Most of my portfolio is pretty boring. 60% of it is invested in stock index funds and 20% of it in low-cost bond funds. That never really changes, so there is little point in writing frequently about it. However, about twice a year I update readers on my other investments. This 20% is primarily invested in real estate investments, but the main aims of this portion of my portfolio is high returns, low correlation with stocks and bonds, and getting paid for illiquidity. Many of these investments are not available to you, but there are often similar investments that are if you are interested. Bear in mind all of these are completely optional. If your written investment plan avoids them completely, you are probably going to be just fine so long as you fund the plan adequately. Returns discussed in the post are as of February 11th, 2019.
The Vanguard REIT Index Fund
My investing policy statement dictates 5% of my portfolio be invested in this fund. I've owned it since November 2006. My annualized dollar-weighted returns since that time are 7.76%, dragged down significantly by 2018 when it returned -7.63%. It is up almost 13% already in 2019. Remember that with dollar-weighted returns, in a portfolio that is rapidly increasing in size, recent returns have a much larger influence on the annualized returns than you might expect. I'm a little underweight here right now, with only 3.24% of my portfolio invested here, so that probably worked out in my favor in 2018 and against me last month.
Peer to Peer Loans
- 2012: 12.65%
- 2013: 13.16%
- 2014: 11.34%
- 2015: 9.99%
- 2016: 7.09%
I decided I wanted out because I didn't like the very concentrated platform risk and it seemed silly to be taking that kind of risk for 8-10% returns when I could invest in hard money loans backed by a forecloseable property instead. It turned out to be far more illiquid at that point than it had been years earlier when I started investing in this asset class. Nevertheless, I was able to liquidate 90%+ of it within a few months and invest it elsewhere as planned. But I still have money there that I won't see for years. That's not such a huge deal in my Prosper account. It was never more than a small taxable account, but just before I decided to get out, Prosper decided they weren't going to let you sell your notes on a third party platform. So as they are paid off, I periodically transfer the money to my checking account. I currently have $107.23 in that account spread across 11 current notes and one late note. I won't get my last dime back until October 2021. My annualized returns with Prosper? 6.02%. Not too shabby.
The Lending Club account was more problematic. I also had a small taxable account there that actually liquidated pretty quickly. But the larger Roth IRA account was a lot harder to liquidate. I sold very few at a premium, a bunch at par, and even more at a small discount. It became obvious I wasn't going to sell any more unless I was going to give them away, so I decided to just keep trying to sell them at par and wait for them to mature. There were two problems with this approach. The first is that to move cash out of the account requires an IRA rollover, which is a pain and comes with a $25 fee. The second was that once my balance fell below $5K, the self-directed IRA holding the assets started charging a $100 annual fee that had previously been waived/paid by Lending Club. Despite having all of my notes for sale for nearly all of the last two years, I still own 52 current ones and seven late ones, for a total of $1273.74. A $100 annual fee on a $2000 account is the equivalent of a 5% ER, so needless to say my returns the last two years have not been stellar (-5.22% in 2017 when I was selling a lot at a discount and -1.60% in 2018 when I wasn't), but at least they've only been on a relatively small amount of assets. Most of the money was moved out within just a few months. I'm still trying to sell those last 59 notes, but if I can't, I'm stuck here until October 2021 too. My overall Lending Club annualized return was not bad, 7.96%.
Partnership Office Building
I still own part of my partnership office building. The value is only assessed once a year, so no real change here. The tenant is great! The return has ranged from excellent to poor over the years. Last year it was poor due to a bunch of upgrades. 9.25% annualized overall.
Indianapolis Apartment Building
This was the one bought through RealtyMogul in 2014. It got behind on payments for a while but caught up. Over the years it has sent me $2,030 on my $10,000 investment. The next distribution is due later this month. It was targeting a 7-12% cash on cash return (and a 15% IRR). I've seen 4.89%. I should have a payment hit about the time this is published. They tell me the cash on cash return has been 5%, which is about right. The estimated hold was 5-7 years, so we'll see what the overall return is in another year or two.
My Local Grocery Store
I no longer own my local grocery store. As discussed in this post, this RealtyShares investment went round trip. It called for an 18.2% IRR and I calculate my own at 17.8%. I'm pretty happy with that, even with RealtyShares on their way out of business.
Houston Apartment Building
This is one I bought through Equity Multiple just over a year ago. It offers a 10% preferred return and until recently that was exactly what I had gotten. It's hard to come to any definitive conclusions until it goes round trip. It's a 3-year hold so that date is still a couple of years away. They're aiming for a 15% return. However, I just got a notice this month that demonstrates well what risk showing up looks like in this type of investment.
Over the course of the last few months, we have been working closely with the Sponsor to finalize their 2019 budget which includes a renovation schedule for the remaining units. As mentioned in previous updates [The property is in Houston where there was a hurricane], one of the difficulties that the Sponsor ran into was lack of available subcontractors to effectively work through renovations. As a protective measure, the Sponsor has continued to lease out the Property to tenants on a month-to-month basis in order to generate cash flows and meet debt service.
The plan moving forward will be to renovate 65 units over the next 9-12 months while leasing out finished units at market rates. Eight units are currently under renovation and are scheduled for completion in early March. As part of the new plan to address labor shortage, the Sponsor has informed us that they have signed employment contracts with electricians, plumbers, and HVAC crews in addition to contracting a larger team to handle carpentry and other renovation work. The Sponsor may add 2-3 more skilled laborers over the next couple weeks to help expedite the entire process and is committed to adhere to the schedule. After many discussions with the Sponsor, we now have a concrete plan in place to complete the unit renovations.
Additionally, we have discussed cash flow distributions with the Sponsor extensively. As noted in previous updates, the initial Interest Reserves have been fully paid out at as of November. Per our Partnership Agreement, cash flow distributions to investors thereafter would be funded by available cash flows of the Property. Based on the current plan, distributions are projected to be partial with the remaining shortfall accrued until additional units are renovated and sufficient cash flows are generated. Delays in unit renovation have no doubt negatively impacted the timing of distributions to investors but all accrued amounts on Preferred Equity will be fully repaid ahead of any distributions to the Sponsor.
While the news on current distributions is disappointing, the Houston market continues to be strong and the prospects for an attractive exit remains optimistic.
As you can see, the return is now dropping below the pro-forma and I doubt it will be made up. Will there still be a positive return? Probably. Will it be 15%? Probably not. Is there anything I can do about it? Absolutely not.
Origin III Fund
This was my first real estate equity fund. I prefer funds to picking the properties individually. I like the professional management, diversification and sometimes additional liquidity. This one is sure taking its time getting fully invested though. It's been doing capital calls for 16 months now and I'm still only 63% invested. That's fine, I'd rather they not rush it if they don't have good deals to buy and I've got plenty of other places to invest the money in the meantime. Return so far is only 1.54%. The first distribution is supposed to be in about 6 months. Hopefully, we can get fully invested by then! The goal with this one is to double my money over 7 years or so. We'll see how it goes.
Fort Worth Apartment Building (37th Parallel)
This was purchased in February 2018. It reliably makes a payment once a quarter. Cash on cash return so far is 3.84% (although that will jump up closer to 6% between now and publication of this post when the 4th quarter payment is made.) I think this one is a 10-year hold. We'll see how it goes. So far it is at pro-forma or very slightly above.
Realty Shares Lover's Lane
This was a $5K loan to a home flipper through RealtyShares. They took the optional extension for an additional 4 months but always paid as agreed. I made 8.69% and got all my money back last October.
This was another $5K loan to a flipper through RealtyShares that also took the extension. It had always paid as agreed until January when it missed a payment for the first time. I'm looking forward to getting my principal back soon given RealtyShares's recent issues (basically they're finishing up their current investments and then going out of business). This is my last RealtyShares investment. 7.24% annualized return so far. Recent notices demonstrate what risk showing up looks like in this asset class. Remember this is a one year investment beginning June 2017.
The sponsor reports that the property is for sale with three other apartment complexes. Several offers were received, the highest of which is $4.4MM or about $28,000 per unit. The sponsor has decided to exercise its 6-month extension to have more time to complete marketing, negotiate offers, and close the sale. The rationale is that with more time to market the property, the sponsor may close on a better offer. The properties can be purchased individually or in a portfolio. The listing price for this property is $1,306,565.
The property is now under contract. The sale price is $1.25MM and the sale is expected to close within 60 days. Your investment will be returned in full with accrued interest upon closing. RealtyShares will update you when the close is confirmed.
The sale fell through. The borrower offered this property with two others he owned in Texarkana to sell as a package. The borrower felt that a sale at a higher dollar amount would attract a wider buying audience. What they found is that a $5MM purchase price was too large for smaller buyers and too large for larger regional buyers. They are back on the market selling the three properties individually. The property is now on the market for $1.2MM. The loan has been extended until June to allow for the consummation of a sale.
RealtyShares Church's Chicken
This one gave me my principal back in July, always paid as agreed. I made 9.76%
Fund That Flip Jay Road
This is is a $5K hard money loan through Fund That Flip and has had some issues. It made a late payment back in August, then in October filed for an extension. The rehab has been completed but they were still trying to sell the property. They missed their December payment, which was probably a bad sign. Then they finally sold the property in January and I got paid all the interest I was due plus penalties. Final return? 11.29%.
Fund That Flip Fox Lane
This $5K loan through Fund that Flip also filed an extension, but at least they're making all their payments. One was a week late, but I'm more concerned that the project on a 1-year loan is only 48% complete after 15 months. Not looking good there. 9.27% so far. At least the late payment and loan extension fees go to the investors.
Fund That Flip 527 East
This one actually completed the project and paid back the loan at the expected time. 10.93%.
In late 2017 I got sick of picking these hard money loans myself and decided to outsource it. First stop? AlphaFlow. They basically pick the loans from the various crowdfunding companies and charge me an additional 1% for removing hassle, providing liquidity, and providing diversification. So far, so good. 7.64%. My $22K is spread over 109 notes.
Broadmark II Fund
One of my favorite investments, this is a hard money loan fund that loans to developers in Utah and Colorado. 9.57% so far. They claim returns around 11%, but that's not what I'm calculating it out as. Part of that may be due to the Colorado taxes being withheld for me, but most of it is just the fact that the reporting comes back a month late and that's what I use to calculate my return. They changed to REIT status recently, which should qualify this income for the 199A deduction.
Arixa Secured Fund
This is another hard money loan fund, lending in California. I calculate my return at 6.02%. That's always about a month behind just because of the way they report it to me, but they're only claiming a 2018 return of 7.7%. I find it interesting that most real estate investments calculate returns differently than XIRR. I guess I shouldn't be surprised. I asked recently why their returns were lower than Broadmark's. Fund manager Dan Frankel said this:
It is all about the risk of their loan portfolio versus ours. Lenders can charge higher rates in states like CO and UT because these states will experience more significant value degradation (on % terms) in a down turn, compared to major job centers in coastal CA. We would charge much higher rates in those states as well.
Whether you buy that or not, it appears to be yet another great financial reason not to live (or invest) in California I guess. 3.6% sunshine tax. Either way, I do prefer owning dozens of these loans via these funds rather than a handful of loans picked individually, and for about the same amount of management fees either way.
I mentioned this one on the podcast a couple of weeks ago, but I'll be picking up another hard money loan fund in my portfolio in the next month or so. You are welcome to join me if you like. I'm not yet sure if it will replace AlphaFlow or Arixa eventually but for now it will just be in addition to it. The fund I will be indirectly investing into is the DLP Lending Fund. I won't be investing directly into it because the minimum investment is a little rich for me ($500K). The fund lends primarily in Pennsylvania, New Jersey, and Florida. While the PPM allows for a small percentage of the fund to be invested in mezzanine loans, the fund is currently 100% invested in first position real estate investment loans and plans to stay that way. The fund also uses some leverage. There is a 10% preferred return and they aim for 11%+ returns. Since they started in 2014, they have averaged 14.3% returns.
So how am I investing in it if I don't want to put $500K in? That's where CityVest comes in. Some of you may recall another fund I mentioned in December in connection with CityVest, one of my site's sponsors. 40-50 of you invested in that fund, but I wasn't one of them. CityVest was started by Alan Donenfeld after he recommended his anesthesiologist brother invest in good private real estate funds and then found out his brother, despite being an accredited investor, could not invest in them due to the high minimums. CityVest bands together groups of accredited investors like physicians into an “Access Fund” that then invests in the larger fund. The benefit is a lower minimum investment and usually another price break. The downside is another layer of fees. Here is the deal with the CityVest DLP Access Fund:
DLP Lending Fund
- 1% + 80/20 split after the 10% preferred return (First 10% to you, next 2% to manager, then 80/20 above that)
- $500K minimum investment
5% exit fee[Update 2/19: This fee no longer exists for any investors and was never for more than the first year anyway.]
- 90 day liquidity
- Monthly distributions
- $500/year fee
- 0.75% annual fee
- $50,000 one-time organization fee split among all investors in the Access Fund
- $50K minimum investment
5% Exit fee waived[Update 2/19: No longer needs to be waived.]
- No liquidity for 3-4 years
- 100 total investors
- Quarterly distributions
- First year annual fee reduced to 0.375% from 0.75%
- $25K minimum (instead of $50K)
Now I don't want to put $500K into this fund. I wouldn't be able to be sufficiently diversified if I did that. But I do want to minimize the fees that come from going through CityVest. There are three ways to do that.
First, I negotiated a lower annual fee for the first year, in addition to a lower minimum ($25K instead of $50K). You have to go through the WCI links to get that. If you go straight to CityVest, you don't get it.
Second, I want the fund to “fill,” meaning I want all 100 investor slots that its structure allows to be filled. The more people that invest, the lower my portion of that $50K one-time fee becomes. I also want people to invest more money rather than less. If all 100 investors only invest $25K, that's a $2.5M fund and that fee is 2%. If all 100 investors invest $100K, that's a $10M fund and that fee is 0.5%. I think the fund will end up being about $5M honestly, so a 1% fee.
Third, I want my $500 annual fee to be as small of a percentage of my investment as possible. I can do that by investing more than the minimum $25K. Katie and I decided to invest $100K, so that fee is only 0.5% per year.
So my total fees for year one will be
- 1% DLP fee
- 0.37% CityVest annual fee
- ~1% CityVest organization fee
- 0.5% CityVest administrative fee
- Total 2.87%
My fees for years 2-4 will be the
- 1% DLP fee
- 0.75% CityVest fee
- 0.5% CityVest administrative fee
- Total 2.25%
In addition, the DLP manager will earn 20% of returns, although they will not receive any until the investor receives the 10% preferred return.
If they can manage to do what they have done the last four years, I would expect returns of around 12%. This investment will be very tax-inefficient by its nature (hard money loan interest is taxed as ordinary income- no depreciation), but the fund will be taking care of the state tax returns in Pennsylvania and New Jersey using composite returns.
If you wish to join me in this investment with $25-100K+ of your money, you may do so through this link. Yes, you must be an accredited investor. Now don't be stupid and invest some huge percentage of your portfolio in this; diversification still matters. I only have 5% of my portfolio in real estate debt and even that is split among 4 different managers.
In case it isn't incredibly obvious, I GET PAID IF YOU INVEST WITH CITYVEST THROUGH THE AFFILIATE LINKS ON THIS PAGE. Affiliate marketing is one of the ways this for-profit website makes money. So obviously I have a huge conflict of interest in this regard and I have no legal fiduciary duty to you. You can read more about my conflicts of interest here. You can get started investing with the link below or you can call up Alan Donenfeld at 212-593-1600 and let him know WCI sent you to get the WCI deal. If you want to learn more, there is a webinar on Tuesday and Wednesday this week at 2 pm EST.
Physician on FIRE
Moving away from the real estate debt, let's talk about my best investments — the WCI Network. Physician on FIRE continues to send me quarterly checks and I calculate out my ROI at an annualized 289%.
Passive Income MD
My best investment, however, is the king of cash flow himself. Nothing better than getting passive income from Passive Income MD. 851% annualized return there. I highly encourage you to continue to support these fine websites.
Overall, the returns on the 5% of my portfolio invested in real estate debt were 9.13% in 2018. The returns on the 10% of my portfolio invested in equity (heavily boosted by WCI Network returns) were 85%.
Most of my investing money the last few months has been going into stocks to try to rebalance the portfolio. Strong performance from real estate/alternatives combined with poor stock market performance has forced me to do that. But I'm sure I'll be looking at more real estate investments soon. If you're interested in real estate investing, take a look at some of my affiliate partners (More details found on this page.)
What do you think? Do you invest in anything besides index funds? How have those alternatives treated you? How have you chosen to invest in real estate? Comment below!
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