I like real estate as an asset class. I think I would eventually even like to see real estate get up to 20% of our portfolio. Stocks, bonds, and real estate make for a very nice portfolio. The stocks and real estate provide the power, with high expected returns and low correlation with each other, while the bonds smooth out the ride, provide rebalancing opportunities, and occasionally, even outperform the other asset classes over the short to medium term. (You know medium term, like 1-2 decades.) However, I've spent years struggling with how best to implement the real estate portion of our portfolio.
REITS
Initially, we added Real Estate Investment Trusts (REITs) to the portfolio. Our timing was pretty terrible. Our first investment in REITs was 11/27/2006, in the Vanguard REIT Index Fund (VGSLX). The value of VGSLX peaked on 2/9/2007 before losing 3/4 of its value over the next 2 years. But we persisted, continued to pour in good money after bad, stayed the course, and in January 2015, the value of VGSLX returned to its previous value (although at the time of this writing-March 2016, it is back down below its January 2015 peak.) That sounds pretty terrible, right? But OUR dollar-weighted returns in that fund are actually pretty good- 10.3% per year as calculated by XIRR on our investment spreadsheet.
Why are our returns so much better than the apparent fund performance? Well, number one most of the return from REITs, just like an investment property, doesn't come from appreciation, but from the rents. With a mutual fund, the yield is the rents minus the expenses of the properties and the fund. With VGSLX, the unadjusted yield is currently 4.07%, about double that of a total stock market index fund. But the larger effect on our returns is due to staying the course through perhaps the worst real estate meltdown in our country's history. We bought many of our shares at an incredible discount compared to those first shares we bought. Those first ones were about $27 a piece. My records show I bought shares in January of 2009 at about $11 a piece, and since then have bought many others at prices in between those two figures. Over 10.3%. Not too shabby and very little hassle. No tax cost either as they're held in tax-protected accounts where they belong. We still hold REITs and will continue to do so in the future, although the volatility and the correlation with the stock portion of our portfolio are concerning.
Direct Property Ownership
We also had the opportunity to own investment property directly. To be fair, we didn't actually mean to do this. It was forced upon us when it came time to sell our town home in mid-2010 and we still hadn't sold it by mid 2011, so we rented it out. We learned a lot from that experience, as noted in this post. We also got a pretty fat tax break from it. I would have preferred not to have lost the money rather than to simply have shared the loss with Uncle Sam, but much of that loss was probably due to a decrease in value of our residence rather than an actual investment loss. Converting it to a rental property was just making lemonade from lemons. We learned a few things from the experience that we'll apply going forward–we don't like being landlords, we don't like being long-distance landlords, we don't like doing tax returns in multiple states, we don't like being property managers, and we're not very good at being landlords or property managers. I much prefer making money by writing and by seeing patients than by dealing with tenants. The equity we took out of that property went into stocks as part of our mortgage payoff fund.
Syndicated Real Estate
Since becoming accredited investors, we've begun looking at syndicated real estate investments for several reasons. First, the correlation with the stock market and apparent volatility (one could argue the actual volatility is different) seems to be much lower. Second, these investments are almost universally illiquid, and I believe I am getting paid for taking on that illiquidity, which we can easily afford to do. Third, it's a set it and forget it type investment. I make the investment, then I forget about it. Every month or quarter or year cash shows up in my checking account and after 5-7 years, I get the principle plus (or minus) any gains back. Fourth, the projected returns are excellent. Projected returns on debt are generally 9-10% and projected returns on equity are generally in 14-25% range.
There are a few things I don't like about syndicated real estate. One is that you usually get a K-1 every year to put into your taxes. They're not terrible (since I'm already doing two of them for my earned income and one for my wife's earned income) but they're a bigger pain than a 1099-int or 1099-div. The state income tax treatment of out-of-state syndicated partnerships also can be a pain. Finally, the difficulty of balancing diversification and hassle is dramatically worse than investing in REITs. When I buy the Vanguard REIT Index Fund I own a piece of something like 120 REITs each of which owns hundreds of properties. When I buy into a syndicated real estate investment, there's just one property. That means it's on me to research if it is a good deal or not and if I'm wrong, I pay the price. But the more of these I buy, in a search for diversification, the smaller the amount I can put into each one, and the larger a hassle it becomes.
Our Investments
I thought it might be interesting to do a post on our actual investment properties and compare the expected returns to what we have actually seen. You really have two options with regards to syndicated properties- you can go through a crowdfunding website, like RealtyShares, RealtyMogul, of Fundrise (among dozens of others with a new one every month) or you can go directly to the real estate firm putting together the deal. The benefits of the crowdfunded sites are that you can look at multiple deals easily and can diversify between real estate firms, you have somebody else helping you vet the deals, and the minimums are generally lower ($2-20K.) Going directly to a real estate firm cuts out the middle man (and his fees) but the vetting is all on you and the minimums are generally higher ($50K is typical.) Mostly due to the minimums, most of our current real estate investments are with crowdfunded sites, but we continue to evaluate direct deals from real estate firms and will probably invest more in them in the future.
Our Partnership Office Building
My physician partnership now includes about 150 doctors. We have a business office in downtown Salt Lake City where our CEO and other non-provider employees work. The physicians own the building through a partnership LLC. When I became partner, I was offered the opportunity to buy 0, 1, or 2 shares. But the year I bought in they were allowing new partners to buy in at the lower original price rather than the higher current value. I'm no dummy, so I bought the maximum two shares. I then suggested they refinance the mortgage to a lower rate, which for some reason they had not yet done. Bottom line, we've owned these shares for almost 2 1/2 years and have a return of 12.01% on them.
Indianapolis Apartment Complex
Our first crowdfunded investment was through RealtyMogul, who has advertised on the site and sponsored the scholarship, back in November 2014. [Update: Since writing this piece, I've also brought them on as an affiliate advertiser. So if you sign up through this link, it helps support the site.] The minimum was a bit higher than the $10K we put in, but we got a break for our business relationship. The property was an apartment complex in Indianapolis. The plan was to fix up the units over the first year or two and increase the rents substantially, then sell after 5-7 years. They estimated a 5-7 year holding period, a 7-12% cash on cash return, and a 15-16% overall return. It's hard to tell what my shares are currently worth, since the Realty Mogul Dashboard still says they're worth $10K and as far as I know no one has appraised it since purchase, but my K-1 states there was a loss of nearly $3K in 2015. Some of that is probably money invested in the apartment upgrades and some of it is depreciation (in some ways just a paper loss) so it is hard to tell what my investment is really worth right now. Meanwhile, it has kicked out $610.45 in distributions, which is obviously less than a 7-12% cash on cash return. If you assume my investment is still $10K, as the dashboard states, then my current annualized return on this investment is 4.68%. If you assume my investment is now worth the $6,750 my K-1 says it is, then my return annualizes to -21.17%. Either way, there's nothing I can do about it for 5 more years, so I'll be hanging tight and let you know how it goes.
The author descending Granary Canyon near Moab UT- now that's some real estate!
Salt Lake City Apartment Building
My next investment is via Fundrise in July of 2015. We put in the minimum $5K investment. It is a hole in Salt Lake City, only a block away from my partnership office building. I say hole, because that's literally what it looked like the last time I drove by it. They demolished what was on the site and are building an apartment building from the ground up. The plan is to build it up over 14 months, lease it out, rent it for a couple of years, and then “exit via refinancing.” Our shares have a preferred equity position with a 14% projected return. Construction is reportedly “on-track” and so far it has paid us $313.72, so assuming our shares are still worth $5K, that's an annualized return of 9.31%.
House Flip
Our next investment is a $2,000 debt investment via RealtyShares in a single family home in Merrick, NY in July of 2015. It pays 9%, is supposed to last one year, and I am in “first-lien” position so we can foreclose if we're not paid. So far every payment has been made in full, so our annualized return is 9.16%. I kind of like these investments. They fill very quickly, return about what you can get on a peer to peer loan portfolio (9-11%), and yet are secured by a property that can be foreclosed on. It's obviously terribly tax-inefficient, but I may eventually dedicate a bit of a self-directed Roth IRA to them. For now, I'll just pay the taxes due on the $15 that shows up in my checking account each month.
My Grocery Store
Our next investment is also via RealtyShares, but it is super-local. It's a strip mall and grocery store we frequent, about a mile from the house. It's a great neighborhood, the parking lot is always full, and we personally know people trying to move their businesses into it. It is a 5 year equity investment with projected returns of 16-20%. We invested $5K in December 2015 and have only gotten one $50 payment from it so far, for an annualized return of 3.53%.
My Hospital
My newest investment, in April of 2016, is $30K in an LLC that owns one of the hospitals I work with. This investment actually violates one of my rules-never invest in something where all the other investors are physicians. Technically, we're investing alongside the hospital corporation. It's an “absolute lease” (better than net-net-net) where the hospital corporation pays for everything and pays us a guaranteed rent. We're locked in for five years, then can cash out if we like. The investment will yield just a little better than 7% and the rent contract says the rent goes up with CPI up to 2.5% per year. It's not an awesome deal, I expect long-term returns around 9%, but I like being on the inside when it comes to seeing how the hospital is doing and it makes our group a little harder to fire as the corporation would have to buy us all out at once since we would no longer be on staff. [Update: This investment ended up not getting off the ground. Bummer.]
Our overall returns on the non-REIT, real estate portfolio annualizes to 9.59%, which is obviously better than our stocks have done over the last year. Including REITs, our real estate investments make up about 10% of our portfolio right now and about 2/3 of that is REITs. As you can probably tell, I'm still dabbling a bit with these crowdfunded investments. Part of that is what I did with Peer to Peer Loans, where I started slow, but part of it is simply that we have so much tax-protected space available to us–I'm not going to pass up a 401(k) contribution in order to buy some property. I view the 401(k) invested in index funds as the serious money and the crowdfunded real estate as the fun/speculative money. So we're limited to the money going into our taxable account every year, which is much smaller than what goes into tax-protected. Plus, we're prioritizing our mortgage payoff fund lately, so that limits how much we have available to invest in syndicated real estate. It is fun to be able to easily drive by four of the six properties though. Next time you're in town swing by and I'll show you the empire!
The Future
So what will our real estate empire look like in the future? Well, it partially depends on how these syndicated investments turn out, but as I mentioned earlier, I'd like to eventually move from 10% to 20% of the portfolio in real estate. It is possible we'll do some direct property ownership again in the future, especially as a way to get our kids involved. But the property would be nearby and it would be purchased as an investment from the beginning. More likely, if the syndicated investments go well, and especially if more 1031 exchange eligible syndicated investments become available (RealtyMogul is starting to advertise more and more of these) we'll stick mostly with that route. Perhaps eventually it will look like this:
- 5% REITs
- 5% Real-estate related debt investments
- 5% Residential syndicated
- 5% Commercial syndicated
But we'll see. We're in no rush.
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What do you think? Do you invest in real estate? How do you do it-REITs, direct, syndicated, or something else? What returns have you seen? What percent of your portfolio do you have in real estate? How did you decide that? Comment below!
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I also invest in real estate, at present it represents ~12% of my portfolio, with the plan to increase to around 18-20% by retirement.
Although, most of my holdings are with major syndicators, I also syndicated a property myself and in addition have an ownership interest in another building locally. I do own REIT’s , but as you correctly pointed out they have a high correlation with the stock market, and I consider them stocks and not part of my real estate portfolio. ( just my line of thinking)
One point I would like to clarify, is that in syndicated real estate you do not always invest in a single building. All of my investments with well known major syndicators with long established track records are in their funds, which typically have asset class and geographic diversification. In addition, I further separate that by investing with syndicators in different parts of the country, thus further increasing my geographic diversification.
I have not tried using Realty Mogul or any of these other crowdfunding sites, but I may have to. My challenge is reinvesting the income from real estate back into real estate to allow it to capitalize. That’s not so easy with the big players as they have higher minimums. Thus, I may have to try some smaller players. I did not know that they were marketing 1031 eligible properties, thanks for pointing that out, as I will look into it.
I could be wrong about this, but after reading MMM’s recent post about PeerStreet, it seemed to me that their platform featured automatic reinvestment of cash, thus avoiding cash drag (?)
That would be nice, even it were just a MMF paying 1%. I’ll have to look into that.
You guys who are doing binary options trading and making less than $2000 a day have to do what I’m doing. Check out this automated binary options that I’m using http://rurl.us/yGYND
Interesting. In my mind this is less investing in an asset class, than specific managers. The return on your investment has less to do with macro trends than contract negotiations, whether a new highway gets built etc. Because of this I wonder if it doesn’t make more sense to dedicate 20% of a portfolio to small direct investments in small companies (not VBR, but like a subway franchise), rather than 20% to syndicated real estate and syndicated real estate alone. I guess these deals might lack established crowd funding websites. (Note to self if I drop out of medical school and need to start a business.) But I know people who do a fair bit of this sort of investing through personal connections.
I do what you mention quite a bit – infact it is a major part of my investment strategy with great returns.
Crowdfunding is nascent field with majority of platforms (other than consumer lending/P2P) in real estate and that is the hype creator in media. I have dabbled in realtyshares and realtymogul, but to be honest their returns are NOT what they advertise. What WCI is posting is correct, the cash flow is usually non existent. You have to wait for that distribution and its rarely monthly. Its more wait and see. Personally I want monthly pay back or something close to it. House flip also carries the risk that your payment may not come back in 9-12 months whatever the term was. Note it is interest only payment and as a balloon at the end.
I also did some unique crowdfunded investments (some were in oil companies) but they are just ok. One I found that has been excellent paying me monthly is http://www.reamerge.com – these guys invest in cashflowing businesses (usually grocery stores/retail/salons etc) and is sort of like P2P lending except to established business but they secure it with business inventory and or real estate. Thought that was unique!
Overall real estate is more nuanced and needs some experience to come out ahead on.
Yes, it’s very similar to investing in specific businesses.
My only issue with these crowdfunded sites is there seems to be “a lot” of overhead management fees, maybe because I have experience being a direct IP owner I can see the issue etc, but when people talk about Vanguard and investing in “lower fee funds etc” to see you recommending something that eats a big chunk out of returns surprises me.
This being said……I agree being a landlord isn’t for everyone.
Keep in mind I put $200K last year into index funds, on top of what I already had invested. That is a 7 figure portfolio. The total amount I have invested in crowdfunded real estate not associated with my business a tiny percentage of that. Play money for now, but I like the potential.
Interesting how you say “much of that loss was probably due to a decrease in value of our residence rather than an actual investment loss”. I beg to differ in that decrease in value is an actual investment loss.
Agree with Dean above that landlord isnt for everyone. I have personally invested via Realty mogul before and have to admit that i am not a big fan. They do promise ‘estimate’ 10% return (for eg) on an investment but the problem is that the funds are not liquid, you have no clue how the business/investment is doing as there are hardly any updates and worst, they eat up a ton of money in fees. What I am afraid is that when things do bad, we would have no information on any thing till its too late. They invest as an LLC as an whole. Another LLC invests as part of the deal in which you are invesing and a sub LLC is your share. I am assuming 3 LLCs expenses dont come as free.
End of the day, they eat money off your investment and with minimal risk to their bottomline.
I think you’re missing the point. I lived in it for 4 years, then rented it for 5. Most of the loss came in the decrease in value over the first 4 years, not the last 5 years. Hope that makes sense.
Just because Realty Mogul (or any other syndication company) makes money, even with “minimal risk,” doesn’t mean you aren’t making money. If their syndication services (ability to invest small amounts, the due diligence they do etc) are valuable to you, then you pay for them. If they’re not, then go buy your own property.
Unless I’ve missed something, my understanding is that Realty Mogul and the other crowdfunders are NOT the syndicator.
Is that incorrect?
My understanding is that they are the middleman who raised the money for the syndicator. Why those syndicators couldn’t or wouldn’t raise the money themselves and take on an extra layer of fees from a middleman is an important question.
So the choice isn’t crowdfunding vs. buy your own property. The choice is more like:
Crowdfunder + Syndicator
Syndicator
Buy Your Own Property
That’s correct.
Clearly you don’t see much value being added from a crowdfunder to either the investor or the syndicator. There’s obviously a lot of money disagreeing with you, for whatever reason. Investors like having someone helping them do due diligence (the crowdfunding companies turn down most deals) and the ability to invest smaller amounts and the syndicators like the ability of the crowdfunders to bring them investing dollars.
For example, the company you work with (and many others) requires $50K minimums. Well, I didn’t want to commit $50K at the time. So what are my options for syndicated real estate? Exactly. Crowdfunding companies.
Valid points Jim
BUT
To all readers: There is platform risk here. See recent lending club struggles. This gets underplayed. I would be very careful and only do play money unless you are experienced.
It’s not all sunshine. Please do the proper due diligence.
There are no easy returns.
Absolutely. There is definitely platform risk. I hope I’ve diversified against that somewhat by using 3 platforms.
I also think it is important to wade into this sort of thing slowly.
I guess I could say the same thing that “there’s obviously a lot of money disagreeing with you” when it comes to Whole Life Insurance. But I realize that just because a lot of money is going into something, doesn’t make it a good investment.
I’m sure that some of the syndicators that work with the middleman crowdfunders will turn out to be good syndicators, but I’m also concerned that crowdfunding has become a place for newbie syndicators, wannabe syndicators, and failed syndicators.
After all, as a syndicator if you have a track record for success and can raise your own money, then why would you hire a middleman to do it for you? You wouldn’t.
Additionally, I’m reading things like NJ saying that there was “no clue how the business/investment is doing as there are hardly any updates.”
You seem to confirm that when you say in your post, “It’s hard to tell what my shares are currently worth, since the Realty Mogul Dashboard still says they’re worth $10K and as far as I know no one has appraised it since purchase.”
Why aren’t you guys getting monthly or quarterly P&L statements as well as asset manager and property manager statements? Why aren’t you guys getting third-party opinion of values annually? This doesn’t at all sound very transparent.
I get your argument about the low cost of entry……but what exactly are you entering?
Passive investing in real estate is all about the syndicator. What is their track record and performance history. Because you are passive, you better believe in the company you are investing with. Do you guys even know who the syndicators are in these deals? Because crowdfunders are NOT syndicators.
You’ve just added an extra layer of due diligence. You now need to check into the syndicator and the crowdfunder. Crowdfunding has only been around since 2012. So it sounds like you are relying on a company that is 3 or 4 years old to do the due diligence on a syndicator for you. That is unwise.
You don’t have to fly to a property to look at Edgar, do internet searches, speak with third party vendors (property managers, real estate brokers, real estate attorneys, and others) who have done business with the syndicator.
Do they tell you how many years the syndicator is in business? Do they tell you what their track record is (best and worst performing deal)?
I don’t care who you invest with, if you don’t know this stuff or are unwilling to take the time to find it out….then you probably would be better off keeping your money in mutual funds.
Just my opinion, but due diligence matters. It’s not like buying an index fund. Syndicators can vary widely in their experience, quality, and track record.
What would I do with those monthly or even quarterly statements? Would I pull my money out? Can’t do that. Not an option. So what’s the point. If you’re going to do any due diligence, you’ve got to do it upfront. But how much time/money (same thing really) are you going to spend doing due diligence on a $5K investment?
Yes, I know who each syndicator is. I have their address and phone number. I can call them up and ask questions. I can go by their office. They do a webinar where you can talk to them prior to the investment. You can look at all the financials. I can even go by the property and look at them (and have the local ones.) But at this point, I’m in for a 5-7 year ride, for better or for worse. I don’t really want to spend my time reading their financial statements unless it at least makes for an interesting blog post!
I have similarly had a 10% allocation in retirement accounts to REITs for many years, regularly investing and rebalancing through the real estate crisis. However, I recently started wondering if this is really real estate exposure. All the constituents of the Vanguard REIT fund are also in the total stock market fund, so it feels more like a sector tilt than a different asset class. Also, according to https://www.portfoliovisualizer.com/asset-class-correlations, REITs have a correlation of 0.77 with total stock market, which doesn’t sound like that much of a diversification benefit.
What are your thoughts – is the Vanguard REITs fund really an investment in real estate? Maybe it’s somewhere in between, but the best we can do if we don’t want to take a liquidity or complexity hit?
Ben also remember what happens to local real states, when stock market crashes. No one is going to pay you the top dollar dollar for the property. People stop spending and start saving. So to say local real state is not correlated to stock market is not true
REITs and the stock market are highly correlated. Direct commercial real estate can also be correlated depending on the type. Take for example retail. When the stock market is down and times are bad financially, then retail tends to also tank. In other words, retail follows the economic cycles.
Multifamily is different in that it follows population cycles. So take Detroit for example. While they are starting to recover a bit, they have had a decline in their population over many years. Hence, multifamily has done terrible there. On the other hand, places that have had good population growth have done well in multifamily.
In that way, multifamily has a very low correlation to the stock market and the economic cycles and is more tied in with the population cycles. In that way, it can be a great way to diversify (if you invest right).
Multifamily is one of the hardest property to buy. You almost have to be a real state agent to buy it. But it also involve being a landlord too.
It’s not that difficult to buy a duplex, triplex, or a quad.
Having said that, I agree bigger properties can be difficult to get into if you are trying to invest actively.
If you don’t want to be a landlord and are looking for passive investing exposure then it isn’t that difficult to get into multifamily. You may not have millions to buy it outright, but you can own a fraction of it. That is typically what syndicated real estate is about.
It’s a great debate- asset class or sector. I fall on the asset class side of the argument, but there are good arguments both ways. Certainly your disciplined approach has paid off so far.
I like the vanguard REIT but also have a portion of my tax deferred in individual timber and farmland REITs. Would rather be a timber baron, but it’s not an option in my price range.
Surprised to see your syndicated returns so low. As you know I’m in this business, but have no experience with the middle men crowdfunders. When you were doing your due diligence, how much info did you have about the syndicator?
How many years in business? How many properties do they have under syndication?
What was their track record / returns?
Why were they using a middle man instead of raising the money themselves?
Had they ever been a failed syndicator and just started over with a new LLC and a new name?
Did you talk to other investors who have invested with them through the years?
I’m also curious to know about the development in SLC. If it is currently under construction, how are they able to pay you a distribution? Are some of the units finished and being rented? Or are they paying you out of money from newer investors?
Great article, thanks.
Lots of good questions and not sure I have all the answers. Part of the issue is this- How much due diligence are you going to do on a $2K investment? It doesn’t make sense to fly out there and meet everybody and go walk the property yourself. In that sort of a scenario you have two options- invest a big chunk into a single property and do tons of due diligence on it, or diversify into a bunch of properties and count on the due diligence done by the crowdfunder. I suspect I’ll eventually do both, but with these small investments, it’s mostly the latter.
The Salt Lake deal you refer to is a preferred equity position, there are no units to rent yet so the distributions are being made out of the cash they’ve raised/borrowed I presume. Just the way it is structured.
As far as returns, I think it’s too early in the process to really weigh in too much on that.
I also wanted to ask you about your investments on the debt side. Don’t you feel like you are introducing a larger amount of risk when you take the bank out of the equation and act as the bank for a flipper?
Traditionally, banks are the largest investor in a multifamily deal. They might lend 75% of the money for those deals. Because they are putting up millions for these properties, they are very good at due diligence. Take a look at this:
https://www.mba.org/Documents/Research/4Q15CMFDelinquency.pdf
As you can see, a property that conforms to Fannie Mae underwriting standards has a foreclosure rate around 0.07% and one that conforms to Freddie has 0.02%. Not just now, but look at the historical graphs. They are great at due diligence and removing risk.
All of that due diligence and lower risk goes away when you remove the bank and their due diligence.
It might be worth more risk if you were getting higher returns. However, 9.16% return is not exactly a higher return in this space.
Yes, there is a larger amount of risk. But the question is whether I’m being paid for that risk. Comparing it to the bank’s ability to underwrite isn’t necessarily right for me. I’m comparing the additional risk to what I can get out of a treasury bond. If hard money lending pays me 10%, and a treasury pays me 2%, is it worth the additional default risk? I think it probably is. I don’t need all of the safety and liquidity that treasuries offer me and I could certainly use the higher return.
I guess you and I would be looking at risk differently. I’m not looking much into the debt side of things because I feel like I can get better returns and better tax benefits on the equity side. However, I do like to piggy back on the banks ability to do due diligence and mitigate risk.
So for me, when I see a syndicator that gets a loan from Freddie or Fannie Mae then I know that they conform to their underwriting standards.
Knowing that as well as knowing Freddie’s / Fannie’s current and historical foreclosure rates for multifamily gives me a large degree of peace of mind in the investment.
I’m not saying that it is all the due diligence that I do, but if I’m putting $50,000 into a property and Freddie or Fannie is putting in $20 million, you know that they have done their due diligence and the sub 0.1% foreclosure rates show that.
I guess Freddie and Fannie due diligence is better than none, but weren’t those the same guys doing the due diligence back in 2008? 🙂
You and I both know that the commercial arms of those two entities are separate from their residential arms. And I would say that their due diligence is excellent. In fact, the best in the business. Who has lower delinquency rates?
https://www.mba.org/Documents/Research/4Q15CMFDelinquency.pdf
Fannie Multifamily Q4 2008 foreclosure rate 0.3%
Freddie Multifamily Q4 2008 foreclosure rate 0.01%
A real estate investment option that never gets mentioned is farmland. I bought 74 acres last year and rent it out to a farmer. It currently comprises about 12% of my portfolio. It’s expensive and its yield is only ~2.5%, but it’s a good diversifier.
I think owning farmland is an outstanding idea. Right now I’m accumulating public REIT investments, but eventually I plan to sell those and buy a 100-300 acre farm and rent it out.
I’m really looking forward to seeing how these crowdsourced real estate investments play out.
There are lots of good diversifiers out there. There are fewer that also have solid returns. 2.5% sounds like an awfully low yield on an undiversified real estate investment to me. I guess if you expect a significant rate of appreciation it could still work out well.
interesting comments above…… for “educational purposes only” can I suggest you google “steve McKnight” “usa passive fund”
I say educational only because although the investments are here in the USA….its only open to Australian residents (I’m an aussie but I live in NY).
Here are some links
– https://www.propertyinvesting.com/topic/4407441-what-do-people-think-of-steves-the-us-passive-income-fund/
– http://www.passiveincomefund.com/author/steve/
Hopefully the sys admin wont mind that I posted them here, there are also so great videos on youtube etc
Now keep in mind this was “mainly” a AUD/USD play (and too long for me to go into why/how here) so don’t take the figures used as gospel however it shows how “cyclical” investing in REIT’s isn’t a bad thing and yes they do/can follow the equities market and so therefor aren’t really a hedge that returns in specific properties that are undervalued at any one time can be substantial for the smart passive long/medium term investor.
That said….what the hell do I know I’m still long Sydney residential property 🙂
(for those of you who didn’t get the joke think SF real estate property values….but with banks that charge 4.5%+)
Cheers,
Dean
Great article.
WCI – if you do plan to increase real estate from 10% to 20% of your portfolio, what will decrease…stocks, bonds, intl? What is your “planned” future allocation and update to your “investing personal statement?”
Still not 100% sure. Haven’t updated the IPS yet. We don’t move quickly in matters like these and some of it depends on these crowdfunded and similar real estate investments working out well. But most of it will likely come from stocks (any equity investments) with any fixed income investments coming from the bond side. For example, I’d consider hard money lending to be on the fixed side.
Interesting. I would just say that you should include your house as a real estate investment.
shouldnt, its really a consumption item
The rent that you forfeit by living in the house and not renting it out is consumption, but you would be consuming that rent whether you own the house or not. The purchase price of the house, and it’s appreciation, is indeed an asset, just as it would be if you had a tenant living in the house. The rent that you get for free because you own the house goes towards your cash flow and bottom line in the form of the rent that you don’t have to pay. You can think of it as a dividend that your asset pays you.
Therefore, my net worth is already over-represented by real estate, in the form of my house plus the 10% of my total market fund that is REITs.
I agree. Like any other investment, a house can be bought and sold, though it is obviously less liquid than a publicly traded REIT.
When considering the finances of the “average American,” you cannot ignore that most of his/her net worth is tied to home equity.
https://www.whitecoatinvestor.com/a-home-is-an-investment/
I agree that is the best way to look at a house. The saved rent and potential tax breaks is the dividend. That combined with the appreciation (with or without the assistance of leverage) determines your investment return. The mortgage is a completely separate issue.
So, if you consider your house to be an investment, how have you decided to factor that into your portfolio allocations? Would you still invest in real estate if your house comprised 25% of your net worth? Or 50%? Do you consider your home’s value to be real estate, or a separate category altogether, perhaps in a category like art or jewelry?
I count my house as an asset, and as real estate, but of course I don’t count on it as an asset towards income. On the other hand, it’s available to me to sell in the unlikely event that I run low on money late in retirement.
Well, I have various portfolios for various financial goals. For example, my retirement AA is 75/25. My college AA is 100/0. My mortgage payoff fund is 100/0. My housing allocation is 100% house. So that’s how I factor it in. If I sold the house and rented, I would change the allocation, but would still use the money toward housing expenses, so I don’t really try to factor it in to my retirement portfolio. I guess if I sold it and bought something half the price, I would put that money into the retirement account, but that day is a long way away, if it ever arrives.
Are you familiar with the TIAA-CREF Real Estate Account? It is like a mutual fund, available in TIAA-CREF retirement accounts. However, it is unique in that the fund directly owns properties. It does not fluctuate nearly as much as REIT funds, partly because the properties are appraised at infrequent intervals.
I have been happy with it and currently allocate 10% of the equity portion of my portfolio to it (with another 10% going to the Vanguard REIT fund).
Would love to hear your take on it!
Hey, that’s pretty cool, thanks for the tip. It looks like it is similar to VGSLX at 10 years, however.
Here is a thread from the Bogleheads board from 2014
How compelling is the TIAA Real Estate fund?
https://www.bogleheads.org/forum/viewtopic.php?t=141242
Yes, I like that fund and have heard great things about it. I have a vague recollection of something changing with it (for the worse I think) a couple of years ago, but can’t remember what it was.
Has anyone of you invested in real estate (not REIT) through retirement accounts (IRA etc)? It could have a potential to grow tax free.
Thanks
thats what WCI was saying in the article, hopefully to do it through his self directed IRA/Solo 401K some day
Many online crowdfunders have preferred self directed IRA partners. You can call them and start it that way.
I have done it (to answer your question)
I’ve got a couple of partners that do that. The tax free aspect is nice, but the fees are not insignificant and there is the reinvestment of dividends issue.
Interesting post WCI, I recently came across RealtyMogul, and was curious as to how well it worked. Looking forward to following along and seeing how the investments come along.
Yes, unfortunately it will take years to see how my investments did. Liquid they’re not.
Agree with diversification of investment portfolio into real estate.
I do disagree with allocation of nearly 20% though. From all the reading I have done, most well diversified portfolio models recommend ~5%. I also would never get into actually being a landlord-tenant type investment, but would hold position via a REIT. I do believe in the KISS principle with investing.
I respect your stance, but investing in a REIT is not, in my opinion, investing in real estate. REIT’s by definition are stock investments and thus accept the systematic risk of the broad market. I separate my direct real estate and my stock/bond investments.
IMHO, I see 10 % as a minimum in retirement. Then again, I have over 10 years of experience in commercial real estate investing, so I have a certain comfort level. Invest with respectable firms and managers with track records, discuss their leverage, asset class diversification, geographic diversification, payout performance and population and economic outlook for the area.
I’ve been the landlord and it’s a pain, now I manage the managers and interview the bigger players and discuss their outlook and skill sets. That’s KISS to me when real estate is involved.
I like Fundrise and Patch of land as they prefund all projects. Both firms appear to have more thoroughly curated pre vetted projects, though frequency of listings are less than other platforms like RealtyShares. Plan on having 5-7% in these investments.
I pushed forward into RealtyShares/RealtyMogul/PatchofLand and invested some 20% of my total assets (including 5% into self-directed IRA via RealtyShares) ahead of WCI’s target exposure. I am still less than 12 months into the “play”. Couple of short term principals were already return to me with promised ROI around 10% in the first position. So far so good:). If every thing works out, the funds can potentially double every 7 years (before tax). I am doing my own due diligence (via Zillow and google mostly and do not invest into any one with credit rating of less than 700 among other factors) before step into water. I am not going too much into 5 years equity deals yet so that I would not get stuck for too long in case things going south. Each investment is relatively small (less than $20K) so hopefully my income from each state would not push me into state tax problems:). I would be glad to hear any comments from any experienced investors.
when i tried, the link to sign up and invest
it didn’t seem to work…
could you please check?
thx
Works for me, not a WCI-specific landing page though.
Try the site referred by WCI. If that site do not work, you may also try the following and get $100 sign-on bonus:
[Link removed. I appreciate your helpfullness but it’s kind of poor form to post YOUR affiliate marketing link on my site for an advertiser I have an affiliate marketing link for, don’t you think? -ed]
Great article and thread. Does anyone have experience investing in trust deed funds? ie Wilshire Finance Partners, Arixa, Norris Group? It’s more passive and diversified than individual trust deeds. 100k min investment w/ 1 yr lockup and monthly or quarterly distribution of 8-9 annualized yield for nonleveraged fund and 10-12% for leveraged funds. I’m looking to invest through a SD 401K.
Probably a good idea keeping that sort of income tax-protected. High levels of due diligence required obviously. I’m not familiar with any of those firms.
Hello All,
In following this conversation it is apparent that all of you are very educated investors. I admire that.
My name is Josh Henderson and I’m a real estate investor in NE Iowa. I offer very attractive returns backed by real estate. As of today, I have 9 properties I am looking at. You will earn 8% on investing amounts between $50,000 and $100,000 and 10% on amounts over $100,000.
I see that most of you prefer investing smaller amounts into crowdfunding. I can definitely understand that. I myself prefer to only have 1 partner in a deal so they can have a 1st place lien on the property. Smaller amounts would require several liens and then it’s a fight for the 1st place. Investors feel much safer with a 1st place position.
My exit strategy is either refinancing in 24-36 months or lease optioning for 24 months. I pay interest at the end of the year and then return your investment when I refinance or when the lessee purchases the property. If, at the end of the 2 year lease, they do not take the option and purchase the property, then I refinance and return the investment. Of course, you’re always welcome to keep you’re investment going into another project and continue to earn great returns.
If any of you would like to talk more specifically about particular deals or have any questions, please respond to this post and we can talk more.
I really appreciate everyone taking the time to read this. Thank you.
Josh Henderson
If the primary purpose of your commenting is to solicit business, please do so elsewhere. If you wish to share your experience or provide education, that’s fine.
Can you provide an update on your experience with these investments, specifically the crowdfunded ones? I’m exploring these options more myself an interested in what your experience has been now with 9 more months under your belt from the original post. Thanks.
Yes, I am planning one. The only reason I haven’t done one lately is not much interesting has happened with them and I haven’t added much to them as I’ve been doing something else with any cash I save above and beyond retirement accounts. Hopefully soon.
Thanks.
How did I miss this post when it came out? Great to hear you’ve been active in the real estate space beyond REITs.
I’m currently invested in some syndications with a few local syndicators. Their minimums are a bit higher ($25k) and you’re right, I had to do the vetting myself. How did I learn to do that? Google & Biggerpockets. Unfortunately, I really had no idea what I was doing and if anything have benefitted from the nice run real estate has had in the last 4-5 years. As these deals have exited, I reinvested with some of the same operators but I’ve since found myself gravitating towards the crowdfunding sites as well. Lower minimums and for some reason I feel better knowing that in the case things don’t go well, I’ll have a company looking after the property and helping with the disposition.
As some have mentioned, access to deals has definitely been made easier by these crowdfunding sites. Before these popped up, I would try to go to local real estate investor meetings and network. Now I can review deals from the comfort of home…
Could you talk a bit more about the partnership office building? I’m very interested in how that came about? Buy-in vs convert from an existing office building? Did you use John Reed’s books to help with this?
No. It was already set up. When I became a partner, I bought in. Then we sold that one and bought a new one. We have the partnership offices and two other businesses as tenants.