I get lots of questions about what we're doing with the real estate portion of our portfolio. I guess that's because the rest of our portfolio is so darn boring. 85% of it is invested in very low-cost index funds. I guess we had one minor change there recently, but in general, we go years without anything interesting happening there. But the real estate side by its very nature has more frequent changes and is probably worth an update once or twice a year. As a reminder, our asset allocation looks like this:
- US Stocks (40%)
- Total Stock Market (25%)
- Small Value (15%)
- International Stocks (20%)
- Total International Stock Market (15%)
- Small International (5%)
- TIPS (10%)
- Nominal Bonds (10%)
Real Estate (20%)
- REITs (5%)
- Equity (10%)
- Debt (5%)
Only two interesting things have happened with the first 85% of our portfolio since our last update.
First, my TSP is now completely filled up with the G Fund, my preferred holding for nominal bonds. That happened before once, but then I was able to roll some money in there when a defined benefit/cash balance plan was closed. But now it's all G Fund again. Maybe I can get another rollover in there within the next year as there is talk of changing our 401(k) and DBP provider. At any rate, when it filled we needed something else for nominal bonds. Since our taxable account is rapidly growing, and since I don't mind having bonds in taxable, especially at these low-interest rates, we decided to go with the Vanguard Intermediate-Term Tax-Exempt Bond fund. Currently our nominal bonds are split 2/3 G fund and 1/3 Munis, but that ratio is going to continue to decrease as time goes on.
Second, the new tax law got REIT investors all twitterpated about the potential for the pass-thru income deduction. Apparently, the income from direct REIT investing now counts as pass-thru income but the income from a mutual fund that invests completely in those same REITS does not. I prefer the fund, so I'll continue to hold it in tax-protected accounts, but lots of private real estate funds are now considering changing their structure to a REIT to take advantage. Now, on to the more interesting stuff. Remember that I have some sort of financial relationship with every firm listed in this post, although some I just invest with, rather than having any sort of business relationship.
First let's talk about the equity side, about 10% of the portfolio. This includes syndicated properties, private funds that invest in equity, and my investment in the WCI Network partner blogs. We'll go through each investment one by one and give an update.
Partnership Office Building
When you become a partner in my EM group, you can also buy into an LLC that owns the building our administrative staff work in. This investment didn't go up in value this year for some inexplicable reason (despite Salt Lake real estate doing very well) so I fired off an email to the CEO and CFO whining about it. The end result? There is now a new volunteer board managing the investment and I'm the chairman of that board. Lesson learned.
My two beefs with the investment were that LLC members weren't being kept up to date on what was going on and that the period of time between the annual appraisal (used to value the shares) and the transaction date was too long (almost a year.) We've made changes now to fix those issues. It turns out the reason for the crummy returns in the previous year was that we spent all our income making upgrades to the new building and that we had a vacancy in part of it. The vacancy is now full, the two tenants besides my partnership are now on multi-year leases, and the upgrades are done so returns going forward should be better. We're managing this thing pretty conservatively, basically using all of the income to pay down the mortgage, which is only about 1/3 of the value of the property anyway. Once that's gone we'll be forced to start distributing income to the members. Returns will also be increased by investing our cash at a better return and using a big chunk of it to pay down the 4.75% mortgage some more, but my expectations going forward are for a return in the high single digits. My returns for this investment year to date were -2.27% for a long-term XIRR of 10.90%.
Indianapolis Apartment Complex
This is another syndicated investment, purchased in November 2014 through Realty Mogul. It's had a few hitches over the years. They calculate my return at 7.4% through March of this year. I calculate it using XIRR at 4.90%. Looking back over the years the payments have been pretty irregular, March and July of 2015, February 2016, March and August of 2017, and February 2018. Their offering materials projected cash-on-cash returns of 7.1-9.6% per year, so this is definitely below pro-forma by my calculations. Hopefully, appreciation and amortization make a significant contribution to the total returns on this one. It's supposed to be a 5-7 year investment and we're about 3.5 years into it.
My Grocery Store
This is the investment I keep the closest tabs on! I even notice when trees fall over there during the wind storms. But it hasn't been incredibly profitable by any means. Bought through RealtyShares, it's a tiny slice of the property our local grocery store and strip mall sit on. Cash on cash it has been 5.65% by my calculations, which isn't bad considering they projected 6%. Let's see if they can get anywhere near the projected 18.2% IRR upon exit. There was some talk earlier about exiting this year (after only 3 years) but that wasn't mentioned in the latest report. These reports are kind of funny. They give you all kinds of detailed information. But there is ABSOLUTELY nothing you can do about it. You can't sell. You can't buy more. You can't affect the management decisions. You're in for the long haul. Why anyone needs a 14-page report once a quarter is beyond me. At least this one is fun to brag about.
Physician on FIRE
One of my favorite investments, this WCI network partner continues to rock and roll. If you haven't checked it out, you really should. While you're there getting excited about FIRE, be sure to click on some ads and buy some stuff! I've only had it a little over a year, but the annualized return of 293% is pretty awesome as investments go. Granted, I do contribute some work to that, the value of which I'm not including in this calculation, but if I could get 293% out of my mutual funds, I'd put some work in there too.
Origin III Fund
You may have heard of this one since it's manager has written a couple of guest posts here and Origin has advertised here a bit off and on. It's been nearly a year since I first started investing in this and I'm still not fully invested yet. They call capital as they find deals, which has been interesting. The nice part about that is that you can use that money for something else in the meantime. The downside is that you've got to use the money for something else. Even a relatively high minimum like $100K doesn't seem so high when it's really $10-20K two or three times a year. At any rate, no distributions yet so it's tough to calculate a return. 0% I guess. I just got an update last week; we've bought 11 properties – 6 office buildings and 5 apartment buildings so far.
Passive Income MD
My top-yielding investment, I love getting passive income from Passive Income MD. Aside from the promotion of this site and all the great tips PIMD has passed along (to you and me), there is also a substantial monetary return on my investment. Yes, it's only been a little over half a year, but I've got 81% of my capital back in distributions with an annualized return of nearly 2500%. I'm sure that'll drop substantially as the years go on, but this one has definitely been a profitable partnership. You want to know how to make passive income? Check out Passive Income MD because this anesthesiologist definitely knows how to make it.
Texas Preferred Equity Investment
This is an apartment building in Houston I bought a little piece of just after Christmas through Equity Multiple. It has been making regular distributions ever since. They say I'm making 10.54%. I calculate it at 9.99% using XIRR. They promised me 10% cash on cash and are paying 10%. I'm happy.
Fort Worth Apartment Building
This is the only new one to report on as far as equity goes. This is an apartment building near downtown Fort Worth that I bought directly from syndicator 37th Parallel Properties. I invested $100K in it in February, got back the $1,000 “discount” (they offer $1,000 when you hit $100K with them and another $3,000 when you invest $200K total with them) a couple of months later. The closing was actually at the very end of March, so no quarterly updates or distributions so far. The first one is supposed to come on July 30th. It sounds like it is going well, but what would I do if it wasn't?
I'm gradually moving away from individual deals here and toward funds. There is an additional layer of expenses, but better diversification and less hassle. There is some tax drag within the funds, but they reinvest my earnings. I like that since I really don't need more cash flow right now. Let's review what I've still got.
As far as individual hard money loans I've made through crowdfunding sites like RealtyShares, Fund That Flip, and Peerstreet, I've now been round trip in four total and all have paid as they were supposed to. I haven't bought anything new in the last six months as I was overweight then.
RealtyShares Lovers Lane
I bought this a year ago and it's made its promised payment every month since. XIRR shows 7.74%.
Same story. Making all its payments. 7.20%.
RealtyShares Church's Chicken
Same story. 8.69%.
Fund That Flip Jay Road
Same story. 9.84%
Fund That Flip Fox Lane
Fund That Flip 527 East
Ditto. 10.34%. This is truly mailbox money. I sent them money and every month cash shows up in my account. The RealtyShares ones I've had for a year and the Fund That Flip ones for 9 months. As long as I get my principal back, there is absolutely nothing to complain about here other than having to keep track of all the little payments on my spreadsheet. I mean, a $5K investment basically pays you $40-45/month.
I invested in a PeerStreet loan last Thanksgiving. It paid as agreed and was paid off early in May for my fourth round trip on these things. My annualized return was 7.78%. My only annoyance was that PeerStreet doesn't automatically transfer the distributions automatically to my bank account. I complained about it and maybe they'll add that feature (that most of their competitors seem to have.)
This isn't quite a fund, it's actually a Registered Investment Advisor charging me 1% on my money. Basically, he's going out and buying the individual investments on my behalf for that 1%. The website says “up to 8-10% returns.” My XIRR returns after 8 months are 7.04%. Basically what I was getting myself minus 1%. The benefit? Instead of being invested in a handful or two, I own pieces of 96 notes across 18 states. I've got 101 active and 2 delinquent. I'm getting about what I expected out of this investment. I still haven't decided whether I'll be adding more money here or going with the more traditional funds discussed below.
Broadmark Real Estate Lending Fund II
This my largest holding on the debt side and has had decent returns at an XIRR of 10.76%. One month wasn't so hot, they blamed it on taking on too much investor money at once. But six months in, no hassle, lots of diversification, and better returns than I was getting myself? What's not to like? I should talk to them about advertising with me as it would be an easy investment to promote.
Arixa Capital Secured Income Fund
This is a brand new investment for me. I invested $75K here just like the Broadmark fund. I like having some diversification both geographically and with managers. Arixa has two funds open, one that uses 50% leverage and expects 1% higher returns and this one that doesn't use leverage. Also talking to them about an advisory relationship. I'll keep you updated as we go along.
The funds are nice for the diversification and decreased hassle, but the minimums are much higher ($50-200K), so I think there is still a place for picking individual crowdfunded hard money loans. If you choose to invest in these, please go through these affiliate links to help support the site. With some of them, you'll get a special deal by going through these links not available at the regular site:
RealtyShares (Debt and Equity) Use promotional code “PARTNER100” to earn $100 with your first investment.
RealtyMogul (Private REIT, equity deals)
FundRise (Private REIT)
Equity Multiple (Debt and Equity) Management fee on your first investment waived when using this link.
Peer Street (Mostly debt deals) 1% Yield bump when using this link
RealCrowd (mostly equity deals)
CrowdStreet (mostly equity deals)
Overall my XIRRed returns for equity are at 50.42% (obviously seriously boosted by my WCI Network partners) and for debt are at 9.40%, so I consider this diversification into “alternatives” to be quite successful compared to the stock and bond index funds I would have had the money in. They've definitely given my portfolio a little kicker in exchange for the additional hassle and I would encourage you to at least consider dedicating a small portion of your portfolio to these sorts of investments. As always, caveat emptor. These are accredited investments that have less regulation. The assumption is that you can afford to lose money and that you're smart enough to know what you're getting into, neither of which is necessarily true just because you qualify as an accredited investor ($200K+ income or $1M+ in investable assets.)
What do you think? How do you invest in real estate? REITs, crowdfunding companies, syndicated deals, direct investing? What percentage of your portfolio goes into real estate? Which companies are your favorites and why? Comment below!