By Dr. James M. Dahle, WCI Founder
I've been investing in private real estate since 2012 and have been more heavily involved with it since 2014-2015. These private syndications and funds generally require you to be an accredited investor, and they also require you to be willing to give up a lot of liquidity. Once you invest, your money is often tied up for 1-10 years before you get it back. This provides managers with flexibility so that they don't have to worry about all of the investors demanding their money at once, but it does make it difficult to really judge an investment until the very end.
Each time I actually have one of these investments go round trip, I do a blog post about it so you can get (in my best Paul Harvey voice) “the rest of the story.” After 3 1/2 years, my investment in the CityVest DLP Access Fund has gone round trip. Let's take a look at how it did.
What Was the DLP Access Fund?
DLP Capital is a current WCI sponsor that offers various debt and equity funds. These evergreen funds offer more liquidity than most, have an excellent track record, and feature a unique fee structure where you don't pay annual fees until after you've been paid your preferred return. The biggest complaint I hear about them? High minimum investments. Over the last few years, the minimum investment at DLP has varied anywhere from $100,000-$500,000. That's out of reach for many white coat investors, and it forces them either to not invest at all or to build an undiversified portfolio.
CityVest offered a solution.
The solution was to pay CityVest some additional fees and give up some liquidity (and communication) in exchange for a lower minimum investment. Instead of $100,000-$500,000, you could invest in the DLP Lending Fund with just $25,000. We brought on CityVest as a WCI sponsor, and white coat investors made up the lion's share of the CityVest Access Fund. I invested right alongside them with $100,000, making me one of the largest investors in the access fund. I think at the moment I invested, the minimum at DLP was $200,000. Although I probably could have gone to DLP directly (and later did with a subsequent investment), it was important that I was in the fund that was being marketed here on the site via the sponsorship—even if it cost me a little more in fees.
More information here:
How Our Private Real Estate Investments Performed in 2022
Why Isn't CityVest Still Sponsoring WCI?
Over the years, we had multiple complaints from white coat investors about CityVest. The complaints never had anything to do with the underlying DLP Capital investment. In fact, they really never had anything to do with the overlying CityVest DLP Access Fund investment. They were primarily communication, customer service, and website complaints. Frankly, we got sick of fielding them. CityVest was making us look bad, so we decided the sponsorship dollars weren't worth the reputational hit.
However, I was always quick to let anyone who asked know that I never personally had a problem with communication, customer service, or the website. When I called or emailed (on my own behalf or that of a white coat investor), Alan always got back to me within 24 hours. CityVest has requested to sponsor the website again several times over the years, but we declined each time.
We learned a lot of lessons from that partnership, primarily that for many investors it wasn't enough to just offer a decent investment. This was especially true for investors making their first investment in private real estate. On average, they just wanted a lot more “hand-holding” (communication and service) than I cared to receive.
What Was the Difference Between DLP and CityVest?
Having invested in the DLP Lending Fund directly AND via the CityVest fund, I had a close-up view to compare these two funds. Here were the primary differences:
- DLP: Open-ended, evergreen
- CityVest: Closed-ended, 3-4 year lifespan
- DLP: $200,000
- CityVest: $25,000
- DLP: Monthly, can be reinvested
- CityVest: Quarterly, cannot be reinvested
- DLP: 1% per year (paid after the preferred return) and 20% of profits above 8% preferred return
- CityVest: Above fees PLUS 0.75% per year (reduced to 0.37% in the first year for WCIers) PLUS $500 per year PLUS a $50,000 one-time fee split among all of the investors. This fee structure was complex and confusing, but I figured it added up to around 2% per year.
- DLP: Debt investments of 6-24 months, loaned to experienced real estate developers, almost entirely in first lien position
- CityVest: Same
More information here:
How to Succeed in Private Real Estate Investing
How Did the Investment Do?
Here are my actual cash flows from the investment.
- 3/29/19 $100,020.00
- 7/29/19 -$1,552.58
- 10/22/19 -$2,750.28
- 1/16/20 -$2,750.28
- 4/20/20 -$2,717.01
- 7/23/20 -$2,522.94
- 10/20/20 -$2,522.94
- 1/29/21 -$2,375.00
- 5/28/21 -$2,633.84
- 8/23/21 -$2,633.84
- 11/8/21 -$2,453.63
- 2/24/22 -$1,913.00
- 5/3/22 -2,273.42
- 11/1/22 -$100,407.93
I invested $100,000 on March 29, 2019 (plus a $20 wiring fee.) I received my capital back on November 1, 2022. In between those dates, I received 12 total distributions. You can learn a few things from that information. The first is that the distributions didn't come like clockwork. The earliest one was just 16 days after the end of the prior quarter. The latest one was almost two months after the end of the quarter. You can see why we received some complaints. When a distribution was late, it was like people assumed CityVest had closed up shop and run off to Bermuda with the money or something—even though the principal wasn't even at CityVest; it was at DLP.
The second thing you learn is that the investment provided the following returns:
- 2019: 4.35% (9 months)
- 2020: 11.16% (12 months)
- 2021: 10.32% (12 months)
- 2022: 4.73% (10 months)
- Overall annualized return: 8.57%
OK, fair enough. That's not a terrible return for a real estate debt fund. These returns tend to be between 6%-12% in the long run and this return was in that range.
The third thing you learn is that you lose some return on the front and back end with these investments. This is because the money is sitting in cash, either at CityVest or at DLP Capital. Either way, it didn't help my return. I was pretty happy with my returns for the “full years” I was invested but not so happy with the other years.
Comparing to the Alternatives
For purposes of intellectual honesty, now is the time to compare my returns in this investment to some alternative investments that I could have chosen at the time I invested in the CityVest DLP Access Fund. This is a bit of an apples-to-oranges activity, but I'll do the best I can.
Alternative #1: Investing Directly at DLP
I have been investing directly into the DLP Lending Fund since January 18, 2021, and have reinvested all of my dividends so the calculation should be pretty easy. I invested $200,000 on January 18, 2021, and on November 1, 2022, I have $228,861.26 in the fund. That annualizes out to 8.90% over 21 months. That return, however, was hurt by the money sitting in cash at DLP for almost two months before it was invested in the fund by DLP. This is fairly common at DLP (expect it to sit 1-2 months). Over the years, this should theoretically help long-term investors as it prevents dilution of their returns by new investors, but it definitely doesn't help that first year. In 2021, I made 4.6% with my money tied up for 11 1/2 months. However, in 2022, I made 10.66% in just 11 months (annualizes to 12.89%).
The actual returns on the DLP Lending Fund for the years I was invested in the CityVest fund, as reported by DLP (through the end of September 2022), were:
- 2019: 12.41%
- 2020: 11.26%
- 2021: 10.61%
- 2022: 11.55% (annualized)
My returns have obviously been lower, but it appears that has primarily been a function of the time spent getting my money invested in the beginning. This year, I seem to be making exactly what DLP is reporting. If you really want to compare investing directly at DLP to investing via the CityVest DLP Access Fund, let's look at 2020 and 2021, the two years I was invested the entire year in the fund.
In 2020, DLP made 11.26%, and I made 11.16% in the CityVest Access Fund. In 2021, DLP made 10.61%, and I made 10.32%. By that direct comparison, I didn't lose much at all investing via the Access Fund. But I think a lot of the additional fees I paid show up in the lower 2019 and 2022 returns. It's just really hard to tease the effect of the fees out from the effect of the cash drag of sitting in cash at DLP and at CityVest. Both are bad for investors, but how much each contributes to the underperformance is hard to say. Clearly, the cash drag isn't JUST a CityVest problem though.
Alternative #2: Other Private Debt Funds
I can also compare both the DLP Lending Fund and the CityVest DLP Access Fund to other debt fund investments I have. Starting in 2018, I invested with the first fund, and I have reinvested everything since. Its returns for the relevant years have been:
- 2019: 7.62%
- 2020: 6.89%
- 2021: 7.14%
- 2022 (through November 1): 5.68% (annualizes to 6.83%)
My overall annualized return with this fund is 7.01%.
With the second fund, I didn't start investing until mid-2020, and I have reinvested everything since. My actual returns for this fund are:
- 2021: 8.50%
- 2022 (through November 1): 8.49% (annualizes to 10.24%)
- Annualized returns since I bought in: 8.43%
The fund has reported returns for the relevant years as follows:
- 2019: 11.80%
- 2020: 7.73%
- 2021: 8.85%
- 2022: 10.49% (annualized from first six months return)
When you compare the DLP Fund both directly and via the CityVest fund to its peers that I am actually invested in, you can see they're all in the same ballpark. If we do an apples-to-oranges comparison here using the annualized return for each of these four investments during the time period I actually owned them (which is different for each investment), they look like this:
- CityVest: 8.57% per year (4/19-10/22)
- DLP: 8.90% per year (1/21-10/22)
- Other Debt Fund #1: 7.01% per year (7/18-10/22)
- Other Debt Fund #2: 8.43% per year (6/20-10/22)
I hope to make 9%-11% on this asset class in the long run (and am so far overall when I consider all of my real estate debt investments). Still, 7%-9% isn't too bad given that lots of people expect less than that out of stocks. I know lots of people who would love to be making 7%-9% with their investments in 2022!
Alternative #3: The Vanguard REIT Index Fund
Lots of white coat investors, including me, invest in the Vanguard REIT Index Fund. Now, this is REALLY an apples-to-oranges comparison. Not only is the Vanguard fund a fund of publicly traded securities, but it is also an equity investment. The Vanguard fund only includes equity REITs. At any rate, its returns over the relevant time period are as follows:
- 2019: 28.94%
- 2020: -4.65%
- 2021: 40.40%
- 2022: -26.78% (through November 1, not annualized)
Obviously, this is a very different investment than these debt funds, with much higher highs and much lower lows. But it is interesting to look at and compare. If you invested $100,000 in the Vanguard fund at the beginning of 2019 and sold it at the end of October 2022, you would have $126,387, for an annualized return of around 6%. Technically, over this particular time period, the private debt funds did outperform the public equity fund. I don't know that I would bet that way in the long run, but that's what the data shows.
Alternative #4: A Public Debt Fund
One more comparison seems appropriate. I could have just invested in a public mutual fund or ETF that invests in real estate debt, not equity. I have not done this, but if I were to do so, I would probably use the iShares Mortgage Real Estate ETF (REM). We can view its returns over the last few years, too:
- 2019: 21.38%
- 2020: -20.66%
- 2021: 16.17%
- 2022: -28.80% (through November 1, not annualized)
That annualizes out to something like -5.5%. Obviously, the private debt real estate investments have all done a whole lot better than that. 2022 was an interesting year comparing private and public real estate investment returns, where basically private looks awesome compared to public. The debt side is no exception. How much of that is due to private real estate not being marked to market and how much of it is due to a lag in returns and how much is due to innate differences is not entirely clear. Even though REM is not equity, it is clearly much more correlated with the stock market than private debt funds are. It is also much more volatile; you see much higher highs and much lower lows.
More information here:
Real Estate K-1s — Here’s What My Depreciation Really Looks Like
You may be interested in my overall return in this asset class. I first began tracking this sub-asset class separately in 2017, and my annualized return since then has been 9.57%. In 2022, my return through October was 8.04% (annualizes to 9.70%).
Overall, I'm happy with my investment in the CityVest DLP Access Fund. I got all my principal back, and I made a solid return, too. It appears there are several things that can be done to improve returns with this asset class (debt real estate.)
The first is to use a fund, rather than individual investments/notes. This provides liquidity and, most importantly, diversification. For the last several years, I've only used funds.
Second, use the best funds you can find and qualify for. You save fees and get better operational ability.
Third, don't jump around. Unlike public mutual funds, where your money goes to work immediately, it is not unusual for your money to sit in cash for a while as it moves into and out of funds. That cash drag lowers returns.
Finally, put this type of investment in a tax-protected retirement account (either tax-deferred or Roth). It is a terribly tax-inefficient investment where essentially the entire return is paid out every year and taxed at ordinary income tax rates. I have some of these funds in a self-directed 401(k), but I am always considering ways to get more into tax-protected accounts.
I plan to continue to invest 5% of my portfolio in debt real estate. I hope this report/review of one of my investments is helpful to you. If you are interested in private real estate investing, start your due diligence with those who support The White Coat Investor site:
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What do you think? Did you invest in the CityVest DLP Access Fund? What did you like and dislike about it? Have you invested in other private real estate funds? Comment below!