By Dr. Jim Dahle, WCI FounderI periodically update blog readers about how my real estate holdings are performing, allowing you to “play along at home” and see how these long term investments play out over time, for better or for worse. Over the last 10 weeks or so, the economic situation of the world has dramatically changed. Something like 1/3 of tenants did not pay rent in April. Unemployment is approaching Great Depression levels. The stock market dropped 35% before recovering more than half of its losses.
Even bonds had a rough go for a little while.
So in comparison, how have our real estate holdings fared over this time period? Well, let's take a look. As a reminder, our portfolio looks like this:
- US Stocks 40% (25% Total Stock Market, 15% Small Value Index)
- International Stocks 20% (15% Total International Stock Market, 5% Small International Index)
- Bonds 20% (10% TIPS, 10% nominal [primarily the TSP G Fund with some muni bonds)
- Real Estate 20% (5% REIT Index Fund, 10% Private Equity Funds/Syndications, 5% Private Debt Funds/Syndications)
We no longer invest “directly” in real estate as sole owners of properties.
Public REIT Performance
The easiest place to start is with the Vanguard REIT Index Fund. It offers the benefits of liquidity, low expenses, transparency, and massive intraclass diversification. However, as real estate investments go, REITs are the most highly correlated with the stock market as they are all traded on the stock market. Due to market fluctuations, they tend to rise higher and fall further than privately held real estate. It also tends to be pretty tax-inefficient, since depreciation is not passed along to you (neither are capital losses), although it has become slightly better with the introduction of the 199A deduction. Most of the properties the publicly traded Real Estate Investment Trusts (REITs) in the fund invest in are large properties, although there are some REITs that will invest in single-family homes. Its performance is easily tracked:
Looks a lot like the stock market, eh? In fact, its performance is even worse. As of May 15th, Vanguard reports the REIT Index Fund is down 25.31% while the overall US market is only down 11.75%. Due to cash flows, our performance is slightly better at 25.08%, but still pretty rotten. In fact, recent performance (on a larger amount of money) has drug my lifetime returns on this investment to -3.96% per year over the 15 years I have been investing in it. That looks really bad, but keep in mind that annualized returns on a rapidly growing portfolio are heavily influenced by recent returns.
Private Equity Real Estate Performance
Let's move on now to the private equity holdings. These are perhaps the most interesting part of my entire portfolio (not that interesting is a good thing for investments) but they are also the least liquid. You really cannot say a lot about performance until the fund or property has gone “round trip”, and that period is usually at least three and sometimes as much as 10 years. But let's get into a few of these individual investments to see how they've been doing lately.
Indianapolis Apartment Complex Goes Round Trip
Back in 2014, I bought a tiny piece ($10,000 worth) of an Indianapolis apartment complex. It was a value-add syndication put together by Birge and Held and purchased via the Realty Mogul platform. Here's what the summary of the original offering said:
So, an investor should expect a 15% return over about 6 years, significant risk, and no liquidity. The purpose of an unknown end date (5-7 years) is to allow management to attempt to “time” the sale to provide the best return for investors. That was why I was very surprised to see the investment sold in April of 2020. Given overall real estate and economic performance, it is hard to imagine a worse time to sell an asset in my opinion. Nevertheless, when you are a limited partner, you are simply along for the ride. There is no hassle, but neither is there any control. Well, how did they do?
Over the years, this property generally underperformed pro-forma. Here's a pretty good example of the performance over the years versus pro-forma.
As you can see, it underperformed pro-forma with all but one distribution over 6 years. At the end, Realty Mogul reports to me that I achieved a 10% return.
Well, 10% doesn't seem so bad given our current economic environment, does it? So what's the problem? The problem is that I have no idea where they got that 10% from. Especially “10.00%” which is conveniently double-digit. However they're calculating it, it is inflating the actual returns I received. Don't believe me? Calculate the return yourself. Here are my actual cash flows:
Not only did this investment not provide the promised return, it didn't even provide the return that it claims to have provided to me. Did it make money? Yes. Did it make enough money to compensate me for being completely illiquid and undiversified? I don't think so. I expect a double-digit return for that.
So why in the world would a manager sell a property in April 2020? Here's the explanation I received via RealtyMogul.
Now there is a bit of spin there, but the bottom line is that we paid someone to take this property off our hands. We basically fire-saled it. Now maybe it would be even worse if we sold in a year and a half, but I wasn't led to believe that in their previous communication, which said:
So if you expect your real estate portfolio to do great over the next year or two, why would you pay someone to take this property off your hands in the depths of an economic crisis that you expect to soon end? It doesn't make sense. Between the spin, the chronic underperformance, and the apparent inability to calculate and report an accurate return to investors, I was glad to get my capital back, score some profit, and move on from this sponsor.
Disaster and Fraud in a Houston Apartment Complex
[EDITOR'S NOTE Section removed for legal purposes.]
Paused Distributions in Fort Worth
I still have one other individual syndication above and beyond my partnership office building (which just plods along year after year given the main tenant is another business owned by the landlords), and that is an apartment complex in Fort Worth sponsored by 37th Parallel. I own $100,000 of this property. Distributions on this property have been below pro-forma. Expectations were a cash on cash return of 5-6% and in reality, it's closer to 2-3%. Unfortunately, with COVID19, they initially seemed to have dried up completely.
While disappointing, when I saw this I hoped it was just a reflection of conservative management rather than any serious financial issues. Just this week they seemed to confirm that by making a first-quarter distribution, although it was only about half the size as usual (and about 1/4 what I expected when I purchased it).
Origin Fund III
In addition to the above syndications, I am also invested in four equity funds. Most I have not been in for very long. The longest one is Origin Fund III. It actually recently sold an asset, shortly after it finally invested the entire fund. The fund actually held 17 properties at the maximum. It was doing pretty well at the end of March, but we'll have to see how things look at the end of the second quarter.
This fund really illustrates the difficulties of knowing the current value at any time of real estate properties. Part of the reason the investments are so illiquid is that the properties aren't marked to market daily like a stock is. So chances are good that the properties are worth less right now than they were earlier this year, but nobody really knows how much less, and it doesn't matter all that much if the funds aren't actually trying to sell them. Which, to their credit, they aren't!
Other Equity Funds
My other equity funds are so new, I can't really say much about them. I'm also invested in the Origin Income Fund, the Alpha Investing Fund, and the 37th Parallel Fund I. I made all of these investments in February and the 37th Parallel capital hasn't even all been called yet. The Alpha Investing Fund is the only one that has made a distribution so far, basically paying out the 4% annualized it pays on uninvested cash quarterly.
Private Debt Real Estate Performance
There are a few updates here worth making.
Fund That Flip Loan Finally Goes Round Trip
I had a $5,000, one-year first-lien debt investment at Fund That Flip (now branded Upright) starting in September 2017. While it continued to make each of its payments, the developer did not finish in one year. Finally, in February 2020, the principal was paid back along with all interest due. It was a good demonstration of the risks of illiquidity, but was all wrapped up before the CoronaBear.
AlphaFlow Still Liquidating
As mentioned in previous posts, AlphaFlow continues to pay out principal as loans are paid off. I still have 58 loans there. By mid-Winter, my investment is supposed to be all paid back. None of the loans seem to have been written off in the last 3 months, so I think we're navigating the CoronaBear well so far, but it is still early. Mostly I'm just annoyed that the principal is being returned to me in drips and drabs, causing time-consuming accounting on my side. I would not have invested if I had known that was going to happen. But the return still seems fine and I have about half the principal back so far.
Arixa Fund
I also have $100,000 invested in the unlevered Arixa Secured Income Fund. The return seems to have dropped over the last couple of months from around 7.2% to around 6% annualized. They provided an update earlier this month noting that they are adding to their loan loss reserves, although they don't seem to be seeing any yet. 56 of their 59 loans made their interest payments as scheduled in April, but the other three are simply delaying them and are well-capitalized and shouldn't have any trouble making them in the end. Here's what they had to say about these crazy times:
This fund has always been managed fairly conservatively as these funds go, which is appreciated in times like these despite the slightly lower long-term returns.
DLP Income Fund Via CityVest Access Fund
I have another $100,000 invested here for a little over a year. My return is 8.86% on it. The last couple of quarterly payments annualize out at almost 11%. The first quarter payment was reassuring, but the second quarter payment will tell us a lot more about how they are doing in the CoronaBear. Like most private real estate investing companies, DLP has been doing webinars to update and reassure their investors, but it feels like a little less communication than I'm getting from most of my investments (not that I necessarily want more).
I hope that overview of my private real estate investments is helpful. Whether you choose to invest in direct real estate, publicly-traded real estate, private syndications/funds, or no real estate at all, readers would like to hear about your experience.
If you are interested in private real estate investing opportunities, start your due diligence with those who support The White Coat Investor site:
Featured Real Estate Partners
What do you think? How have your real estate investments been impacted by the pandemic and economic downturn? What risks have you seen show up? What surprised you most?
Thank you for sharing your real estate investments with us so transparently. Overall, what do you estimate has been your annualized return on all the RE portion of your portfolio, put together? Is it significantly different from the return on your stock allocation? If not, do you see yourself continuing to invest in RE, at the current 20% allocation- for the diversification it provides or your belief that over the long run, RE will provide better returns than the market?
I have not dipped my toes into RE beyond being an accidental landlord, which didn’t go well for us- and Vanguard’s REIT. I find it difficult to vet and pick one syndicator or private fund to invest with, especially since the sums involved are often large. It’s like trying to choose the winning actively managed mutual fund.
Thanks,
PFB
I don’t need to estimate my returns. I know exactly what they have been. However, there is a slightly complicating factor in that until 2020 I included my small business (primarily online businesses) holdings in my equity real estate allocation. It’s also a little complicated in that you really don’t know how you did on an investment until it goes round trip. So you are generally understating your returns most of the time because these investments aren’t marked to market. For example that property in Indiana. Up until this year, I would have told you that I was making 5% a year. But when it finally sold, my overall return was closer to 9%. At any rate, my data shows an annualized return of 58% from 2012 to 2020 on the equity side and 12.35% on the debt side from 2017 to 2020. YTD equity (no longer includes small businesses) shows a return of 1.72% on the equity side and 3.84% on the debt side. Meanwhile, my annualized returns in the Vanguard REIT Index Fund (obviously heavily influenced by recent poor returns) are 1.65% since 2006. YTD returns there are really bad, -36%, primarily due to a sizeable rebalancing transaction out in April. The fund itself is down 15% year to date.
Is that different from my stock allocation? Yes. US Stocks are down 6% YTD and international stocks are down 15% year to date.
Will I continue investing in real estate? Yes. Why? Solid returns and low correlation with the rest of my portfolio, and on the private side, hopefully an illiquidity premium.
I agree the vetting process is tough.
Thank you for your in-depth reply, WCI. My earlier reply to this showed up as a comment below. Your RE portfolio has certainly been worth it! Now I’m tempted to delve into it and maybe go for it, too. I got some reading to do.
I think it’s worth looking at if you’re the type that’s willing to read a blog post and comment on it every day. 🙂 I have no plans to abandon the asset class any time soon.
Before the crisis, I had a portfolio of 62% (skewed toward US) equities, 21% bonds, and 16% REIT. It was similar to the WCI portfolio in that it was also bent toward value, but had less international exposure and my bonds were primarily BND and LQD. I day traded TLT during the crash as the volatility was something that could be exploited with minimal capital risk.
My REIT stock holdings were completely hammered (LADR off 80%, O off almost 50%, ABR off 72%, etc.) My search for yield that had provided quite a bit of income came back to bite me in the crash of 2/20 to 3/19. I sold ABR at $12 (currently $8.50) and day traded LADR to average down my losses, kept my O, and have since purchased more O. In addition, I made a bet on 1000 shares of several government backed mortgage REITS with the best balance sheets. I picked three and it cost me about $20,000 for 1000 shares of each. I also sold my largest REIT (FREL) at $27 for a small loss and will be buying it back at about $4 a share less. At one point it had gone from $29 a share down to $17 a share, it is now $23.
I did not “just hold and wait on the way down and ride it out”…I know it’s a fool’s game, but I made some strategic moves to increase cash, selling some high yield debt, and a few individual stocks and REIT that were ill advised in COVID-19 world (Disney, regional banks). I did leave my 457 plan and 401 accounts completely alone and they have rebounded markedly to within a few percent of their ATH.
I had been getting out of individual stocks in Jan and February and some of this was helpful (Disney tanked from $140 a share to $90 for example and I was out at $133). That is the good news…I also sold my MSFT for a loss at $163 and it has completely rebounded plus some. I day traded from 3/20 to now and have been in and out of stocks I would not mind “getting stuck with” and have been able to average $500 a day or $10,000 a month.
What is the point? I’m lucky so far. I am back to within 6% of the ATH of 2/19/20. I rode the Fed pump of bonds up to now and then converted that to cash. I participated in the recent run up at the 50% equity level and am within 1.9% of my 1/1/2020 balances. I have 38% of my funds in cash at this point, 42% in equities, about 10% in REIT, and 5% in bonds. Why do all this work? Why didn’t my planned allocation hold up.?
Well, at 56 years of age, my equity allocation was too high and so was my REIT allocation. when you add those two, I was really in 78% equities with the REIT stock included. And I got my rump handed to me with a combined 23% decline at the bottom. I will be reworking my allocation and looking for a few bargains as I now have the 38% cash, although to be fair, about a third of this is from selling my BND and LQD, seeing little upside at this point. Trouble is…as I wait for the second COVID-19 wave and US/China turmoil…my cash hoard sits idle.
Wow! meanwhile I used this time to play with my kids and kept my investment of passive index funds unchanged. I taught my son Algebra and we read Harry Potter every night. Luckily we are in black for the year as of now.
I’m pretty amazed you’re in the black YTD while investing passively as I don’t know of any broadly diversified stock index funds that are in the black and bond index funds are only up a couple percent YTD. Are you sure you’re not counting new contributions? As I mentioned above, stock funds are down 6-15% as of today.
You are right I am in black only with new money added. I think I am down 3.5% since Jan 1st now that I look at it. I was only looking at personal capital website and forgot about the significant 140K I have put in stocks since Jan 1st
That makes more sense. Almost no one in passive index funds is in the black with with their whole portfolio even with the current two month “bear market rally”, without counting new money.
I thought maybe you were using magic.
I have also been putting in, but not as much as you. Just 457, 401A with match, my two eldest daughter’s ROTH money, and a bit on Robinhood. Soon, I will deploy my SEP-IRA contribution on “a big dip”. If there is one.
Many say yes, many say no. I will use magic and say yes…7-10% correction between now and August. Let’s hope my magic beans are wrong.
Calling it a bear market rally implies you know what the future holds. You don’t. Technically, since it is greater than 20%, it is not a bear market rally, it is a new bull market. Maybe there is a CoronaBear II, I have no idea, but CoronaBear I is definitely over.
How come you’re using a SEP-IRA instead of a solo 401(k) so you can do Backdoor Roth IRAs?
I call it a bear market rally because I don’t understand it. It seems fake to me, propped up by the Fed, but it’s real enough in my accounts. It seems disconnected from fundamentals like the run up from 1/1 to 2/15 this year. But as you say, it qualifies as a new bull.
I’ve had the SEP-IRA since 2008. Since I have a side gig and a main job as an employee, I’m under the impression that because I put $15,000 into a 401A and my employer matches it with another $15,000 that this would limit a solo 401 contribution?
This 401 money is already at $30,000. Is it not limited to $55,000 total? With the SEP-IRA, I am usually putting in the max based on earnings or about $30,000 a year.
I think you may be able to do an employee contribution in a solo 401(k) in addition to the employer contribution (equal to what you’re putting in a SEP-IRA) because I see people with both 401(k)s and 401(a)s from the same employer. I think you should read these posts:
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
https://www.whitecoatinvestor.com/multiple-401k-rules/
I read the and looked around the internet.
…”So if the two businesses you are involved in aren’t a controlled group, and they each have a 401(k), (or a 401(k) and a SEP-IRA) you get two $55K limits. Pretty cool huh? ”
So, if I work for one employer that has a 401A and a match ($15,000 off the top and they match it), then this $30,000 does not affect a solo 401K for a side gig with a different 1099 employer where I make, say, $130,000.
So, I could put the 401A (set at 5% of salary) and get the match ($15,000 + $15,000 match) and then open a solo 401 for the side gig and put in an employer (me) contribution and an employee (me) contribution and the employee contribution can be Roth money…I think. This chunk would be a separate from my 457 plan at the employer ($26,000) also.
If this is right, I can shelter $30,000 in the 401A, $26,000 in the 457, $8,000 in the HSA, and up to the maximum amount in a solo 401(k) for 2020 which is $57,000 younger than age 50. or 50 and older can add an extra $6,500 per year in “catch-up” contributions, bringing the total to $63,500!!
I am going to open a solo 401 today. Thanks WCI.
Yes, I believe that is right. You’re welcome.
Woah, wow. Are you saying that the solo 401K will take you from $55,000 to 63,500??
Interesting. Perhaps some more information on my part will add to the story.
My wife and I have walked 250 miles, mostly at lunchtime from 11:30 to 1:30 daily. We replaced the mulch in the landscaping, and I have been staying in shape, reading quite a bit, and getting some sun with the kids in the back yard on good weather days. I took 10 days vacation including the Memorial day holiday. We have been enjoying cookouts in the back yard.
The day trading was in between telephone appointments with patients as I was “on duty” and did almost as many appointments from home as I did in the office. I am an employee and this was the task, along with coordinating the COVID-19 response for an agency with 1500 employees via dozens of hours of Zoom meetings. I also moonlighted weekends on an inpatient unit (as usual) to build up cash reserves for the ongoing recession.
I’m curious what group of “passive index funds” could “be in the black” at this point with only the Nasdaq and Bonds in positive territory. The S&P 500 is still off 10% from the ATH, QQQ off 3.15%, and the DOW is off 13.4% from 2/19/20. You mean year to date? That’s an easier metric to meet. As I said, I’m within 1.9% of that, but it cost me time and effort.
I think (yes, its just an educated guess) that the market will tank again in July/August when the 40 million unemployed is still about 35 million, the bankruptcies continue and accelerate, and I believe that COVID-19 is not done wreaking economic havoc just yet. But I get your point, passive index investing and riding it out with the correct allocation may work out well and was certainly less stressful. Past performance may not be indicative of future results in COVID-19 world.
Or any other world.
We all have hobbies? And there is no context here, but if this is 5%, (although it doesn’s sound like it) of Huckleberry’s portfolio than he’s likely having a marvelous time. I’m not sure I could sleep at night or do anything else during the day, but to each their own. May the luck never run out and best wishes!
See my answer above. I have worked the entire time from when our system shut down 3/13 to now and done some inpatient moonlighting (in full PPE, or the best I could get). One of the doctors in our system got COVID-19 at his office and I took his weekends. I have been primarily working from home via tele-medicine.
The day trading was within my Fidelity Accounts which comprise about 75% of my retirement monies. I left a lot of it as it was (Fidelity Balanced, Fidelity OTC, Fidelity S&P 500 index, etc.). I used the money from the things I sold in JAN/FEB to day trade as well as the REIT and Bonds (BND/LQD) I sold after the fed pump. The prices for BND and LQD had stalled and they yield only 3% a year or so. If you take the cash hoard day trading proceeds ($20,000), I made 10% on this money in two months. That’s the context.
Makes sense, thanks for sharing.
If I’m not mistaken… Didn’t you used to have Fundrise?
I’m not sure what you mean by “have Fundrise”, but I’ve reported every single real estate investment I’ve had on this blog. At one point I owned a preferred equity investment in Salt Lake City that was purchased through the Fundrise platform. Looks like I owned it from 2015 to 2017. I had an annualized return as projected, just below 14%. It was not their current REIT product.
I do have a small Fundrise account that I put $3000 in. As you know, it is somewhat illiquid.
That particular $3000 has held up well from November to now (6 months return 5.8% net of fees).
Annualized that would be 11.6% meeting your criteria for double digit gains on less liquid assets.
However, you and I both know that they will not be able to complete all of their projects on time as planned and that their time lost may not entirely be made up with lower borrowing costs.
I will admit that staying the course with REITs in my portfolio has been challenging! As you mentioned, with its high correlation with stocks, I feel like I am constantly trying to remember and justify why I own them and the role they play in my portfolio. It certainly does seem to zig more often when the market zigs rather than zag. Holding international equities or having a small value tilt are easy arguments as you could reasonably expect them to have their day in the sun in a long-term portfolio. REITs, well… not sure what to think anymore. (JL Collins didn’t help either with his Stock Series post). As it is reasonable to have REITs, and reasonable not to have them in a portfolio, if I decided to make a change and eliminate this asset class, not as a response to changes in the market, but simply to reduce asset classes, (taking the time to make sure I really want to do this etc), is there ever a really “ideal” time to do this? It seems with the current market volatility, this would not be a good time to make any changes, so maybe a better question is:
When you made your asset allocation change, how did you select the timing for this?
* At 7.5% of my portfolio, the amount of time I spend thinking about this topic vs. the long-term effect is likely negligible.
** As Physician Finance Basics mentioned, I appreciate the transparency and your firsthand experience with these private equity/debt funds. I think the “no called strikes in investing” is making a strong appearance here for me. Thanks for the great post.
The ideal time is after a big run up and just before they crater. Good luck figuring out when that is in advance.
Can you please add that to the WCI Newsletter 😉
I did not stick with my REITS.
Example: I owned 900 shares of VNQ, purchased at $96 a share. I sold it for an $826 loss during the ensuing COVID-19 debacle. It is now at $77. Assuming I purchase it today, I am better off by $17,000.
I can but it back at this price if I wish, although it was a better buy at $57 at the bottom (who knew that was the bottom…not me).
As I said above, I also sold my FREL:
I purchased 1000 shares at $28 with the proceeds from the sale of my starter home. I sold it at $27.79 for a small loss. It bottomed at $17 and is now $23. I can but it back today and get the same 1000 shares for $23,000, about $5000 less.
These two “sells” would currently net me $22,000 in extra cash and I would still have my original shares back.
The question is: Do I want them now? The answer is no. Buying a basket of REITS without regard to the new reality of COVID-19 world is like buying an airline ETF and hoping for the best as the smaller players and the poorly capitalized in the index go bankrupt. I’d rather pick individual large REITs with high levels of cash on hand and/or “COVID resistant” business models like ‘O” for the former and AMT on the latter.
I just wanted to point out a clarification. The 1/3 of renters didn’t pay their rent in April claim has been spread over the internet lately, but it is a false statement at worst and a misleading statement at best.
31% of renters did not pay their rent ON-TIME in April, with on-time being defined as rent being paid between April 1-5. In 2019, that number was 18%. So in reality, only an additional 13% of people didn’t pay their rent on-time compared to last year. https://www.cnn.com/2020/04/09/business/americans-rent-payment-trnd/index.html
As of the end of April, 91.7% of renters paid their April rent, compared to 95.9% last year. So in reality, only 8% of people couldn’t pay their rent, but this is only an increase of 4% compared to last year. https://www.nmhc.org/rentpaymenttracker
Thanks for the clarification. It does make things look a lot better.
Yeah, I was about to do the same correction. I’ve actually been surprised with how well rents have held up so far on my investments. One small syndication I have did stop improvements due to the uncertainty, but received something like 94% of their rents in April (although not all on time). My other properties haven’t had too many issues yet either although I anticipate the distribution at the end of the year will be lower.
Thank you for sharing !!
I recently started dabbling in crowdfunding to diversify my holding
I personally prefer physical properties since I tend to have more control; yes it’s more work but as long as you have the right team then it’s just managing your property manager
Crowdfunding is a platform that I understand yet don’t seem to comprehend lol; I believe it’s because I’m not accustomed to equating real state to it until recently
For anyone who is weary on investing in physical properties I say just give it a try and you could control the scale of it by controlling the price of the property you want to start with
If this is both Dr Gan and Dr Mo, shouldn’t that be “we” instead of “I”?
Here is the summary:
1. Do not invest when you don’t understand the investment. Real Estate included.
2. I have yet to see big portfolios (1M+ , diversified, in RE in these ‘funds’) generating significantly higher returns than stock market. May be white beard doc can chime in but I suspect ‘passive’ RE investment with that big of an amount will have similar returns to market when all said and done. Welcome to post contrary #s, curious to know.
CN I have 7 figures in passive RE, and the returns vary – some have been higher than stock market, some lower – and totally fine w that. I think fairly diversified, in that these include NNN lease funds like Broadstone, as well as debt (Arixa, like WCI, but in the levered fund, still paying through the downturn), individual syndications of both multifamily and office and storage, and funds like MLG (which the WCI partner PIMD is in and wrote about). Some have delayed distributions in the downturn, and some have reduced, but all should do fine long term. I’m comfortable with this amount as only about 20% of net worth, and have taxed and tax favored accounts in the public markets. Love the passive income; would never want to own directly but yes the trade off is no control after the initial due diligence research.
Thanks SM. Are your returns higher than stock market returns? As in if you are getting 7-8% overall returns, how is that significantly different than market returns?
As I said, if you keep increasing your allocation to this and diversify, then your returns will be more in line with what market returns. I could be wrong in this ofcourse.
Now, managing and doing RE actively is a whole lot different and I know for a fact returns are higher.
Good Q – to be honest I don’t actively follow the RE returns, but most are probably somewhere in the 7% at low end to 12% at higher end. I don’t draw any income from my 401k since working in my 50’s, and don’t take anything out of taxed accounts. As work $ ebbs/flows, especially in this market, just love the passive RE income. I agree it’s “the same” as if I took the dividends from stocks/bonds, but there’s just something oh-so-very-sweet about getting checks every month and every quarter, and not having to have “slaved over a hot colon” to produce that check. Love love love it.
Since I’m newer in RE investing I really can’t say how my returns are in the long term. In 2018, while the stock market was down for the year, I earned 6% on my property (lower than expected). Last year, the stock market won big. The other benefit I will say though is that in addition to the distributions that I can calculate on a yearly basis, there is also the increased value of the property (we had a lot of capital improvements on the property plus improvement in the neighborhood) that can’t be calculated until in sells in the distant future that is added onto to what I’m hoping is 6-12% yearly distributions.
Appreciate both the comments. But as I said, I think if you look deep and see portfolios of well diversified RE passive investment, they aren’t much different than stocks in overall returns.
SM, I can understand that, but that’s psychological. Dividend investors getting regular dividends argue the same thing but what really matters is overall return. Not criticising, infact I am on your side and believe in cash flow investing but my point remains.
Also I believe the proliferation of these funds are meant to be “sold” to passive investors and so if you don’t understand the risks, skip. You will do fine in the market.
Thank you for the answer. You’ve had solid returns, no doubt- so the increased risk has paid off for you. I agree that unless the returns are double digit, it doesn’t make much sense to add this layer of complexity.
A lot of folks in RE (including passive) would argue it’s not so complex after doing good research and learning, and being very selective in which sponsors you choose to partner with. The risk in many cases should not higher than public markets. People need somewhere to live, and in MF as long as you don’t price yourself too high especially in an economy like this – i.e. probably stick closer to Class B and C rather than Class A housing – it should do fine. People pay their rents, albeit delayed right now, and the economy will return. Agree that other assets like retail and hospitality (like hotels) are probably not the way to go and entail more risk – the last 3 mos demonstrate this.
When treasuries are paying 2%, I’m not sure I need double digit returns before getting interested.
WCI: How does as Private RE fund newby perform a reasonably diligent vetting process in your mind? Everyone seems to talk a good game but your post today gives me more pause then your prior comment regarding risk/benefits.
PIMD has an entire course on this subject.
https://www.whitecoatinvestor.com/passive
I’m not sure I can distill it into a simple comment. But here are a few principles:
Diversify. It protects you against what you don’t know and what you can’t know.
Understand what you are investing. How does it do well? How does it do poorly? How is the money split up in all possible scenarios?
What does the track record look like?
If you want to get really hard core, fly out and see the property and talk with the managers in person and run background checks and have your accountant and attorney go over everything. But it’s hard to justify doing that for a low to mid 5 figure investment. It would eat up a huge chunk of the returns.
WCI-I’m curious if you will be investing in the JKV fund that you have linked to in your post.
I’ve always been reluctant to invest in these funds due to the illiquidity and the complex tax implications for out of state funds, but as a So-Cal resident I’m intrigued by this one.
I probably put 20 of these out a year to my real estate list. If I invested in every one of them and they averaged 5 years a piece, I’d have 100 investments to keep track of. So no, I don’t invest in all of them. I invest when two things occur:
# 1 My equity real estate balance is low compared to its target percentage (10%). That is not currently the case since I just made a bunch of investments in February
# 2 I like the deal
If # 1 doesn’t apply, I don’t spend all that much time on # 2. Remember any real estate deal I introduce to my Real Estate Opportunities list (or in a blog post like this one, although this is probably the last one of those, at least for a while, based on reader feedback) is an introduction, not a recommendation. But I certainly mention when I invest personally.
This is an excellent post thanks! When you say 10% does that mean primary residence as well?
No. I include my primary residence in my net worth, but not my portfolio.
Would love to see an analysis of how the return would’ve looked if you had just put the same amount of fund in your allocation of index fund.
I know we’re not factoring time of the research and the benefit of diversification. But I’m curious if for those of us starting, maybe it’s easier to stick to the basics.
It wouldn’t mean much in the short term to do that comparison. Here’s my latest post on my index fund performance though: https://www.whitecoatinvestor.com/my-index-fund-performance-report/
It’s DEFINITELY easier to stick to the basics.
Personally, I am afraid of these real estate syndications. I feel like the overwhelming majority are set up to reward the syndicators more than the passive investors. And the minority of syndications that are set up to feed the passive investors right along with or ahead of the syndicators have been saying over the past year or more that prices had become too rich for them to make any good deals. Or perhaps I am simply lacking sufficient knowledge to understand all of the contractual intricacies of these syndication real estate funds deeply enough to feel comfortable investing.
My personal direct ownership residential real estate investments have continued to perform well. We have experienced an impressive 100% on time payment history on 100% of our properties so far this year. We were interested to see what would happen, but many of our current tenants work in the tech sector and have been working from home. Our niche is upper middle class top school district rental properties, and we require a credit rating above 720 and an income multiple of 50 to approve a tenant. We did agree to renew all tenants with leases expiring this summer, and we did not raise any of the rents this year in the setting of Covid. 100% of expiring leases were renewed, also a first for us. Maintaining a stable rent was not necessary from a business perspective, as our market is seeing a surge in demand from all of the center city dwellers looking to escape Covid to the top schools in the close in commuting zone. At this point, however, I am not really sweating it to maximize every possible dollar of rental income as it makes little difference to us at this stage of our lives. When we first started purchasing the investment real estate properties, maximizing rents and minimizing turn over time was a big priority as it allowed us to maintain stronger positive cash flows, but now there is a substantial cushion with all of the properties paid off in full. Our longest term tenants have been with us for 14 years and they pay about 5-10% below market rent, but the stability is worth it. We are running out of depreciation deductions to shelter all the rental income, so it is likely we will have to either 1031 exchange into some larger multifamily properties with on-site, live-in professional management if we want to continue taking advantage of the tax benefits of real estate, or simply pay growing amounts of taxes on the persistently rising income. One of the factors that led to the impressive growth of our real estate portfolio was the combination of leverage and inflation. With lower future inflation, I don’t know how easy it might be to replicate what we were able to achieve.
I invested a small amount in Rich Uncles NNN REIT and BRIX (University campus-adjacent) REITs. As you can imagine, these haven’t done well, losing nearly half the value in the NNN and nearly all in BRIX. I don’t love that they are re-valuing the shares rather than simply keeping everything fully illiquid, rather than partially liquid, until things recover.
I’d also rather give up some liquidity than half my value!
Thanks for the loong article 🙂 I was thinking about investing in real estate in 2020 but the current situation scared me a little. We need more articles like that! 🙂
Any updates to your 37th Parallel experience?
My syndication there is still below pro-forma but distributing quarterly. My fund there is still calling capital.