The collapse of real estate investments follows a pattern similar to airplane crashes, according to veteran investor Brian Davis, who argues that understanding this “cascade of failures” theory could revolutionize how investors evaluate deal risk.
“What I have found in commercial real estate investments is it’s very similar to aviation, when you have a plane crash, they say that the average plane crash has seven things go wrong,” says Davis, Co-Founder of SparkRental. This observation comes from analyzing dozens of deals through his investment club’s portfolio.
According to Davis, just as a single mechanical issue rarely downs an aircraft, individual challenges in real estate deals seldom cause total failure. “Usually there’s a cascade of failures where it’s not just one thing that goes wrong, but a lot of things all go wrong together,” he notes.
Davis points to a particularly instructive example from his club’s early days, a Florida multifamily investment that exemplified this cascade theory. The deal faced multiple simultaneous challenges: variable rate debt without protection during rising rates, doubled insurance premiums, inexperienced operators who ultimately disappeared, and poor property management.
“Everything that could have gone wrong did go wrong with this deal,” Davis says, emphasizing how the combination of factors, rather than any single issue, led to the investment’s deterioration.
This experience shaped Davis’ current investment philosophy, particularly regarding operator selection. “Bet on the jockey, not the horse,” he says, “because a good operator can salvage a deal when things go awry.”
Davis now advocates spending “two-thirds or three-quarters of your time vetting the operator, and then the other quarter of your time vetting the actual deal.” This approach reflects his observation that skilled operators can often navigate through individual challenges that might otherwise contribute to a cascade of failures.
The cascade theory has practical implications for how investors should approach due diligence. Davis suggests looking beyond traditional metrics to evaluate how deals might withstand multiple simultaneous challenges.
This might mean examining not just current market conditions, but also operator track records during previous downturns, backup strategies for key risks, and the depth of the operating team’s experience in crisis management.
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