The Devastating Mistake in Real Estate Investing that *Happens All the Time* – and How to Avoid It: Part II Deep Dive into a Deal that Imploded

Real estate's long-term track record is excellent (comparable to stocks in raw returns and often superior on an after-tax basis). So why do so many investors end up with massive holes in their portfolios that they never recover from? This Part II does a deep-dive into a real-world example of an aggressive deal that imploded. It also explains the warning signs that were visible from day one.

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Real estate’s long-term returns have been as strong as stocks (and with less volatility). And its after-tax performance has trounced public equities — for investors who understand how to use its unique tax advantages.

Yet despite these strengths, I repeatedly see real-estate investors making one common fatal mistake with their real estate portfolios (and concluding that “real-estate investing itself doesn’t work”).

During the upcycle, they chase aggressive deals with high projected returns. And everything works great while prices are rising. But when the cycle inevitably turns, those same deals are the first to collapse — and investors take large losses.

And because the unintuitive math of large losses is so brutal, they never realistically recover — even over the entire next upcycle.

And what could have been a temporary speed-bump becomes a permanent hole in their portfolio.

So this article is about avoiding that outcome. And it’s presented in two parts.

Part 1 looked at how real estate has performed versus stocks, why large losses are so mathematically devastating, and strategies for mitigating that risk.

This Part 2 walks through a real-world example of an aggressive deal that imploded — from YieldStreet (which has since rebranded to WillowWealth). It also explains the warning signs that were visible from day one.

The sad but real-life consequences of failing to mitigate the risk of large losses

Louis Litz is a 61-year-old electrical engineer from Ambler, Pennsylvania. And per an interview with MSNBC, he invested decades of savings ($480,000) into Yieldstreet real-estate funds.

Unfortunately, he had an experience there that was all-too-similar to that reported by many other investors.

(Note: Yieldstreet has now rebranded to Willow Wealth …see this recent article I wrote for more details: “Rolling Back the Odometer: Beleaguered YieldStreet Changes Name to Willow Wealth and Scrubs Checkered Record from its Public Website”)

And Litz says that three of his investments have already defaulted (100% loss). And several more look likely to default in the future.

Litz, who is now experiencing the unintuitive but brutal mathematics of large losses, said:

“I’m 61, so there’s no way I can really recover.”

What went wrong?

Let’s do a deep dive on one of the deals Litz invested in – and which later imploded.

A Lesson on How NOT to pick real-estate

Yieldstreet attracted many new investors with an aspirational-wealth pitch: “Invest like the one percent.” And that appealed to many.

But for many sophisticated investors (including many in the sister site to The Review…which is called the Private Investor Club), this was a disturbing sign.

An aspirational-wealth pitch isn’t motivational to a sophisticated investor who is already wealthy. And so in general, high-quality experienced sponsors, who are targeting sophisticated investors, don’t do this.

On the other hand, this sort of pitch is generally used by a newer sponsor who markets to unsophisticated investors and can be an effective way to motivate them to part with their money. And what I've found is that most deals targeted to unsophisticated investors have multiple things I personally can't stomach. So, an aspirational wealth pitch is a yellow to red flag for me personally. (And the same goes for some others in the Private Investor Club.)

This particular deal was called Nashville Multi-Family Equity II and invested in an impressive and prestigious-looking, newly-built, Class-A multi-family high-rise building located in Downtown Nashville. It also projected an eye-popping 17-19% return in less than 3 years.

So it filled up quickly and fully.

Ultimately, investors not only lost 100% of their money on the investment itself, but also suffered a complete loss on any follow-up capital call they contributed (and was intended to “recuse” the deal).

What went wrong? And were there any signs in advance?

I and similarly-minded investors in the Private Investor Club (sister site to The Review), recently reviewed the pitch deck for Nashville Multi-Family Equity II. And it’s a case study in overly-aggressive underwriting. And from the point of view of a conservative investor, there were numerous unacceptable red flags from day one.

1) Lease-up risk

This was a new building that needed to complete a lease-up (i.e. increase occupancy) to get the property generating income and stabilize it:

Generally this strategy does very well during the up-cycle … and most up-cycles run a very long time/many years. But when the cycle enters a downturn it becomes risky and can completely blow up.

When a downturn ultimately happened in 2022 (shortly after this investment closed in 2021), the sponsor's strategy contributed to its default on the debt and its implosion.

And for many conservative investors in the Private Investor Club, a deal employing this strategy so late in the cycle would be an immediate red flag (and a sign to move on to the next deal).

2) Signs of distress even on Day 1

Yieldstreet had a reputation for vague investor pitches that provided too little transparency for an investor to understand the risks (and that a sophisticated investor would consider unacceptable). And this was so egregious that in one case it was actually fined $1.9 million by the SEC: https://www.therealestatecrowdfundingreview.com/post/rolling-back-the-odometer-beleaguered-yieldstreet-changes-name-to-willow-wealth-and-scrubs-checker

And unfortunately, this particular pitch deck seemed to fit that pattern.

It presented this deal as essentially "situation normal" and a great opportunity.

But the #s in the fine-print of the memorandum showed strange/unusual things and suggested this was actually a much higher-risk investment.

Per the investment memorandum:

That’s odd-looking. If things had gone according to the initial plan, the original owners should have just leased this up to 95% and been done. And raising $19.2 million more from Yieldstreet would just dilute returns and be counter-productive.

So this almost certainly means that this was actually a rescue or recapitalization. And if so, then this was much riskier than the deck conveyed.

Back in 2019 (when this launched), this type of riskier strategy was considered by many conservative investors in the Private Investor Club to be too aggressive.

3) Debt woes

If a deal can't pay the debt payments, then it can implode and lose 100% of the investment. So to minimize the risk, many investors in the Private Investor Club require minimal uses of debt. I personally want to see no more than 65% loan-to-value (or else I move on to the next deal).

And for the same reasons, many of conservative investors require a deal to lock in long-term debt at 7 to 10 years (with no floating rate debt). Caps on floating rate debt can help that issue….but don’t come even close to fully removing this risk.

Unfortunately, this Yieldstreet deal did the opposite of these things. And that all directly contributed to it blowing up.

3a) Sky high debt

The memorandum showed 71.2% (below) which was already too high and a major show-stopper for a conservative investor:

However, the actual loan-to-value (LTV) debt levels were almost certainly much higher. YieldStreet didn't show loan to value (a standard metric and a key factor in gauging the risk of a potential blowup).

Instead, they showed only the loan to cost (LTC), which is the percdent of the total money put in. But LTC doesn’t take into account investors potentially overpaying (which is common…and especially likely if it was already distressed on day 1…see point #1).

This suggests that the LTV was probably in the “absolutely stratospheric” range – and could have easily been 80%+. And if that's correct, then had they disclosed this metric, then I suspect that many investors would have run away from this deal (because even many unsophisticated investors know that’s a major red flag). However, I can't find any disclosure of the LTV.

At the same time, there is also no legal requirement that a sponsor disclose LTV. So it is really up to an investor to ask the right questions when they see something like this.

3b) Floating rate /short term debt:

When I saw the section and thought: "yikes":

Having the sky-high debt was already over-the-top. But to make things worse, they added on floating rate debt. This ratcheted the risk even higher.

And then to aggravate it further, it’s short-term (only 3-5 years).

I require long-term debt of 7-10 years (to reduce the significant re-finance risk)... so again this memorandum's showing a major red flag for me.

And this exact structure (high leverage, floating rate loan, short term debt) caused so many similarly-structured deals to go belly-up in CRE downturns.

And, unsurprisingly, all these things backfired on this deal as well (and caused the same result).

3c) Interest Rate Caps:

Back in 2022 (and earlier), many sponsors would try to market floating rate loan risk as “safer” because they had purchased interest rate caps. And a cap can help mitigate risk. But it also is a limited tool that can only shield a certain amount of change and for a limited amount of time.

So many deals with caps still ended up going belly-up at that time.

And YieldStreet did caps on this deal as well:

Ultimately, the cap was not enough (and it failed to eliminate the floating rate risk).

Another key problem/red-flag in this disclosure is the mismatch on timeframes. A two-year cap is insufficient to protect three-year debt (let alone if it extended to five). So this was structured from day one with additional amounts of interest rate risk.

“We messed up with your money. So can you give us more money to fix it?”

A year after this deal was funded, the cycle ended and a downturn started. And unsurprisingly, this highly indebted, aggressively structured property quickly ran into trouble.

Another year later (2023), YieldStreet informed investors of the bad news:

A property that can’t meet its debt obligations results in a 100% loss to investors. So Yieldstreet was pitching investors on putting in even more money to attempt to save it.

And the projected returns for this rescue were even more sky-high than original projections: 20% in just two years.

Sometimes putting in additional money can rescue a deal and is worth it. Other times it isn't and is just a case of throwing “good money after bad.”

Unfortunately, this ended up being the latter case. And every investor who funded that capital call lost all their money as well.

So this added insult to injury.

Summary:

Real estate's long-term track record is excellent — comparable to stocks in raw returns and superior on an after-tax basis. So when investors suffer devastating losses and conclude that "real estate doesn't work," the problem isn't the asset class. It's the strategy.

The pattern is predictable and repeats every cycle. During the long, stable expansion, investors get lulled by low volatility into chasing the most aggressive deals with the highest projected returns. And for years, it works. But when the cycle turns — as it always does — those same deals are the first to implode.

And the math on large losses is brutally unforgiving. A 90% loss requires a 900% gain just to get back to even. That means a single catastrophic deal can realistically wipe out an entire decade of future gains — turning what should have been a temporary setback into a permanent hole in the portfolio.

The Nashville Multi-Family Equity II deal from YieldStreet (now Willow Wealth) is a textbook example. It had nearly every red flag a conservative investor looks for: lease-up risk late in the cycle, signs of a hidden recapitalization, sky-high leverage, floating rate debt, short-term loan maturities, and inadequate interest rate caps. Investors lost 100% — including the additional funding of the subsequent capital call intended to rescue it.

The good news is that this outcome was avoidable. The warning signs were visible from day one — for investors who knew what to look for. And the strategies for mitigating this risk are simple:

• Choose sponsors with multiple cycles of experience and a track record of little to no money lost.

• Require conservative debt structures — low leverage, long-term fixed-rate debt.

• Diversify across vintage years to avoid concentration risk.

• And most importantly, be willing to pass on aggressive, high-return deals that look so tempting during the upcycle (or at least only invest throw-away money that you don't mind losing).

And over the long run, success is often defined by avoiding the large losses that are unintuitively so difficult to recover from. Unfortunately, many investors only learn this after experiencing a large loss. And by then, the damage can take many years — even decades — to recover from.

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