Periodically, I update readers on how my real estate portfolio is doing. (Last update here). Since many of these investment vehicles are somewhat new and none are easily researched on Morningstar like publicly traded and SEC regulated mutual funds, many people seem to be really interested in my real-life experience with these. Perhaps I'm a bit of a real estate crash-test dummy that way. But good or bad, I'll tell you how it is going. Be aware that I have an advertising and/or affiliate relationship with most of the companies named in this post.
Remember as you read that real estate only makes up 20% of my portfolio, the rest is invested into stock and bond index mutual funds. My asset allocation is:
- US Stocks 40% (divided 25% Total Stock Market and 15% Small Value)
- International Stocks 20% (divided 15% Total International Stock Market and 5% Small International)
- Bonds 20% (divided 10% TIPS and 10% nominal [made up of the TSP G Fund as much as possible and an intermediate muni fund for the rest)
- Real Estate 20% (divided 5% REIT index fund, 10% private equity deals, and 5% private debt funds)
Today we're only talking about that last section. You can check out the post from two days ago if you want an update on the rest.
Vanguard REIT Index Fund
Let's start with the easiest section. I've owned this fund since 2007. It's been a great investment ever since it lost 78% from peak to trough in 2008. My annualized return has been 11.08%, including 2008. I have always owned it in tax-protected accounts, even now that REIT income qualifies for the 199A deduction. It sits in a Roth IRA right now. I like its broad diversification and liquidity. It had a heck of a 2019, 30.78%. In years like that, you might wonder why anyone would bother with private real estate deals. See 2007-2008 and late 2018 for details.
Let's go to the debt funds next.
You may recall from my last update that there were some changes afoot here that I was not at liberty to reveal. Well, Broadmark not only became a REIT in 2019 to qualify its income for the 199A deduction (a very good thing), but it also decided to go public. It is now a publicly-traded company. I wasn't super thrilled about that, as I had to decide what to do about that. I basically had three choices:
- Sell it before it went public
- Let it go public, then sell it
- Let it go public and hold an individual stock
Investors did all kinds of different things in response to this news. Some sold half of it and are holding half of it. I decided that I didn't want to hold an individual stock long-term, but I also felt it was a well-run company with a significantly higher yield than its publicly traded peers. I figured it was likely to get a nice bump in price once it went public. I also knew I had lots of tax losses I've been carrying around from tax-loss harvesting, so I thought I'd take a bit of a gamble and hold it for a few weeks after it went public since there would be no significant tax consequences to doing so.
I later found out that due to Washington State law that it wasn't a gamble at all. I had the right for 30 days after it went public to “put” it to the company at the price on the day it went public. It took about that long to get the shares transferred to my Vanguard brokerage account anyway, so I sold it about the one month mark. At that point, it had gone up significantly. I wouldn't say I timed it perfectly, but I pretty much did as it has been pretty level since then. Who knows how it will do going forward, but I was pretty happy with it for the two years I owned it. My overall XIRR return was 20.91% (35.57% in 2019). Not bad for something I expected 10-11% from.
Fund That Flip Loan
Remember that Fund that Flip Loan I had? It was only $5K, but it was supposed to be a 12-month loan. It took 2 1/2 years, but not only did I get all the principal back, but also all the interest owed and my share of the late fees, etc. I ended up with an 11.28% annualized return. All in all, I made 9 different debt deals through crowdfunding sites (RealtyShares, Fund That Flip and Peerstreet) and got my principal and interest back on all of them.
If you're interested in a larger sample size, AlphaFlow basically invests in these crowdfunded notes for me. I currently have 77 notes, 9 of which are delinquent. I have lost about 1% of my principal investment there over 2.5 years. So they do go bad from time to time, but you get all of your principal and interest back most of the time, even if it does come late when there are delays with the project.
Arixa Secured Income Fund
Another debt fund I own is the Arixa Fund. It loans money to developers in California. They have two versions, one leveraged 50% and one unleveraged. I own the unleveraged one. It's a little boring but steady. 18 months into it the return is 6.85%. I've considered swapping to the leveraged version which typically has a 1-2% higher return.
DLP Fund III Via CityVest
Lots of you have been invested in this one with me over the last year. I've been pleasantly surprised with the last couple of distributions. Those two distributions annualize out to 11% returns. My XIRR return is now up to 7.96% there, drug down by a bit of a slow start. Hopefully, that'll continue to rise into the 9-10% range over the years. If you're going to WCICON20, stop in and see CityVest in the exhibitor area.
I'm not happy about this one at all. I mean, the returns were fine, even after the 1% advisory fee, but they basically just decided they were not going to service individual investors anymore. To make matters worse, there was no way to just take your money and walk away. They decided they would just return your cash as the notes were paid off. So now I'm getting this $20K investment returned to me a few hundred dollars at a time, 3-5 times a month, over a year or so. For someone who keeps track of all the cash flows into and out of his investment accounts, that's a major pain. XIRR is 6.55%.
A New Fund
I'm taking a look at a new fund (no, they're not interested in advertising at all) that I'll likely be adding in April. With Broadmark out and Alphaflow on its way out, I'm underweight in this category. I like the fund and its management, but its $250K minimum and qualified purchaser requirement (higher than accredited investor) puts it out of reach for most white coat investors. I was about to add money to Broadmark when it started talking about going public. I think this will be a suitable replacement.
My overall return on debt real estate for 2019 was 15.84%. Since I entered the asset class in 2017, I have an annualized return of 12.56%. Yes, there's some risk there, but considering intermediate treasuries have a 3 year annualized return of just 3.57%, I'm okay with that.
As of the 1st of the year, I removed the part ownership interests I have in small businesses from my retirement portfolio. I had them in this category and they really didn't fit. Plus, they were growing so fast they had become the main holding in this category. Their removal left a big hole that needed to be filled as you will see.
Medical Office Building
Our partnership office building is one of my holdings. It's managed very conservatively (the board I run has voted to basically use all the income to pay off debt.) It's not that awesome of an investment, but it certainly isn't a loser. It made 4.54% in 2019 and my long term XIRR is 7.94% per year.
Indianapolis Apartment Complex
This is another one I've had for a long time, since 2014. It was a mere $10K investment purchased through RealtyMogul. I think it has generally underperformed pro-forma, but sends some income a couple of times a year. It's tricky to calculate a return on it before it goes round trip as there are no appraisals or anything for what it is really worth. Realty Mogul just reports it as “$10,000,” so the XIRR only counts the income. It missed a distribution last Fall:
“Although operations are stable, cash flow has been hindered as the asset required substantial capital expenditure needs, much of which were required by the lender.”
But the first one in 2020 is in the mail as I write this and they claim that will bring up the cash on cash return to an annualized 4.3%. Without the distribution, I'm at a long term XIRR of 4.26%. It's supposed to be a 5-7 year hold and we're into that window now, so this one could end any time.
Houston Apartment Building
This is one of my worst performers. A $20K preferred equity position bought through Equity Multiple at the end of 2017, they should have described it as a “value-subtract” project rather than a “value-add” project. It made monthly distributions all the way through 2018, but didn't send me any cash at all in 2019.
It's a bad sign when your dashboard shows that stuff on the right side. The communication is upbeat as it always is, but it's hard to hide that this one has been disappointing for everyone:
As of October 15, 2019, the Property was 55% occupied as vacant units are being renovated…To date, eleven completed units are leased and occupied at rents above underwriting, twelve units are in various stages of completion (plumbing, HVAC, electricity, demo and framing), and ten additional units are poised to begin renovation in mid-November…We recognize the overall progress of the project has been much slower than expected. We’ve been working diligently to engage the Sponsor and its team to identify and resolve potential project delays, and believe proper alignment between us is now in place.
This was only a three-year hold and I'm now about 27 months into it, so it'll be interesting to see the end of the story, especially given my preferred equity position in it. If you're going to WCICON20, stop in and see EquityMultiple.
Fort Worth Apartment Building
This is a 37th Parallel Project, also a value-add. I own $100K of it. They seem to have had a bit of trouble raising rents as lots of other people are also building in Fort Worth. At least it's over 90% occupied, though! It does cash flow, but not as much as the pro-forma said it would. It's a ten-year hold on this one, so we'll see how it goes. My current XIRR shows a return of 4.09%, but the current annualized yield is less than 3% cash on cash.
Origin Fund III
Another $100K investment, this has been an interesting one to watch. It took a long time to call all of my capital and as soon as it had all been called they're already talking about selling some of the assets bought with the original capital! No cash flow yet, but Origin does periodically update you on the value of your investment. My annualized return so far is 5.23%. Just like with the syndications, you really can't read much into that until the assets are sold.
Origin IncomePlus Fund
Another new $100K investment for me. This calls the capital all at once and places it in a note paying 4% something while waiting to deploy the money. If you're going to WCICON20, stop by and see them.
Another new $100K investment for me. This one will call capital over time. This one is still raising capital, so use that link if you want to invest alongside me.
Thoughts on Equity Real Estate
I've only really gone round trip in three equity deals so far and no funds. They just take a lot longer than debt deals. All three have provided solid returns, at or above pro-forma. Overall, I had a great 2019 with this portion of my portfolio (93.38%) but that was obviously juiced by the small businesses in it (see below.) Take those out and it would be a single-digit return.
I often have real estate deals come across my desk that never show up on the blog or even the podcast. If you'd like to hear about them all (and first) be sure to sign up for our free Real Estate Opportunities newsletter using the links at the bottom of every email I send.
Sometimes when I introduce my Real Estate Opportunities email list readers to a new deal they ask whether or not I am investing in it. I basically stay fully invested all the time. I don't leave cash sitting around for months waiting for the right opportunity. So when I have money available to invest, I look to see what is available out there and attractive to invest in. That's easy to do with index funds, but a little trickier with real estate as you can't invest at any given moment. So if you're curious as to why I might choose one project over another, it often has more to do with my personal cash flow than the particular deal itself. I generally prefer funds to syndications for the additional diversification, but that does usually come with having to file some additional state tax returns. If only someone would start an equity fund that only invests in tax-free states….hint, hint.
Those Small Businesses
You know those posts you see every Saturday morning from folks like The Physician on FIRE, Passive Income MD, and The Physician Philosopher? Those are investments of mine too. My best ones in fact. I can't say they're entirely passive (or passive at all), but they're definitely my most fun and profitable investments. As the newest addition, The Physician Philosopher had the best 2019 return of 2,078%, but POF (248%) and PIMD (133%) had pretty darn good years too. Too bad there was never a way to invest more than a small amount. I also bought a tiny piece of Alpha Investing recently. It's a bit of a flyer but hopefully one with a big return down the road. At any rate, I'm probably going to stop reporting returns on these now that they're out of my real estate portfolio and not really available to my readers anyway.
What do you think? Do you like private real estate? Why or why not? What surprises you about my experience? Comment below!