FREE NEWSLETTER
WHEN I FIRST CAME across HumbleDollar, I just lurked on the website, convinced that everyone knew more about investing and personal finance than me. After a while, I started making occasional comments.
Finally, I’m ready to share some of my financial stories. My first topic relates to my misadventures with real estate limited partnerships. Note that all references here are to my then-wife, not my current wife.
I was in my first job as an engineer. It was the mid-to-late 1970s, and I worked for a relatively small consulting company. I was good at my job and quickly gained both the respect of colleagues and more responsibility. One day, the company’s owner asked me and several other principals—all of us were young and in our first jobs—if we were interested in joining in a partnership that would “own our own building” and that would pay us rent.
In short order, a group of us agreed to join this partnership and individually borrowed money to participate in this grand adventure. Land was purchased and construction began on an office building and a test laboratory that would house our operations, with plenty of room to grow. We were successful. Both our engineering services and test lab capabilities were in high demand almost immediately, and that high demand continued well into the 1980s.
For several years, the partnership members received substantial tax deductions. But there were uncomfortable signs, too. The company’s owner, who was also the general partner, was always terribly late generating IRS Form K-1, which was required for the limited partners to file their tax returns. As a result, we often had to file for an extension.
The next thing to happen was that the industry where we obtained most of our business went into decline. It was time to reinvent ourselves as consultants and develop new skills. That’s when we found out that our very profitable company was in trouble because the owner had extracted a huge amount of cash from the company. He’d also invested proceeds from our partnership in another real estate partnership, which was now in the process of collapsing.
These were hard times, and for several years we struggled mightily to keep both the company and the partnership afloat. By 1990, the mortgage holder sued the partnership to take ownership of the building, and we all had to pay our pro-rata share of the remaining debt. In addition, our employer failed, and we had to find new jobs.
On the plus side, this was a long time ago. The bank payoff stung at the time but wasn’t devastating. Also, one of my clients offered me a job almost immediately after the company failed. The final plus: I managed to obtain several solo consulting contracts from past clients, which took some of the sting out of the whole ordeal.
Early on, while that first partnership was going well, the owners of the architectural firm where my wife worked asked if we’d be interested in becoming limited partners in the purchase of a downtown office building that would allow us to “own our own building” and collect rent. Sound familiar? This partnership included the renovation of an historic building that initially resulted in substantial tax credits and deductions.
Unfortunately, a similar financial downturn hit both the architectural firm and the partnership. My wife eventually left that company for a different job, but we were still part of the real estate partnership. The general partners made multiple cash calls that ultimately exceeded the total amount specified in the partnership agreement. We and a few other limited partners declined to pay the cash calls that exceeded the total specified in the partnership agreement, and later found out that the general partners commensurately lowered our ownership stake.
The ultimate insult came when the general partners, who were not real estate agents, negotiated a private sale of the building and kept a hefty sales commission for themselves, rather than including it in the partnership’s revenue. This further eroded our portion of the sales proceeds. Given the tax breaks, I’d say we broke even on the transaction, though it was just as emotionally trying as the first.
If nothing else, the two partnerships convinced me that owning rental property, regardless of how it was done, was something to avoid. Both events occurred at a time when my wife and I had barely started saving for retirement. We knew nothing about investing. We trusted our employers and believed they were looking out for our best interests. Our IRA and 401(k) investments were small compared to our partnership investments. The partnership investments also carried much greater liability.
Later, upon reading and studying investment articles, I learned that we fell into the trap of being overinvested in our employers, resulting in us being too dependent on the success of two small consulting companies. Inc. and other business periodicals have reported that many small companies fail in their first five to 10 years. My employer failed. While my then-wife’s employer still exists, the company has never grown as the founders thought it would.
The good news: We both managed to move on. We got new jobs, owned our home, raised two sons and began investing for retirement using index-mutual funds. Since then, I’ve kept my IRA, 401(k) and other investment accounts entirely in mutual funds and exchange-traded funds. It’s only recently that I’ve changed my holdings to include a few individual stocks. Still, I continue to be leery of putting too many eggs in one basket.
Jeff Bond moved to Raleigh in 1971 to attend North Carolina State University and never left. He retired in 2020 after 43 years in various engineering roles. Jeff’s the proud father of two sons and, in 2013, expanded his family with a new wife and two stepdaughters. Today, he’s “Grandpa” three times over. In retirement, Jeff works on home projects, volunteers, reads, gardens, and rides his bike or goes to the gym almost every day.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Thank you for sharing, Jeff! Nice article.
Jeff, thanks for the great article! And you look very fit- I am a gym rat too. Maybe a good contribution to comment on your fitness program in a future article? Just a thought!
Best regards,
DH
Thanks! Another potential future article!
Thanks for sharing your experience. Information such as this is valuable for all to read and seldom available anywhere else. Very helpful to have this knowledge base.
Thanks! I’m working on another article right now.
Great article and fair warning. Brings to mind a couple financial rules of thumb: 1. Shoot for the moon but only with a small portion of your portfolio. 2. Don’t invest in something you really don’t understand. And as you note, a concentrated investment in your employment.
Anthony – Yes, to all three. Those two events pushed me to a more conservative mindset related to investing.
Excellent first article!
Thanks!
Jeff Thank you for taking the time to formulate a most informative post. I look forward to more of your wisdom here on future posts in H D..
Thanks for the encouragement. We’ll see if the wisdom follows . . .
Congratulations on your first article, Jeff. I enjoyed it very much. It brought back some memories of my own about the good years my husband and I shared when he was a partner in a small consulting firm, followed by some lean years when the industry upon which he depended went into a downturn. Fortunately, he had the foresight to save for retirement and the college educations of our three kids during the good years. Some belt-tightening, a move to a lower-cost area and my job as a recent nursing school graduate got us through.
Linda – thanks for the shared experiences. We also fended off some lean times.
Jeff, I enjoyed your premiere article. When I was young and naive I had a similar experience with a limited partnership formed to own Austin rental properties. Not long thereafter a bust came and I lost 100% of my investment. (And our general partner was similarly always late with the K-1s!)
Like you, I was fortunate that this was a long time ago, my investment was not large, and I learned a valuable lesson.
This must be a thing with the K-1s. I was getting them for awhile because of a golf course I inherited shares in from my grandfather’s trust. Always late, always held up filing our taxes.
Andrew – thanks for the confirmation of a similar story. The part that hurt the most was that we borrowed part of the money for investment with my employer’s plan, and then had to pay out of savings to satisfy my pro-rata share of the loss.
Jeff, congratulations on your first article. That must have been a challenging time for you and your then-wife. Glad you powered through it.
Rick – Thanks for the welcome. Like I said, we were young and were able to recover. Part of it may have been the resiliency of youth.
Jeff, your HumbleDollar beginning is similar to mine. Thanks for your comments and your first article.
Edmund – Thanks. I have more ideas for articles. I just need to find time to write them all down.
I started keeping a list in my Notes app months before I got up the nerve to write to Jonathan about my ideas. I still add to it when something occurs to me.