, were going through those Four Cs. They were committing to raise capital—this is going to be their property, their first renovation. They were facing fear and earning their courage with my money. Now I look at it and I'm like, "Man, I should have gone to operators that had better reviews, better referrals, and people that have seen five cycles."

See who's on your board. Who's on your team? How did they invest during 2008, '09, '13, '14? The investors that lost money are the ones that had an amazing property—they're like, "Hey, you find an amazing property, the money will come." And that's true. But you take an amazing property, you take the money, and a bad operator, and everything goes to shit. They're not managing the project right; timelines are missed. You've got a one-year project that takes three years. They didn't negotiate the debt right or didn't expect a certain expense when it comes to the renovation, or an economic vacancy, local laws, or neighborhood problems. You learn that in the process. My issues weren't the properties or the investment vehicle. It was the operator. They learned lessons on my money and it cost me time and money.

Pat Zingarella (22:42)

Yeah, for sure. We hear more and more of that narrative: the jockey and the horse. It's shifting from deal-based to sponsor-operator-based. I'd like to pivot. You are a unique guest in the fact that you host this GoBundance Seven to Eight call, and you're exposed to high-net-worth individuals that have made the leap from seven figures to eight figures. A lot of our listeners are trying to shift into their investments being their primary source of income. What do you see separates the people that invest their way from a seven-figure net worth to an eight-figure net worth?

Daniel Del Real (23:35)

Number one, I think they go deep. For instance, you take a physician who has the ability to make half a million to a million a year. That physician is saying, "Do I go in and start flipping property or buying property?" Then you realize they're getting out of their lane, and it might cost them more than they expect. Somebody like that—even with me—there was 10 years of my life where I said, "I need to go deep in my business and generate more income." Instead of trying to figure out how to make 10% of a hundred thousand dollars, I'm like, "What would it look like if I invested that money in myself, my business, and my time?"

The best investment you can make is in yourself. That physician might be better positioned spending their time in their profession making $900k a year. If you can make an extra $200,000 a year, that's a lot of assets you’d need to have to generate that kind of income. Then what you do with that income is what's important. In some professions, syndications are important because the skillset is high. What's your exchange on time? You want to get the knowledge and maybe do a couple yourself, but after that, you're like, "Okay, it's going to take me a long time to do this on my own, so I'd rather just go into my profession, earn a lot of income, and be a steward of that income."

Invest in good operators and know that this is a cycle. You do this for five years, maybe 10 years. I'll tell you what, like the stuff that I came full circle on, I was averaging 30-35% IRRs. Of course, that was an up market, but even now some operators are 18-22%. If your goal is to invest $100k or $200k a year—for me, it was every single year. We started with a couple hundred and by the last few years, we were investing a million a year in other deals. In my mind, I knew this was going to come back in five to 10 years. If I invested a million this year, in five years I'm going to get two-and-a-half or three million back.

As you steward your business and time and invest in other people's deals, eventually that money is going to come back to you. Then you get to choose: do I reinvest in that same operator or a different operator, or is it now large enough for me to take control of this money myself? That's what happened to me. I'm like, "Well, my time is better suited in my business. But I know that if I do this consistently and faithfully for 10 years, when this money comes back, my business will be in a different position. I'll have more systems and more time." If I invested $2 million over 10 years and that comes back at four to five million, that demands more of my time. Making 10-15% on that should demand my time and now it's worth my time.

The secret behind my success was it wasn't just one year where I invested in one deal and that's it. I was really consistent. Every year I was in between one to five deals. Up until last year, I was putting in well over seven figures. I've had capital events every year—not this last 48 months, because it's not the right time and operators are keeping them longer, which is a smart idea. But I was talking to my accountant when we were getting all these capital events in 2018, '19, and '20. He looked at my investments and said, "Daniel, you're going to have a big problem for a long time." He's like, "Because all the investments that you did in 2013, '14, '15, and '16 are all coming back at 20-30% IRRs."

I created a capital event windfall because I was so consistent for 10 years. If I invested $500,000 in 2015, I’m getting a million or a million-and-half back this year. The next year, if I invested in 2016, I'm going to get another million-and-a-half back. I think a lot of the issues people have is they're just not consistent enough with the plan to create momentum and this windfall of capital events. It's hard because you're releasing control of your money and you're allowing somebody else to steward it. But I didn't need the income to live on. A person's wealth is measured by his ability to go without. Delayed gratification. Say you're a physician or attorney making good money—I want to be able to defer that with things coming in the future. The money is really made when you start seeing that windfall of capital events.

Pat Zingarella (29:38)

For sure. That was fantastic. We are gearing toward the end of the call. I want to ask you the one question I ask on every call: What part of passive investing do you think needs to die?

Daniel Del Real (29:47)

Man, being part of large organizations of guys, I realized that we fall into "groupthink" a lot. "Hey, I'm going to invest because I know this person that invested in it." Now with ChatGPT it’s really good because you could actually put these PPMs into ChatGPT and say, "Okay, pull these apart a little bit."

But I think one thing that needs to die is groupthink. Too many people have too much communicative knowledge. They're listening to a lot of different things, but they don't understand how to read a balance sheet or a performance report. I think that needs to die. It's okay to be passive, but you also need to understand what you're reading. You're going to ask for referrals and you're going to call those referrals and ask questions. There were a lot of deals that I did where I was groupthinking—"I’m a great operator, this guy's smart, I'm just going to put money in this thing." I probably would have avoided some mistakes if I would have called and asked some questions.

Pat Zingarella (30:55)

Yeah. Awesome. Daniel, thank you so much for coming on. If people want to get ahold of you or learn more about GoBundance, where should they go?

Daniel Del Real (31:04)

GoAbundance.com is the best way to start. It's an amazing organization of guys living these amazing pillars of life. It's not just about being a millionaire in your finances, but not losing your soul, your health, your family, or your adventure. This group of guys is focusing on being millionaires in all aspects of your life. Whenever you get around a good group of guys, it's hard to be stopped. Go to gobundance.com.

Pat Zingarella (31:39)

Awesome, Daniel, thank you so much.

Daniel Del Real (31:41)

All right, see ya.