By Dr. James M. Dahle, WCI Founder
It's been a while since we gave an update on our real estate investments. They're really the only “interesting” part of our portfolio because everything else changes so infrequently. As a reminder, here is our asset allocation:
- US Stocks (40%)
- Total Stock Market (25%)
- Small Value (25%)
- International Stocks (20%)
- Total International Stock Market (15%)
- Small International (5%)
- TIPS (10%)
- TSP G Fund (10%)
Real Estate (20%)
- REITs (5%)
- Equity (10%)
- Debt (5%)
Today we're only going to be talking about the last two categories there, for a total of 15% of our portfolio. The rest is covered with what is the equivalent of seven index funds. Also, be aware that I have a financial relationship with essentially every company and link you see in the rest of this post. Some firms I just invest at, others buy ads here at The White Coat Investor, and still others I have an affiliate marketing partnership with. So if you decide to use some of these firms, I do appreciate you going through the links provided here as they help support the site and letting them know where you heard about them.
First, a broad overview of the many different ways one can invest in real estate and why we've chosen to invest as we have. Let's use a slide I'm borrowing from the real estate investing lecture of our online course, Fire Your Financial Advisor.
As you can see, on the left side are options like buying the house down the street and managing it yourself. There is the most opportunity to add (or subtract) value, the most hassle, and the most control. This option is most like a second job. On the far right, you see a REIT mutual fund like Vanguard's excellent REIT Index Fund. Minimal hassle or expertise, maximal liquidity and diversification. So what's the problem there? Well, it's terribly tax-inefficient and has higher correlation with the overall stock market- “real estate flavored stock” if you will. I think you probably give up some potential return for the convenience too.
On this continuum, we lean more right than left, but have investments all the way from syndicated properties to REIT mutual funds. We don't have the time, desire, or expertise to spend much effort on the left side (at least any more). Doesn't mean it's wrong for you, but that's what we do. Pluses and minuses either way. I figure if I'm going to put a lot of effort into a second job/inefficient market investment, it's going to involve websites, where we have significant expertise and not real estate, where we do not.
Equity Real Estate Investments
Let's talk about our equity real estate investments. Remember we lump some of our website investments in here as well, but out of respect for Physician On FIRE and Passive Income MD and what they're trying to accomplish, I'll be leaving many details of those investments out of this post.
Since our last update, we've made some new investments, closed some old ones, and held some others. I'll be discussing all of them here. Be aware that the overall returns will often appear lower than they actually are. These investments are not marked to market on a daily basis. In fact, they might not be marked to market on even an annual basis. So I may be using the value I bought something at 2 or 3 years ago when calculating my returns. With some investments, you never get to know how you're doing until you've actually gone round trip with it, and that round trip may take a decade!
Partnership Office Building
Up until 2017, our partnership office building had been a really great investment for us. Part of that was the screwy way the buy-ins and buy-outs had worked with it. When I bought in, I was able to buy in at what was essentially the prior year's price. I bought some more of this in late 2016 (essentially doubled my investment to $32K or so) But what wasn't made clear to the investors by the board was that we were buying at a projected future price for the investment. Wacky? Of course. Unfair? In many ways. So I complained about it. Now it looks like I'm going to be on a new separate board managing this investment. That's what you get for speaking up. I suspect things like this happen with physician office building type investments all the time. Pay attention to the details because they do matter. The annual appraisal comes up in another month or two so the return is probably a little better than it looks. But my annualized return on this one over 5 years is 13.84% a year.
Indianapolis Apartment Complex
This one was my first crowdfunded syndicated investment. It was purchased through RealtyMogul way back in November 2014. It was trailing the pro-forma (and still is) but is catching up. Some money was held for a while due to a dispute with FHA, but that was finally released to the investors in 2017. It's not clear what my share of the property is worth, making it difficult to calculate my return, but if it is worth exactly what I paid for it ($10K), our annualized return stands at 4.96%. I suspect it is worth quite a bit more as the Net Operating Income increased 13% over the last year, and the value of the property should be increasing along with that. Time will tell.
Salt Lake City Apartment Building
This one was a preferred equity investment on a building in downtown Salt Lake City purchased through Fundrise. Fundrise has been gradually moving from a model where they offer individual investments to accredited investors to running an “eREIT.” Well, the eREIT bought this investment off me this year, almost a year earlier than I expected the investment to end. It promised a 14% return and now that we've gone “full circle” I can report that indeed we made an annualized return of 13.66% for a little over 2 years. It was nice getting those checks like clockwork each quarter and I was kind of disappointed to be bought out early.
My Grocery Store
This one has been fun to own. We've been owners of (a tiny slice of) the land our neighborhood grocery store sits on that we bought through RealtyShares. This $5,000 investment basically pays us $25 a month. Part of that land was sold off (I think it was the old Burger King in the parking lot) this Fall and some of our capital was returned. I haven't seen a current valuation for the property since we bought it a couple of years ago, but assuming it is worth what we paid for it, our return annualizes out to 5.46%. (It promised 6%.) It sounds like we'll be exiting by summer, so with my next update I should be able to give you the total return on this one.
This is an equity investment in a website you all know well. This is by far my highest yielding and highest returning investment in 2017. I enjoyed a 50% yield in 2017 with a total return that annualizes to something like 344%. That's a little squirrelly to calculate as websites are so difficult to value.
That's it for updates on the old equity stuff. Let's move on to the stuff we've bought since last April.
Origin III Fund
I've been realizing the last couple of years that I don't particularly enjoy scouring through a bunch of crowdfunded real estate websites. Nor do I think I'm doing a particularly great job of picking investments and doing due diligence. So I'm moving more toward funds where I pay someone else to do that for me. The nice thing about that approach is that while you still have to do due diligence on the manager, that's it for 5, 10, or more years. And if they buy 10 or 20 investments in the fund, it also provides you a fair amount of diversification. This investment with Origin Fund III is the first of these I have done. Instead of giving them all your money up front, they call for capital as they find attractive investments. So while I've committed $100K, I've actually only invested $37K so far. There haven't been any distributions yet, as expected. This is going to be a long-term one, so I'll update you as we go along. It is managed by Michael Episcope who has guest posted here a few times.
Passive Income MD
Another equity investment in a website you know well. We haven't had it long but returns are promising. Cash on cash yield was over 6%. In the first month. Now you know why I like website investing. Granted, it's a little tough for you to reproduce what I'm doing here, but we're talking about my investments today, not yours!
Texas Preferred Equity Investment (Equity Multiple)
I've been watching for an investment with Equity Multiple for a few months and decided to jump on this one. It is a preferred equity deal on an apartment building in Houston. My share of it is $20K. Nothing to report yet on it other than the promised 10% yield and a 15% overall investment return. I like Equity Multiple because they invest some of their money into every deal. The deals are pretty few and far between though, and fill up quickly.
We'll continue to meet the capital calls for the Origin Fund III. We're also expecting to make an investment with WCI advertiser 37th Parallel Properties at some point this year. These guys are really of the mindset of “Do one thing and do it well.” They do apartment complexes, mostly in Texas. But they may only offer 1 or 2 investments a year, so you'd better be ready when it comes along! We also anticipate adding another site or two to the WCI network this year.
My overall calculated return for the equity real estate portion of the portfolio annualizes out to 26.57% per year for the last 5 years, but as noted above, it's probably higher than that. This year's return was 46.60%, boosted significantly by investments in the two members of The WCI Network. It takes a fair amount of time to get money invested into equity investments, so I'm actually a little underweight there; too bad with those kinds of returns.
First, let's update you on what's happened with some of our past debt investments. The only round-trip real estate investment I could report on last time was a $2K trial investment that I bought through RealtyShares and ended up with a return slightly higher than promised. We've had two more round trips since.
We lent some money ($5K) to a home flipper in New York via Fund That Flip. He returned our money 6 weeks later with interest and penalties for early pre-payment. The return annualized out to 14.46%, although it was actually a 2.02% return in just 6 weeks. I've been pretty happy with Fund That Flip. I like their lower Loan to Value ratios and they're rated well.
This was another $5K hard money loan done through RealtyShares. Our money was returned in a little under 6 months with an annualized return of 8%, as promised.
Let's talk about our current investments.
RealtyShares Lovers Lane
Another $5K hard money loan through RealtyShares. After 6 months, it is paying as promised. Annualized return is 7.32% so far.
Similar story. $5K hard money loan. Lower yield. Making 6.74% on it so far per my calculations.
RealtyShares Church's Chicken
This might be the only loan for a retail project that I've done. This is a $10K loan on a Church's Chicken in Alabama somewhere. I'm making 8.21% on it. I've been pretty happy with RealtyShares, from a volume standpoint, a transparency standpoint, and a yield standpoint.
Fund That Flip Jay Road
Another $5K loan through Fund that Flip. Making 6.97% so far (4 months) on it.
Fund That Flip Fox Lane
Fund That Flip 527 East
I had been watching for a PeerStreet loan for a while and managed to get into this $5K loan. I think it promises 7.5% or so. No payments yet, but I just got into it. I like Peer Street as they seem to have a lot more inventory than many of the sites; there are new loans every business day. They only do debt investments and are highly rated by those who keep track of these sorts of things. One minor annoyance- they don't automatically send the payments to your bank account like the other companies do. Hopefully that'll change soon.
As I've been doing these crowdfunded hard money loans over the last two years, I've been running into a problem. They're popular. That seems to be resulting in two things. First, the yields are dropping. Where it used to be easy to find 10% or even 11%, I'm seeing more and more at 8% and now 7%. Second, they're snatched up in seconds. That's part of why it took me forever to get that money invested with PeerStreet. Even with their “auto-invest” feature, I had to stand in line for a month until it was my turn to get an investment that met my criteria. And that line is getting longer all the time. Forget due diligence. There's no more of that going on. It's like what happened with Lending Club and Prosper. You either invest automatically or you are left with the crumbs. So I'm doing two solutions for this last problem. The first is Alpha Flow. Alpha Flow is actually a Registered Investment Advisor (RIA,) so in that respect, I guess I have a financial advisor now. But they basically take my money and spread it out over a whole bunch of loans. Instead of having $5K or $10K per loan at RealtyShares, Fund That Flip or PeerStreet, I have $20K invested in 84 different loans. That service costs 1% of AUM. This is all brand new, and so far I calculate my return at an annualized 4.90%. I'm just auto-reinvesting everything here. I'll be curious to see what the return is on this after a year or so.
Broadmark Real Estate Lending Fund II
Broadmark is my second solution to my problem making individual hard money loans. Like a mutual fund, this is very much set it and forget it. I sent them $75K and they reinvest my earnings in the fund and send me statements every now and then. This fund makes hard money loans in Colorado and Utah. I've only been in this one for a few weeks but my return annualizes out to 5.62% so far by my calculations. Historical returns range from 0.84% to 0.99% per month in this fund. We'll see how this goes over the next few years. I'm actually only locked into it for a year.
So far, I calculate my overall return for the debt portion of my real estate portfolio at an annualized 6.71%. That's a little lower than I'd like to see. I'd prefer to be in the 8-12% range. I think it'll get there though as most of these are brand new investments and the fact that there is a little delay in sending me the distributions has a major impact on the return calculation over such a short time period.
I'm actually a little overweight on the Debt side (mostly due to the Broadmark minimum investment amount) and a little underweight on the Equity side (mostly due to the Origin capital call process.) So I won't be buying anything on the debt side for a little while as that situation works itself out. I think the additional layer of fees for the Alpha Flow, Broadmark, and perhaps another fund or two is probably worth it to me to avoid the hassle and lack of diversification of picking individual investments myself, but time will tell. Now that I'm invested, I only need to invest a little each year to keep it at 5% of my portfolio.
Lending Club and Prosper
A quick update on my situation at Lending Club and Prosper. Long-term readers will recall that I invested 5% of my portfolio in Peer to Peer Loans for several years but have been gradually exiting. Since Prosper no longer allows you to sell any notes, I'm basically stuck there for a while. I made 5.75% this year at Prosper (5.83% overall since inception). But I'm down to just $259 invested there now across 20 notes, 18 of which are current and 2 of which are in collections.
Lending Club has been a pain in the butt for me this year. I was able to liquidate most of the account (perhaps 80%) within 2 or 3 months a year ago including my entire taxable account, although I sold many of those for a small loss (<5% of face value.) This year I've been trying to sell the rest throughout the year for par value with limited success. I still own about 10% of what I had invested, but am down to about $4,500 spread across 135 notes, of which 121 are current. Due to the IRA custodian's fees, there has been quite a bit of cash drag there during the liquidation process. I've done two partial rollovers to Vanguard so far at $100 a whack but probably won't do another one until it is all liquidated. That date may still be over 2 years away. One thing I noticed though is that it is easier to sell a note under $25 than one over $25, so perhaps when they get paid down to less than $25, they'll be easier to sell. At any rate, my Lending Club return for the year is -5.22%. Overall XIRR since 2012 is still over 8%, 8.09% to be exact, so I guess I can't complain too loudly. I enjoyed double digit returns for 4 years but had a bit of a sour experience toward the end.
Here are the links and special deals available through this site's sponsors that are mentioned in the post:
Affiliate deals (meaning I get paid if you sign-up after going through this link):
- Equity Multiple Management fee on your first investment waived when using this link.
- Peer Street
- Lending Club
Other WCI Supporters mentioned in this post
Bear in mind that most of these investments are available to accredited investors only ($1 Million+ in investable assets or $200K+ annual income.) Two great resources I've found to do due diligence include:
Crowd Due Diligence – An outgrowth of the 501 Investing Google Group. Honest reviews from real investors.
Overall, I'm cautiously optimistic about the real estate (and alternatives) portion of our portfolio. Some of the returns seem a little low this year, but frankly, the Vanguard REIT Index Fund didn't exactly knock it out of the park in 2017 (4.94%) so I can't really complain. And I think the returns I'm reporting are lower than what I'm actually getting, especially on the equity side. I do like that it is easier to diversify platform risk with crowdfunded real estate, which is the main reason I got out of the Peer to Peer Loans. I also like that I have something backing up the loan besides the word of somebody who carries a balance on credit cards. But there is a lot of capital sloshing around in this world and it is finding its way into crowdfunded real estate (particularly the debt side) just like it did into Peer to Peer Loans. Falling yields and slipping financial ratios are the natural consequence of that. So be aware that these are all high risk investments that are likely becoming even higher risk. Not sure that's all that different from the stock, bond, and publicly traded REIT markets these days though.
If you are interested in learning more about real estate, I recommend checking out WCI's No Hype Real Estate Investing course. It will give you the foundation you need to learn about all the different methods of real estate investing.
What do you think? Do you invest in real estate? Where on the continuum do you fall? Have you invested with any of these companies or funds? What was your experience like? Comment below!