By Dr. James M. Dahle, WCI Founder
Many investors are not familiar with the concept of a real estate access fund. But before I can get into what an access fund is, I need to describe to you what an access fund accesses, which is generally a private real estate fund. If you have taken my Fire Your Financial Advisor or No Hype Real Estate Investing online courses or heard me speak at PIMDCON19, you have seen my slide showing the spectrum of real estate investing.
Today we're way out nearly to the right side of this continuum. We're talking about individual real estate funds. This is actually my favorite spot on the spectrum. You don't have the liquidity of a publicly-traded REIT (or better the Vanguard REIT Index Fund), but you do have much lower correlation with the overall stock market, depreciation actually gets passed through to you, and most proponents would argue your expected returns are higher. That's really the attraction to me.
The ideal portfolio component has high returns and low correlation with everything else in the portfolio. I'm more than willing to give up some liquidity on at least part of my portfolio in order to earn higher returns. I get professional management, economies of scale, and broader diversification than I would be able to achieve buying individual syndications. Most importantly for someone like me who already has two jobs, I get passivity. At least once the fund is selected, it's just mailbox money until the fund liquidates in 3-10 years. While I don't retain the control over management and taxes that I would have buying individual four-plexes, I don't have to actually do anything more than write a check and cash checks, at least after the initial due diligence.
Sounds great, right? Well, it has its downsides too. It's tough to do 1031 exchanges when you're investing in funds. The most tax-efficient way to invest in real estate is to depreciate, exchange, depreciate, exchange, depreciate, and die. While easily done while investing directly, it's more difficult with syndications and nearly impossible with funds. We already mentioned another downside–illiquidity. But as long as I'm being paid for that, I can deal with it and so can most other doctors with some portion of their portfolios. The final downside is much more difficult for doctors, even me with my income from WCI–high minimum investments. These are institutional class funds and they expect you to have institutional money. If you're lucky, you might find $100K minimums. If you're unlucky, those minimums might be $1M or more.
Enter the “Access Fund”
The whole point of an access fund is to lower that minimum investment. Perhaps the typical scenario is lowering the minimum from $200-500K to $25-50K. You still have to be an “accredited investor” (income of $200K+ or investable assets of $1M+), but the majority of doctors meet that requirement even while they still have a negative net worth. But coming up with a quarter-million dollars for one investment in one asset class? That takes some real money. In exchange for that service, the access fund usually charges an additional layer of fees. Maybe it negotiates a little bit better deal than a $250K investor would get (since it is coming in with several million) but its fee usually eats up more than it can negotiate. So the basic exchange is higher fees (and thus lower returns) in exchange for access. Is that exchange worth it? Only the investor can decide.
Two Debt Funds From CityVest
There are all kinds of private real estate funds, just like there are all kinds of mutual funds and even REITs. Some invest on the equity side, in multi-family, retail, industrial, storage, or even mobile homes. Some invest in preferred shares, kind of a hybrid between equity and debt. While others invest purely in debt. Most of these funds loan money to home flippers who are looking for quick money they can borrow for 6-12 months.
Their biggest cost is opportunity cost, so they are more than willing to pay double-digit interest rates (and points) in order to get ready access to capital. The fund provides that capital, takes its cut, and the investors who provided the capital get the rest. (Although to be totally accurate, it is usually set up so the fund gets its fees first [1% is pretty typical], then the investors get their capital, then the investors get a “preferred return”, and finally the investors and the fund split the rest of the profits 80/20 or 70/30.) I have invested in these funds both directly and via an access fund.
CityVest is a company that has been sponsoring this website for the last year or so. They do nothing but access funds. They go out and find the best funds they can and cut a deal with them to bring them $5 Million or so all at once, often acquiring better terms than an investor with the fund minimum might be able to get. Then they turn around and form a 99 member LLC and offer a lower minimum to that LLC than the fund offers, usually $25-50K. In exchange for that, they charge a 0.75% annual management fee, a $500 per investor per year tax prep fee, and a one-time $50K fee to the fund. This usually works out to something like 2% in total fees to the investor. Right now they're offering two access funds that invest in debt funds.
A Word About Fees
Before we get into the two funds, let's talk for just a minute about fees. For those who have been hanging around in the mutual fund and the financial advisor space, a 1% fee is egregious, much less a 2% fee. We're used to paying 0-0.1% for our mutual fund expense ratios and by golly, if we're going to pay an advisor it sure as heck is going to be less than 1%. But you can't compare those fees directly to what you are paying to a private real estate fund. It's a little bit of apples and oranges. Let me explain.
First, the EFFECT of fees is exactly the same, no matter why, how, or when they are charged. Every dollar you pay in fees is a dollar you do not get in return. A key principle of investing has always been to minimize fees as much as you can.
Second, a real estate fund is a partnership. A type of company. Like any company, it has expenses. When you invest in a publicly traded REIT, you are investing in a company. That company has expenses too. But those expenses don't show up in the expense ratio of a mutual fund that invests in that REIT. But they still reduce the return of the investor just the same. With the private real estate fund, they actually tell you what those expenses are. So it SEEMS that you are paying dramatically more, but in reality, you may be paying dramatically less. A publicly traded REIT has a lot of regulatory and accounting costs that a private fund doesn't have. So in many ways, it is cheaper to run a fund than a public REIT. That may account for some of the higher returns that most investors in these funds expect. although it's possible that it is simply a result of REITs having been bid up in price. For example, the yield of the Vanguard REIT index fund is under 3%. That's pretty low considering that a REIT by law must return 90% of its taxable income to its investors each year.
CityVest Arixa Access Fund I
The first of the two funds I'll highlight today is the Arixa Access Fund I. I have personally previously invested both with Arixa and with CityVest in the past, so it is kind of fun to see them teaming up. Arixa has two funds. The first one, which I have invested directly in, is the Arixa Secured Income Fund, has a target return of 7-8%, and has a $100K minimum. My personal XIRR return there over the last 18 months or so is 6.54%, but that's probably slightly lower than my actual return because there is a slight delay in reporting. That fund simply loans money to fix and flippers in California. The loans are secured in first lien position by the properties being renovated.
However, the CityVest Arixa Access Fund I is not investing in that fund. It is investing in the other Arixa Fund, The Arixa Enhanced Income Fund. The main difference between the two is that the Enhanced Income Fund uses up to 50-65% leverage and the Secured Income Fund is non-levered. However, the Enhanced Income Fund has a $200K minimum and a target return of 9-10%. It also has a $200K minimum if you invest directly.
Enter the Access Fund.
Now, instead of needing $200K to invest, you can invest with just $50K. Actually, if you go through the links on this page (or simply tell CityVest you came from WCI), you can get in with a $25K minimum. In addition, you get part of your first year's CityVest management fee waived if you come from WCI.
But that only offsets part of the fee. The CityVest fees on this fund are:
- 0.75% per year (0.375% in year one) plus
- $500 per year per investor plus
- $50K up-front for the fund (1% if the fund hits its target $5M investment, otherwise higher.)
That ads up to a little under 2% a year for a $50K investor if the funds hits its target, or a little over 2% a year for a $25K investor especially if the fund doesn't hit its target.
What should you expect from this access fund return wise? Well, if the underlying fund thinks it can hit 9-10% after-fees (seems reasonable given the 10.31% return the last 5 years), and the access fund is going to cost you 2%, then Alan and I both think it is reasonable for a CityVest Arixa Access Fund I investor to expect 7.5% returns. Maybe a little better, maybe a little worse. Not too bad for an investment that is primarily backed by first position real estate liens. The only similarly diversified investment in this asset class with a lower minimum investment that I know of is the iShares Mortgage REIT ETF REM, but that is subject to stock market volatility. It lost more than 3/4 of its value in 2007-2008.
The Access Fund has less liquidity than the underlying fund (4 years instead of 2) and less frequent distributions (quarterly instead of monthly).
Check out the CityVest Arixa Access Fund I Today!
CityVest DLP Access Fund II
The second access fund I wanted to introduce you to today comes from DLP. You may recall the DLP Access Fund I investment from almost a year ago. I invested $100K in it and the majority of the fund was actually made up of white coat investors. My XIRR return in that fund as of the time of writing was 7.37%, but the most recent distribution annualizes out at 11% (and I expect my overall return to be in the 9%ish range after the CityVest fees as time goes on since the underlying fund is targeting 11%.)
However, these two access funds are investing in two different DLP funds. Access Fund I invested in the DLP Lending Fund, an older fund with a $500K minimum. Access Fund II will invest in the DLP Income and Growth Fund, a newer fund with a $250K minimum. Both of those minimums are out of reach for most physician investors, so there isn't much difference between $250K and $500K. Both funds are primarily invested in first-lien loans to home flippers and apartment developers, but can invest in other investments. According to CityVest, The Income and Growth Fund can invest in opportunities that may include, but are not limited to:
- Rehabilitation and private loans to real estate investors
- Loans to Affiliates of the manager
- Investments in Affiliates’ other LLCs, such as the DLP Lending Fund
- Preferred equity investments and partnerships
- Acquisition and disposition of non-performing notes as well as other real estate backed investment LLCs
So there will be a broader range of investments in this fund than in the Lending Fund (and it may even invest in the Lending Fund) although according to the DLP site, the Lending Fund itself can also take equity positions. The fund is targeting a return of 11%.
Once more, the point of the Access Fund is to lower that minimum investment from $250K to $50K ($25K for white coat investors, who also get half their first year's CityVest 0.75% management fee waived.)
This access fund is also going to be a four-year fund with quarterly distributions. It is aiming for $7M, although it certainly won't get there if every investor only puts in $25K. CityVest fees will be the same as for the prior fund:
- 0.75% per year (0.375% in year one) plus
- $500 per year per investor plus
- $50K up-front for the fund (1% if the fund hits its target $5M investment, otherwise higher.)
So if these fees work out to be around 2% total, a reasonable expected return from the access fund would be 11 – 2% = $9%.
Now that is higher than the Arixa Access Fund I (7.5%), but the underlying investment may also be riskier. Only you can decide if that risk is worth taking for the potentially higher return.
Check out the CityVest DLP Access Fund II Today!
Do you feel ready to learn more about real estate? WCI's No Hype Real Estate Investing course is the best on the planet. Taught by Dr. Jim Dahle and more than a dozen other experts, this course is packed with more than 27 hours of content, and it gives potential investors the foundation they need to learn about all the different methods of real estate investing. If you’re interested in real estate investing, you can’t afford to miss the No Hype Real Estate Investing course.
What do you think? Do you like investing in real estate on the debt side? What do you think of private debt funds like these? What do you think of access funds? Have you invested in one? What was your experience like? Comment below!
One other downside with the debt funds are these are tax inefficient. After tax returns will be closer to 4%-5% as the returns are taxed at your marginal tax rate.
So would this be ideal for self directed IRA? I have an old 403b I could rollover. I looked at investing with another WCI introduced company, Mortar, but as this is more of a real estate investment, not a debt investment, so I’m rethinking that idea.
Yes, a self-directed IRA or self-directed individual 401(k) is a good place for a debt fund.
Unfortunately I only have a employer sponsored retirement account. I do have a backdoor roth IRA that I have been building for 6 years. Can I roll this over to a self directed roth IRA and invest with those funds? Is there a custodian who allows investing in these kinds of funds, is aware of all the rules about prohibited transaction and charges reasonable fees?
Yes, you could do that. The only one I have an affiliate relationship with is rocketdollar:
https://www.whitecoatinvestor.com/rocketdollar
But there are at least a handful of companies out there offering Self-directed Roth IRAs for reasonable fees. Reasonable is something like $500 up front and $1-200/year. Obviously that doesn’t make sense for a $10K account, but for six figure accounts, the fees are relatively low, certainly better than the tax bill on a debt fund that size.
Agreed. They are definitely NOT tax-efficient investments.
How does the filing of state taxes work for those? Is it one k1, if so for which state?
Or do you have multiple K1s for all the states the fund invests in
Good question, I did a cityvest fund and nearly stooled myself when I saw the NY tax form. Queue the Flashbacks/PTSD. That alone is not worth doing these deals for me. Wish I never got in.
It varies. With an equity fund, it may be a K-1 for every state the fund invests in. But they often file a composite return for you for some or all states.
Debt funds can be much less involved.
Let me go back and look at what I got from Arixa for 2018.
Okay, looks like they sent a K-1. All income was on line 5, interest income. They also sent me a New York K-1 and Pennsylvania K-1, but since neither listed any taxable income for that state, I didn’t file in either state. Don’t really know why they sent me K-1s for those two states. They didn’t send me a CA K-1 (where they do all their lending.) So I just paid UT state tax on it.
2019 is my first year in the Cityvest/DLP access fund, so we’l see what they send.
But I think the bottom line is that it varies.
When I spoke to my CPA about citivest/DLP access fund, he said that I only have to file taxes where the company is based. I believe its NY or PA for citivest. Not sure why you got all those K1s for a debt fund. I get a K1s for equity fund deals even if there is no taxable income so that depreciation is tracked. As mentioned, there is no need to file individual state tax returns if there is no taxable income from that state. However I am not sure what happens at sale or close of the fund. I am hoping most of the properties will have capital gains and therefore I may have to file taxes in all states where the fund has properties. I haven’t done a round trip on any of my funds so I am not quite sure what happens when the fund closes.
Buyer beware … I invested in “hard money real estate “ loans prior to the 2007-2008 real estate collapse. I helped organize an Reg D partnership to invest in Trust Deeds yielding low double digits ($22 million loan value at origination). These were first deeds of trust with current appraisals and a 65% loan to value ratio. The loan term was 6-36 months. The loan originator was fully vetted and had a pristine regulator history. Fast forward post-2009, all of the loans were in default and it took until 2016 to liquidate all the REO. Net net we received 33 cents on the dollar which was better than many investors in these private real estate deals received. Promoting these investments almost ruined 35 years of delivering sound investment advice to my clients. Like I said … buyer beware!
Yes, there is definitely a reason they pay more than treasuries! I think it was Larry Swedroe who said “If the yield is higher, the risk is higher, even if you can’t see how.”
? Access fund from WCI for Origin QOZ OR income fund to eliminate 2% front load
20×50 1mil 100×50 5mil
I haven’t been able to talk Origin into doing an affiliate deal with me thus far, but please mention you’d like them to every time you talk to them.
If you had 1 choice Origin vs CitywiseDPL
Totally different asset classes. If you want debt, DPL. If you want equity, Origin. I know CityVest has a couple of equity funds coming in the next couple of months. I’ll have a post on those too. The other big difference, of course, is minimum investment. That’s the whole point of CityVest is to get you lower minimums.
Love the concept of real estate funds in almost every way except for the “non-passivity” of dealing with potential tax filing headaches or dealing with self-directed IRAs. Possible multiple state K1s?! Rules and fees for self-directed IRAs and real estate debt funds?! Not yet ready for prime time for me. If it turns out tax filing is no biggie for you guys after a few years of experience please report back….
I report on it a couple of times a year. So far not too bad, but I think you’re right to be wary of the tax complications.
I like real estate access funds, but I feel like there are other assets that have the same level of passivity that have a higher ROI.
I feel like real estate access funds are a worthwhile egg in the basket, but not the first choice.
Thanks for breaking it down to a simple level!
Were you going to mention what they were?