The greatest real estate loss of our investing careers earned that position of honor thanks to good, old-fashioned greed. This one was all Lief. Kathleen was never on board. Just like every other investor we knew, Lief got caught up in the exuberance of global markets in the years leading up to the 2008 global real estate crisis and double dipped, despite Kathleen's reluctance.

A colleague had a brother. His brother had a friend who was working with a developer in Northern England. The project fit all the parameters of a great deal. It was preconstruction, so the pricing was below market. The payment terms were the standard of the day—10% down with two more 10% payments over XX months. The developer had lined up banks to finance the remaining 70% upon completion. The rental-income projections were conservative based on current rents and would slightly better than cover the mortgage and other operating expenses. On paper, the deal was golden. Lief reserved one of the condos.

A colleague invested, too, and, after we'd made our initial deposits, he updated us regularly on sales and general progress with the project. A few months after we'd made the purchase, the colleague sent an email saying that 10 units had come back onto the market. A group of Italian investors had fallen out.

By that time, the developer had increased prices, which is typical with this kind of preconstruction offer. To create momentum and to get cash flowing, preconstruction developers offer sometimes significantly discounted prices at the initial launch phase. As sales are made, they increase prices according to a predetermined schedule. After X units have sold, prices are increased by Y%, and so on. As the units that came back onto the market for the development of our colleague's brother's friend had been sold at launch, the developer was offering them to other buyers in the project not at that original price but at a nicely reduced cost compared with the current going rate.

Lief broke out his calculator and spreadsheet to remind himself of the numbers behind the deal and got himself so excited that he decided to take a second bite at the profits he projected. Buying a second apartment in the same building violated our personal diversification rules, but the numbers were that good. Plus, we had the cash in hand for another down payment and no other compelling opportunity on our radar competing for it.

When we tell this story to other investors, they interject at this point to say, “Aha … but then the developer didn't complete. The building didn't get built.” That's the most common reason preconstruction deals go south. But that's not what happened here. The building was delivered on time, but the timing was colossally bad. It was 2007. Newcastle, England, where the project was located, like many markets at the time, was overbuilt. This global oversupply had a lot to do with the historic bust of property markets worldwide a year later.

We had never been to Newcastle. When our units were completed, we decided to make the trip to see the apartments firsthand and to work with the management company to furnish and list them for rental. We'd been told that the building's location was prime, and the building style and amenities were intended to target the local hip and upwardly mobile crowd. Those things could have been true, but we realized they weren't the point within three minutes of getting out of our rental car and walking down the high street. Newcastle was grey and depressed, shabby and rundown. We saw no reason to stick around and no reason to return. How many upwardly mobile types could there be shopping in this town for hip digs?

When we met with him, the rental management agent wasn't optimistic about getting the rents that had been projected two years earlier. Indeed, he cautioned us that we might struggle to find renters at all in the current climate. Several other buildings nearby and in other locations around the city had recently been completed. It was not a landlord's market.

We had financed the 70% balance due on our two apartments. We were committed and instructed the management agent to do his best to get the units rented so the cash flow could begin covering the mortgages. To our relief, both apartments rented quickly but for 75% of the monthly rents we'd been expecting. We figured we'd be fine. We'd increase the rents the next year, as Lief had done every year with his Chicago apartments. If only.

One tenant moved out at the end of the first year, and we weren't able to replace him. The other renter stayed on, but the market forced us to lower the rents for both apartments. Not significantly but enough to turn our cash flow negative. We were paying out of pocket to cover expenses. At the end of the second year, the rental manager told us we needed to reduce the rents further. Rental rates continued down as more inventory continued coming onto the market.

Not only had rents fallen due to oversupply over the two years since we'd taken possession of our apartments, but so, too, had property values. Local agents counseled us that the best sales prices we could hope for were about 75% of what we'd paid for each unit. Backing out real estate commissions and other costs, we wouldn't be left with enough to cover the amounts owed on the mortgages.

Lief called the bank that was carrying the loans to try to renegotiate terms. While our loans were amortizing, interest-only mortgages were common in the UK at the time. We figured the bank would rather switch us to an interest-only payment rather than take the properties back. We were wrong.

It was still early in the real estate crash, and the bank refused to talk to us about options. We can only guess that they became more flexible as their books filled with the properties of fellow investors who likewise couldn't sustain their debts over the following 12 months.

That left us in a painful position. We had a choice to make. We could sell at a loss and then come up with more money out of pocket to pay back the mortgages. We could continue to cover the negative cash flow, which was expanding each year rather than shrinking. Or we could walk away and let the lender have it all. We made good-faith efforts to work with the bank, and they told us to take a hike.

The total loss was the 30% down payment on each apartment plus the closing costs, the furnishing costs, and the cash we'd injected to cover expenses for about 14 months. We've not experienced another loss of this caliber before nor since.

Rather than double dipping and buying the second apartment, we should have put 60% down on one apartment. With that level of financing, the cash flow would have been positive even with the falling rents. The investment would have underperformed expectations, but it would not have been a complete loss. Over time, as the local property market recovered, we could have come out okay.

This was our first lesson in the dangers of leverage. Previous experiences in Chicago and Spain and many leveraged investments since have been casebook successes. It was this one, where we doubled down, that blew up.

However, the biggest lesson we learned from this Newcastle debacle was never to invest in a market you do not know and have not scouted personally. Even if it's preconstruction purchase and a boots-on-the-ground inspection trip amounts to standing in a vacant lot, make the trip. Walk the neighborhood. Look to see what else is being built in the vicinity. Speak with the locals about the path of development and the state of the economy. See for yourself the commerce taking place (or not) in the shops and restaurants.

Had we made the quick trip from Waterford, Ireland, where we were living at the time, to Northern England, to spend a day in Newcastle, we would not have made this investment. We would have ignored Lief's spreadsheet and projections. Cash-flow math is key to making good cash-flow investment decisions, but so too is your personal understanding of market dynamics.