The Five Risks That Ruin You in Real Estate

If you follow my writing, you will know that I love blending history with modern-day affairs. If history teaches us anything, it’s that;

1. Real Estate is a fantastic way to build generational wealth

2. It’s also a fantastic way to go broke

So how can both be true?

The short answer is this - real estate is not just about the upside. It’s also about survival.

Survivorship bias is a real issue here. Survivorship Bias is the premise that we only see the success stories, so we assume it’s easier than it actually is. If one hundred people start businesses, and ten of them become fabulously wealthy, but you never hear about the 90 failures, then you would assume it’s pretty straightforward and easy to build great wealth this way.

Here’s my view. The upside is great. It’s the downside risk protection that really matters, though. There are many people who invested a lot of capital on the endless population growth and hot Red State exodus thesis during the COVID-19 pandemic. They only looked at the upside. Some of those deals are fine. But many of them are not. I would argue that the sponsor and the investors didn’t properly account for the downsides. They didn’t account for surviving.

In Timeless Wealth style, we will examine five undercounted risks that have sunk investors in history, tied to real stories.

The 5 Hidden Risks that can Make or Break an Investor

Number 1: The Liquidity Mirage: You’re Asset-Rich, But Cash Poor

This is fairly straightforward, yet it seems to kill people every cycle.

You can go broke doing too many good deals if you run out of cash. Illiquidity is a feature, not a bug, of real estate investing. But it’s a bug if you are so illiquid that you cannot support your properties in a downturn.

If you are an LP investing in a deal, I think it’s a fair question to ask your sponsor - how much cash are we keeping in reserves? A poorly capitalized deal can be quite dangerous. If the GP doesn’t plan to keep healthy reserves, then the fair follow on question is - who supports the deal if we run out of cash? Ideally, your sponsor plans to support the deal themselves with a cheap loan (AFR rate) to the property if times get lean. Ultimately, the fallback shouldn’t be to call more capital - but it might be.

But more to the general point - when times are good, rents are rising, your equity is swelling, you feel awesome. Even then, there are risks. What if the property needs a major injection of capital? Even a good deal can capsize if you don’t have the capital.

For our first historical tale, let’s look at John “Bet a Million” Gates.

 

First of all, that's an awesome name. John W. Gates is a classic example of the illiquidity trap. While his fortune wasn’t derived from real estate, the example is still particularly apt. I had to include him just because this guy deserves to be known. Look at the ‘stache. Also, he wasn’t ruined - but it was painful.

Gates was a heavy player in highly speculative stocks, including railroad and steel companies. He took on highly leveraged positions, and liquidity dried up when the panic of 1907 hit. The key point here is that liquidity is both cash in your pocket and lender availability to make loans. Both are critical and can kill you.

Bet a Million Gates survived - but he lost tens of millions of dollars (in 1907), which is some serious money. When he died, he was worth over $1 billion in today’s money.

The next gentleman, though, wasn’t so lucky.

Samuel Insull: The Real Estate & Utility Empire That Collapsed Overnight

 

Samuel Insull was one of the most powerful businessmen of the early 20th century. He was a former right-hand man to Thomas Edison, and he built an enormous utility and real estate empire, at one point controlling 85% of the electricity market in the U.S. Midwest.

He also invested heavily in real estate (of course - hence being a better pick for our story here) and financed major construction projects across the famous Ch Chicago, including the Civic Opera House. At his peak, Insull’s holdings were worth $3 billion in today’s dollars.

His empire, though, had one major flaw: It was highly leveraged and dependent on access to credit. When the 1929 crash hit, the stock market tanked, and banks started to pull back heavily on credit. Insull’s companies were also heavily leveraged, and everything they backed was illiquid. As margin calls piled in, he was unable to sell his assets fast enough to meet the calls, and by 1932, his entire empire was gone.

He eventually fled to Greece to escape prosecution but was extradited back by the United States for bankruptcy, embezzlement, and mismanagement. He was acquitted but died broke. His estate was valued at $1,000 at his death, with debts of $14,000. He could not even afford his own funeral.

The moral of the story is that if you’re rich but illiquid, you can and often do go bust. Keep in mind - it’s not like the assets he owned were worthless! They were worth quite a lot. But he couldn’t liquidate them (fast enough)!

Number 2: The Trap of “Guaranteed” Rent Growth

It is true that rents tend to go up over time—in an inflationary sense. The cost of materials rise. Labor becomes more expensive. Debt, too, gets repriced. And, of course, landlords want to make a profit.

But what’s true over 50 years is not necessarily true over five.

In fact, the assumption that rents will steadily and inevitably rise is one of the most dangerous beliefs in all of real estate investing. It creeps into underwriting, inflates exit projections, and justifies paying prices that don’t make sense in today’s reality.

What also happens, though, is that the equation can backfire. Sometimes spectacularly.

Take office in 2019. I wasn’t an investor in the space, but I presume most investment models at the time assumed an inevitable and non-stop rise in rents. That’s an extreme example, given what happened - but it can happen in many different styles of deals. Let’s just say this - I am 100% confident that there are almost no investment deals being pitched right now (or ever) that assume 0% or negative trending market rent growth.

 

William Zeckendorf: The King Who Lost It All

Zeckendorf was a real estate legend. At his peak, he controlled more urban property than anyone else in America—entire blocks of New York City, Chicago, and Washington, D.C. He once owned the land that became the United Nations headquarters. His firm, Webb & Knapp, was a titan of postwar real estate development.

He was bold, ambitious, and a master of using leverage to scale his empire. But he had a fatal flaw: he overestimated how much rent his buildings could generate.

In the booming postwar years, rents were rising and money was cheap. Zeckendorf doubled down, launching massive projects across multiple cities—often with thin margins and even thinner cash reserves. He assumed the rent would catch up. That the deals would pencil. That the good times would keep rolling.

They didn’t.

When a market downturn hit in the early 1960s, rental income from several of his trophy assets came in far below projections. The debt service didn’t change, but the income couldn’t keep up. And because he was operating on razor-thin cash flow, the whole house of cards came tumbling down.

In 1965, Webb & Knapp filed for bankruptcy. Zeckendorf, once one of the most powerful men in American real estate, lost everything.

His memoir, written later in life, is a fascinating and humbling read. A man who once shaped skylines died broke, reflecting on the fact that he had been too aggressive. Too optimistic. Too sure the numbers would always work.

And here’s the kicker: his projects weren’t bad. The properties themselves were valuable, even iconic. However, the assumptions baked into the rent growth projections were too aggressive. And when reality didn’t cooperate, the empire collapsed.

The lesson?

Don’t assume rents will go up just because they have in the past. Real estate is cyclical. Sometimes, rent stalls. Sometimes they drop. And if your deal only works in a best-case scenario, it’s not a deal—it’s a gamble.

Number 3: The Debt Time Bomb

Real estate lives and dies by debt. It’s the lifeblood of the industry. When money is cheap, values inflate. When money gets expensive, markets crack. It’s that simple—and that dangerous.

Most investors don’t realize just how fragile their empire really is until the debt matures.

In the low-rate environment of 2020–2021, floating-rate debt was all the rage. Why lock in 4% fixed when you could get 2.75% interest-only for the first three years? The models looked amazing. Spreads were tight. Rents were rising. Everybody thought they were brilliant.

Then, the Fed hiked rates at the fastest pace in four decades, and suddenly, the math didn’t work anymore. That $10 million loan that costs $275,000 a year? Now it’s $700,000. The cash flow is gone. You can’t refinance. You can’t sell. You’re stuck.

And this isn’t some modern cautionary tale. It’s happened before.

Just ask Harry Helmsley.

Harry Helmsley was once the king of New York City real estate. A high school dropout who rose to become one of the largest landlords in America, he owned the Empire State Building and dozens of Manhattan office towers. For a time, he was the embodiment of real estate wealth and power.

But he built that empire with massive amounts of floating-rate debt.

Helmsley's world began to unravel when the commercial real estate market hit turbulence in the late 1980s and early ’90s. Interest rates rose, office vacancies spiked, and refinancing became nearly impossible. Cash flow couldn’t keep up with rising debt service, and much of his portfolio turned upside down.

At the same time, his legal troubles compounded the pressure. Harry and his wife, Leona Helmsley—“the Queen of Mean”—became embroiled in a tax evasion scandal. Investors got spooked. Lenders pulled back. The press smelled blood. The Helmsley empire began to fall.

By the time the dust settled, Helmsley had lost control of some of the most iconic properties in the country. And while he wasn’t personally bankrupt, the collapse of his portfolio was spectacular. An empire undone by the same force that built it: cheap money that got expensive.

The takeaway is brutal and timeless: Floating-rate debt is not a gift—it’s a ticking clock. You need to know exactly what will happen when the clock runs out.

Number 4: Government Policies that can Kill Your Investment Overnight

Real estate is a game of numbers—until it isn’t. Because sometimes, the rules change mid-game.

You underwrite a deal. You model your returns. You do your homework. Then the city council passes a new rent control ordinance, or the state raises property taxes, or a ballot initiative changes the zoning on your land. And just like that, the deal no longer pencils.

That’s the thing about real estate: it’s not just an asset class—it’s a political football. Unlike other investments, housing is directly tied to social, political, and economic pressure. Everyone has an opinion about it, which means the government always has a hand in it.

Let’s rewind to 1970s New York City, one of the most infamous examples in real estate history.

New York had strict rent control laws aimed at protecting tenants from rising housing costs. The problem? The math didn’t work. Landlords couldn’t raise rents, couldn’t reinvest in their buildings, and eventually couldn’t justify holding onto them.

Properties deteriorated, entire neighborhoods fell into disrepair, crime soared, and landlords walked away. Some stopped paying taxes altogether, and others simply let buildings rot.

The city had to step in and take control—at one point, New York City owned over 11,000 apartment buildings it had seized through tax foreclosure. It became, unintentionally, one of the largest slumlords in America.

It didn’t happen because of a crash or over-leverage. It happened because of policy.

And it still happens today.

California’s Proposition 13 radically changed how property taxes work, locking in low rates for long-time owners but crushing cities’ ability to raise revenue. Oregon’s land use laws have made it almost impossible to build new housing in large swaths of the state (conversely a positive in our view for owning assets). In Florida, changing insurance regulations are sending premiums through the roof. In Illinois, property tax hikes have wiped out investor profits.

Sometimes, the risk isn’t the market. It’s the mayor.

That’s why I tell every investor—before you fall in love with a deal, fall in love with the rulebook. Understand the politics. Understand the zoning. Understand the direction of the winds.

Because the government doesn’t need to take your property to make it worthless. They just need to change the rules.

The Final Risk (No. 5): Emotions, Mania, and the Madness of Crowds

 

Real estate mistakes are rarely made in spreadsheets.

They’re made in boardrooms, conference calls, and late-night conversations where someone says: “We can’t miss this wave.”

I’ve written before about how we are, as a species, deeply social and myth-driven. We like to think we’re logical creatures making rational decisions. But in truth, we’re far more susceptible to collective emotion than we care to admit. And when enough people start believing in the same story, it doesn’t matter how smart your model is—you’re probably getting swept along for the ride.

That’s what happened in Japan during the 1980s.

At the height of the boom, Tokyo real estate was the most expensive in the world. Land under the Imperial Palace—just the land—was said to be worth more than the entire state of California. Banks lent aggressively. Developers bid recklessly. Everyone believed the same story: prices only go up.

The mania was total. Office buildings were sold multiple times before construction even began. Loan-to-value ratios stretched to the moon. The Nikkei soared. The Japanese were buying up global trophy assets—Rockefeller Center in New York, Pebble Beach, and Hollywood studios.

Then—snap—the music stopped.

The Bank of Japan tightened credit. Interest rates rose. The bubble collapsed. Land prices in Tokyo dropped by over 80%, and many of Japan’s wealthiest individuals—those who were on magazine covers just a few years prior—were financially ruined.

Some never recovered. Others took decades.

And here’s the kicker: the underlying story was partially true. Japan was booming, and global influence was growing. But the assumptions were stretched too far, too fast, fueled by herd behavior and a kind of national euphoria.

The lesson?

If you find yourself surrounded by people who all believe the same thing—“Rents only go up,” “Everyone’s moving here,” “We can’t lose”—it’s time to pause.

Because when sentiment becomes consensus, risk becomes invisible. And that’s when real estate becomes dangerous.

Markets aren’t just about numbers. They’re about moods.

And moods always swing.

So how to plan for these?

It seems trite to say, “Well, don’t do them.” I get that.

But that is part of the advice.

Here’s a short hit list I like to keep in mind.

1. Underwrite conservatively (and conservatively needs to be somewhat of a timeless conservatism versus an “at the moment conservatism”). What I mean is that it’s easy to “feel” conservative by utilizing present-day figures and hedging a bit for the downside. But the “present period” could be totally irrational.

2. Just don’t use bridge debt. I have used bridge debt, and my general feeling today is one of disgust. I dislike it. I find it unnecessarily risky. If a deal requires a lot of leverage and additional debt to work, then perhaps one should pass on the deal. I know, I know - it’s a useful tool. But it just seems that bridge debt is highly correlated with disaster.

3. Stress Test like a maniac. If you’re not stress testing, you are running blind. Understand downside risks intuitively and deeply.

4. Build in Adequate Reserves. For your deal and for yourself. If you must bottom out your bank account to buy a property, maybe don’t do it. I say that having done exactly this. I survived. I’m an example of survivorship bias. But think about it - if it goes wrong, it’s REALLY wrong.