A couple of weeks back I wrote about the New WCI Asset Allocation. If you read it, you may have noticed that we are now dedicating 20% of our portfolio to “alternative” types of investments, chiefly real estate, but also including other interesting asset classes–basically anything other than the stock and bond index funds that make up 80% of our portfolio. In reality, the “change” was really an acknowledgement that we had some investments that weren't being formally included in our asset allocation/written investing plan rather than any significant change in asset allocation. In this post (and subsequent updates) I'll be discussing the nuts and bolts of these investments so you can follow along at home.

Update on Real Estate Investments

First, let's do an update on the real estate investments we have owned for a while. You can compare to this prior post about our Real Estate Empire. The main theme you will note here is that we have very little interest in buying (and especially managing) an entire property. Not only are we not really any good at it, but we really disliked being landlords. We mostly prefer to invest our time actively and our money passively.

Publicly Traded REITs

Yup, we still own the Vanguard REIT Index Fund. Despite a terrible beginning, we have had excellent long-term returns from this investment since we added it shortly after getting out of residency back in 2006. Our official, annualized, XIRR returns come out to 12.33% per year from 2006 to present. Not bad considering the 78% loss we took in the Global Financial Crisis. Over the years this has been 7.5% of our portfolio, but it will be trending down to 5% and perhaps even lower to make way for other investments. I love the convenience, liquidity, and low costs of this fund, but dislike its moderate correlation with the overall stock market. In my stock-heavy portfolio, that's a big deal.

Our Partnership Office Building


Bonus points if you know where this is

This has been one of our best investments of all time, although a lot of that is just luck in my case. For some reason, the year I made partner they let me buy into the investment at a price that was several years old, giving me an instant boost to my return. Unfortunately they only let me buy two shares. In addition, the old building was recently sold and the LLC bought a new, larger building. We got a great price on the old building, further boosting my return. The shares split and I was able to buy more so this is becoming a bigger and bigger chunk of my portfolio. The income from the property is going toward paying down its debt, but I'm fine with that. My XIRR return on this investment as of the first of the year was 21.55% per year for the last four years. Our investment is currently worth about $33K.

Indianapolis Apartment Complex

This has been a bit of a disappointment so far and may continue to be one. This was my first (and so far only) investment through the crowdfunded platform at RealtyMogul, one of this site's advertisers. I think the minimum on it was $20K, but they let me in for half of that, or $10K. We put the money into the investment in November 2014, a little over 2 years ago. We get a report from time to time, but most of them seem to list problems that have been encountered. For example, HUD apparently disagreed with the management team about how much needed to be held in reserve and so held on to a bunch of cash. That cash, of course, happens to be the same cash that was supposed to come to me. The initial documents on this investment projected a 15.5% IRR and a 9.5% cash on cash return. Meanwhile, my actual XIRR return on this investment (valuing my share of the partnership at the $10K I bought it at) is 3.77% per year. That's obviously a lot less than 9.5%. The management team says:

Most of this cash is withheld by HUD until we complete the remaining 29 rehabs. Our goal is to complete all rehabs as occupied rehabs, enabling all work to be done by the end of April. The choppiness of your investment returns is directly correlated with the timeliness of rehabs and the 60+ day lag on reimbursements; however, this choppiness does not affect our confidence in the long-term performance of the asset.

Let's just say the choppiness IS affecting my confidence in the long-term performance of the asset. But hey, it's a 5-7 year investment (and it's only $10K). Let's give it some more time.

Salt Lake City Apartment Complex

If you'll recall, this is a building being built from scratch with a preferred equity structure that we purchased through FundRise. Our investment is only $5K. Without fail, they send me $168.75 per quarter. I calculate my return (again valuing my investment at $5K) at 12.50%, not quite the promised 14% return. It's been fun to drive by occasionally and see it going up.

The House Flip

You'll recall we had a $2K investment through RealtyShares. This was a one year debt investment I bought in summer 2015 for a house flip. It made all the payments as promised and I even got my money back, for a 9.14% return, slightly better than promised.

My Grocery Store

I own a little tiny chunk of the strip mall closest to my house, including the grocery store we shop at. This was a $5K investment crowdfunded investment bought through RealtyShares that was supposed to have a 6% cash on cash return for the first three years and an overall IRR of 16.6-19.8%. They basically send us $25 a month (and haven't missed any payments.) That works out to an XIRR of 5.33%, a little less than the promised 6%.

The Hospital

At the time I wrote that last post, I had just committed $30K to buying some of the land on which the new hospital our group staffs is located. The investment ended up falling through due to some legal/structuring issues and they gave us all our money back with a little interest (and I mean little) a few weeks later. I anticipate I'll eventually buy some syndicated shares of our main hospital, but haven't yet done so.

I expected to buy some more crowdfunded real estate investments later in 2016, but ended up putting that money toward our mortgage which is rapidly dwindling. More details on that in a future post. But we expect to invest some more in 2017, particularly the latter part of the year after all the 401(k)s, Roth IRAs, and DBP are funded and the mortgage is paid off.

Our Alternative Investments Portfolio

So what is actually in the 20% of our portfolio currently dedicated to real estate and other alternative investments RIGHT NOW?  It's a mess. Here's the list:

  • Vanguard REIT Index Fund
  • Partnership Office Building
  • Indianapolis Apartment Complex
  • Salt Lake City Apartment Building
  • The Grocery Store Strip Mall
  • TSP S Fund (I know, not an alternative, but it takes time to move illiquid investments around and fund them so this will make up the difference for a few more months.)
  • Lending Club Roth IRA Account- 70% liquidated and transferred but will probably have a small amount there for years.
  • Lending Club Taxable account- 90% liquidated and transferred
  • Prosper Taxable Account- Stuck with this tiny account for years as Prosper no longer lets you sell notes
  • Physician on FIRE

The Future

So what does the future hold for this section of our portfolio? It holds lots of fun stuff that I'm really excited about.

Less Mutual Funds

The TSP S Fund (an extended market/mid cap fund) should be phased out of the portfolio by the end of the year and the REIT Index Fund will also decrease to around 5%. Long-term readers know I have a portfolio that is almost entirely in tax-protected accounts. While I would love to have tax protection for really tax-inefficient assets like P2P Loans and real estate debt investments, it introduces a fair amount of hassle (although I am considering a checkbook Roth IRA) and additional expenses. So most of these alternatives are just going to be held in taxable. That means I can't move money into this section of the portfolio any faster than I can grow my taxable account, and I'm not going to fund taxable while I have tax-protected space available to me. That money has to come from somewhere. It will come from the (hopefully) ever increasing earnings of WCI, from cash flow freed up by paying off the mortgage, and from our small taxable mutual fund account as its appreciated assets are used for our charitable contributions and replaced by the future earnings earmarked for those charitable contributions. Bottom line, it'll take some time for us to grow our taxable account to 10-15% of our portfolio, especially since we fund all the tax-protected stuff first.

Some Hospital Shares

I expect I'll buy a few syndicated shares of our hospital in the next year or two. The returns have been pretty good for past investors and correlation ought to be low with the rest of the portfolio.

More Crowdfunded Real Estate Debt Investments

As noted in my recent post about liquidating our Lending Club investments, I prefer a 9-10% return backed by an asset I can foreclose on than a 9-10% return backed by someone's word (especially when that someone is dumb enough to borrow money on credit cards.) I'm sure we'll have more of these in the future. I also have some local contacts that do some hard money lending to trusted real estate investors.

One tricky aspect of crowdfunding is that unlike with a mutual fund that owns companies located in many states, you directly own these investments as a partner in an LLC. That may mean filing a state income tax return in those states. My understanding is that the debt deals can be in any state and I just pay taxes on the income in Utah. However, the equity deals may actually require me to file a state tax return. That sucks. Luckily for me, my only out of state equity investment is in Indiana, where they require a composite return to be filed. Otherwise, my entire investment return on that tiny investment would be eaten up by the cost and time of filing an Indiana return. At any rate, I intend to very carefully monitor whether I will need to file an extra state tax return before getting into any more out of state syndicated deals. I'll stick with Utah, the 7 income tax-free states (AK, FL, NV, SD, TX, WA, WY), and states that require a composite return be filed by the LLC.

The Plethora of Crowdfunded WebSites

One of the biggest difficulties I've had with the literally hundreds of crowdfunded real estate websites that have appeared on the scene since the JOBS act of 2012 is separating the wheat from the chaff. Each of these entities is competing both for investors and investments and obviously are incentivized to put together as many deals as possible. Since it takes years to do a round trip through an equity investment and since these are essentially all accredited investor only investments, there is no Morningstar where you can go get detailed information about the investments. The closest thing I have found is some yeahoo's blog reviewing them. He divides them into 6 tiers. The crazy thing is that not a single site meets his requirements to be in the top tier and 80% of the sites are in the bottom tier due to “not enough information available.” That leaves four tiers. The 2nd tier is called “The All Stars.” He considers these companies to be All Stars:

That's nice, since two of the three I'm using made the list. Fundrise, the third company I have actually used, apparently used to be in that tier (and in fact was ranked number 1 back when I invested in it), but has dropped to the fifth tier after some legal issues related to the unexplained resignation of their CEO with replacement by his brother and a change in the business model to exclusively using eREITs (which are also offered by other sites but which I'm definitely not sold on. Perhaps more in a future post about those.)

Other crowdfunded websites that advertise with WCI include:

Equity Multiple (in the fourth tier-“Up and Comers”)

I'm really excited about this company. They might be ranked by this random review site as an “up and comer” but I'll be including them in my search when I next look for a crowdfunded real estate investment. They are one of the few sites whose principals co-invest in every investment and publishes their returns quarterly. Kudos to that kind of transparency.

Fund That Flip (in the third tier-“Contenders”)

These guys do all debt investments and unlike most sites, have a number of investments with a LTV of < 65%. I'll include them when I look for my next debt investments later this year as well.

Crowdfunded Equity Investments Versus Private Funds and Syndications

There are some serious benefits to using a crowdfunded site in comparison to finding your own syndicator or fund. These include:

  • Lower minimums- It is much easier to diversify with a $2-20,000 minimum than the $50-100,000 minimums you often see with more private deals. This not only allows you to diversify between deals, but also between crowdfunding websites. Diversification protects you from what you don't know.
  • Extra set of eyes/due diligence- If you're like me, your experience with real estate investing and the business world in general is limited. Having the experienced eyes of the crowdfunder going through the deals and throwing out the obvious losers has some benefit. There is a cost (i.e. an additional set of fees) you have to weigh against that benefit though.
  • Convenience- If you're willing to use a half-dozen different crowdfunding sites, there is essentially always a reasonable deal ready to go when you have the money to invest. It is a lot tougher to do that with private funds or syndicators.

Advocates of using a private fund or a private syndicator would point out that crowdfunding websites attract inexperienced investors–Perhaps the truly experienced and talented managers have investors lined up out the door to invest with them as fast as they can find deals to invest in. Once you have found a talented manager you trust, you can then invest in all of their future deals. While it lacks diversification, it is essentially the Warren Buffett principle of “Put all your eggs in one basket and watch it very closely.”

However, there are significant downsides to going the private route.

  • Due diligence- You've got to do all this yourself, and given the amounts you'll be investing, you'd better. That might mean flying out and meeting the management team, going to see the investments, or even doing background checks on the principals.
  • High minimums- $50-100,000 is typical. A typical doctor might only invest $50K in an entire year, and much of that will be going into 401(k)s and Roth IRAs. Coming up with $100K all at once is tough for a young accumulator.

As you can see, there are pluses and minuses with each of these models. Some of the current and previous WCI advertisers offer private funds or syndications, all of which I have considered investing in, but haven't (mostly because I don't have the taxable money to do so.) These include:

Origin InvestmentsI had dinner in Salt Lake with one of their principals last month and I really like their approach to investing. They are just about done raising money for their third fund, but have had exceptional returns so far with their first two funds. The $100K minimum is still a bit of an issue for me, but hopefully in the near future that sort of thing won't be as big of a deterrent for me.

37th Parallel/Nest Egg Rx– Dennis Bethel is an emergency doctor now turned real estate investor who has advertised on the site in the past. He works with 37th Parallel and a few WCI readers have invested with them in the past. I have yet to hear a complaint and I've asked everyone who has invested to send me feedback when they can. The last time I looked into it there was a $50K minimum. It seems to be working out for Dennis as he hung up the stethoscope last year.

Larson Capital Management- This is the arm of Doctor's Only (Larson Financial) that offers real estate funds to their clients. I think they're on their fourth or fifth fund with several properties going into each fund. Initial returns on the first few funds look promising. The last time I looked into it, the minimum was $50K.

There are hundreds of other real estate investing companies out there. There is no way I could ever look at even a small fraction of them. But I expect I'll eventually invest in one of these companies or one of their competitors. Before doing so I will certainly do more due diligence and I recommend you do too.

Life Settlements Fund

Some time ago I wrote about investing in Life Settlements. This is basically buying whole life policies from people who want to get rid of them at a price so good that your return on a diversified portfolio of them provides a solid investment return. The attraction here is solid returns with an asset class that ought to be dramatically uncorrelated with stocks, bonds, and real estate. I'm still interested, but like the private real estate funds, the minimums (typically $50-100K) have been high enough to keep me out in the past. This is on my list of things to invest in “some day.”

Growing the WCI Network/Buying Websites

The White Coat Investor NetworkMost of you noticed I bought a small piece of Physician on FIRE, LLC recently. I'm certainly no expert in real estate investing, but I'm pretty good at running a website, particularly in this niche. As discussed in a post last year, I am interested in buying websites, particularly websites where I can add significant value. I expect I will buy part or all of more sites in the future. Sites in this niche, assuming our “proof of concept” experiment these next few months goes well, will become part of the WCI Network. The best part of this network is that not only can I dramatically increase the return of my investment using my expertise and hard work, but that the investment also increases the value of my own business. I fully expect my investment in POF, LLC to be a “ten-bagger” within a few years, not even including the value the network brings to WCI. At any rate, POF, my “biggest competitor,” now has no bigger cheerleader for his success than me!

Well, there you go. That's what we're doing and what I'm thinking with respect to the alternatives portion of our portfolio. This is certainly the “fun” part of investing for me, but it's not play money. This is just as much “serious business” as the index fund portion. These investments all have the potential for outstanding returns and should have low correlation to the remainder of the portfolio.

If you choose to invest with these crowdfunding sites, I would appreciate you doing so using these affiliate links as it helps support the site at no additional cost (and sometimes significant additional benefit) to you:


Invest with RealtyMogul!

Invest with FundRise!

Invest with Equity Multiple! Management fee on your first investment waived when using this link.

What do you think? Do you invest in alternatives? What percentage of your portfolio do you use? How do you invest in real estate? What do you think about the crowdfunding websites versus private fund dilemma? Comment below!