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:
Stocks (60%)
- US Stocks (40%)
- Total Stock Market (25%)
- Small Value (15%)
- International Stocks (20%)
- Total International Stock Market (15%)
- Small International (5%)
Bonds (20%)
- 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.
Real estate looks pretty exciting compared to the rest of our boring portfolio.
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.
Equity Investments
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
Platinum Level Scholarship Sponsor
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?
Debt Investments
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%.
RealtyShares BarTree
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
Ditto. 9.84%
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.
PeerStreet
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.)
AlphaFlow
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
Platinum Level Scholarship Sponsor
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:
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RealtyShares (Debt and Equity) Use promotional code “PARTNER100” to earn $100 with your first investment.
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RealtyMogul (Private REIT, equity deals)
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FundRise (Private REIT)
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Equity Multiple (Debt and Equity) Management fee on your first investment waived when using this link.
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Peer Street (Mostly debt deals) 1% Yield bump when using this link
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RealCrowd (mostly equity deals)
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CrowdStreet (mostly equity deals)
Overall Returns
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.)
If you want to learn more about real estate and how to get started in it, I recommend checking out WCI's No Hype Real Estate Investing course. It will give you the foundation you need to learn about all the different methods of real estate investing.
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!
Featured Real Estate Partners
Thanks for the update. It is great for us readers to get experience with investments through others like this. It helps our learning curve.
I’m at 40:40:20 (Stocks:Bonds:Other). My ‘other’ includes private businesses and real estate so it isn’t too different from your breakdown. My real estate holdings are much simpler though. I’m amazed at how many details you can keep track of. That would be a struggle for me. Your ROI on WCI, PIMD, and PoF will undoubtedly be the best investments for the foreseeable future.
Very interesting write up. When you wrote about your real estate investments in your last post it made me feel like it was too much effort for my limited time. But this gets me more inspired to dip my toe in the water as you give a big picture rundown. For a newbie in this area, do you have any specific site you recommend like debt vs equity as I start out? Any red flags to beware of when researching options? Many thanks,
Lots of red flags. As you can see, I’m diversifying as much as I can to protect myself from what I don’t know.
As a believer in index funds, this notion of picking specific real estate investments seems fraught with peril. Real estate is, generally, far more opaque than equity investments in publicly traded companies.
Of course that means there should be opportunities for those who put in the extra effort (at the expense of those who don’t).
I agree with both statements.
Question inspired by Jim’s asset allocation description at the beginning of this post:
Does anyone know what the convention is regarding reporting allocation of market capitalization between US stocks and international stocks? For example, many people say they have a “small cap tilt” to their portfolio with 25% small cap ETF’s. Does this typically refer to 25% of US stocks, 25% of all equities (including international equities), or 25% of entire investment portfolio (including equities, bonds, REITs, etc)?
I’ve recently started using Personal Capital to track my asset allocation (previously had been doing it manually with excel). PC only allows you to see your asset allocation/market cap within US stocks, so I’m curious as to whether this is the industry convention. Thanks!
I don’t think there is convention, so best to specify whether it’s 25% of portfolio or of equity.
Second shift this week. So you’ll be spared from my first responses each day 🙂
I will probably be investing in syndicated deals and crowdfunding it/when I start. That’ll be after my 200k in loans has been paid off over 20 months. Only 8 months left and this point. So, keep the real estate posts coming!
TPP
WCI, what is XIRR? Something to do with internal rate of return, I’m guessing, but then what is the X factor? In any event, would you comment on why it is a better metric than the investment company’s reported rate of return?
It is an excel function.
Search WCI and the forum for more detail. It is good to be able to calculate your own returns.
https://www.whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/
As noted, it’s an spreadsheet function. I can use it to measure my own rate of return for my own personal cash flows.
Can you tell I don’t trust financial professionals very much?
I’ve been intrigued by real estate funds such Arixa. Is there considerably more tax complexity (K1s?), vs say pure debt investments at PeerStreet (?just 1099). How do these equity funds handle apportioning depreciation and other tax benefits to the investor? Does timing of when you enter the fund affect your tax treatment?
Arixa is a debt fund. I think it’s a 1099.
My understanding of the equity funds is that your share of depreciation is apportioned to you. I don’t think the timing changes much as most investors enter at close to the same time.
How you are dealing with the funds required to buy the proprieties? The banks are limiting the loans according to the total value of the propriety. So the cash upfront may be very substantial.
Are private funds ? Or bank loan funds?
That’s the fund manager’s or syndicator’s problem. But usually they’re using a combination of investor money (perhaps 1/3) and bank money (2/3).
Great diversification Jim. You definitely have your bases covered if one asset or asset class goes south.
With all these holding do you find yourself needing to file multiple individual state income tax returns? I have been choosing syndicated investments (also with 37th parallel) that are located in Texas which has the benefit of no state income tax.
The only thing I don’t like when having investments like this is you have to wait for the K1 forms which come really late (mine this past yr came 2 wks before IRS deadline and I have heard of some places you get it even after so you have to file an extension.
True.
A lot of us who invest like this routinely file for federal income tax filing extensions.
Yes.
I agree that late K-1s stink. I’ve still been making the April 15th deadline so far.
Wow. You have a 3rd job. More work. More risk. You deserve more reward! Not for me though….
please tell us how we can participate in your WCI network partnership w returns of 293%, and PIMD returns of 2500%.
Sounds like you ought to buy more Financial WebSites, the return is high. WallStreetPhysician, is he next?
Thank you for this post. I miss having a rental condo and once I pay off my primary residence, I plan to emulate your diversification plan.
If you exclude the blogs you invested in, what is the REIT return vs the rest of your real estate holdings? In other words, is all this extra work to pick real estate investments paying off over what you got by just investing in a REIT fund like Vanguard Real Estate Index Fund Admiral Shares (VGSLX)?
Single digits on the equity side because most aren’t marked to market until the deal goes full circle, and none have gone full circle so we’re only looking at the income portion. So far, yes, it’s throttling the REIT index fund, but it’s too short of a time period to base anything off that. I’ve owned the REIT index fund for years and it has been a good investment to me.
Thanks for the update. Over time, Fund That Flip has been the most interesting to me. It’s good to hear that they’ve been spot on with their projections. Once I reach accredited investor status, I might allocate a single-digit portion of my portfolio to them.
WCI, I can qualify as an accredited investor and looking for suggestions on 2-3 of the real estate alternatives you listed above. If you were starting out, which ones would you recommend in terms of user interface, integrity and quality of the offerings? I’m in TX so not sure if there are restrictions to these investments (some states aren’t offerable on the sites).
Thanks in advance for feedback. Enjoy your blog and posts on BHs forum very much.
I’m not quite ready to make strong recommendations. I’m just showing what I’ve done/am doing. You can play along if you like. But unless you’re willing to dedicate serious cash to these investments ($50-200K minimums), you’re basically limited to crowdfunding sites or REIT index funds.
Does anyone know how Fund That Flip reports the income received from investing in a property?
Reports it to you or to the IRS? You can see it in your account when you logon. I think you might be able to set it up so you get an email too.
As far as the IRS, looking back at my 2017 taxes it looks like I got a 1099 for the interest I was paid, so presumably they sent one to the IRS too.
How they report it to me. I assumed it was simply interest income, but I wanted to know for sure. Straight interest income is so highly taxed that I was hoping (but knowing the truth) that it would be reported in some other way.
Thank you for the answer.
Sorry, it is what it is. Just ordinary interest on a loan you made.
I am a little surprised you haven’t done anything with CrowdStreet or RealCrowd yet. In my, admittedly very limited experience, they seem to have high(ish) quality sponsors and deals and their fee structure is very different from the other sites in that they don’t charge investors any fees but rather connect you directly with the sponsor and then it is up to you to decide if the fee structure in the deal you are interested in is something you can live with.
I am just starting out with commercial real estate investing, so it is very interesting to read your about your experience so far. Keep these posts coming!
There are 120+ of these companies. I don’t plan to invest with all 120 of them. Do you?
Obviously I don’t, but RealCrowd and CrowdStreet seem to be consistently ranked as one of the best. I like their deal flow too. To each its own, I guess.
I picked up RealCrowd as an advertiser recently, but haven’t invested there. Part of that is my transition toward funds. I honestly just don’t have the patience/desire/time to pick and manage dozens/hundreds of $5K investments. I mean, if you have $50K invested in real estate, it’s easy to do the crowdfunding sites. If you have $500K, not so fun. And $5M? Are you kidding? That could be 1,000 individual properties/paychecks into your bank account each month. The alternative is to put more money into each deal, but I’m not going to put $100K into a $200K deal.
Yeah, I hear you – I think in general the typical crowfunding model where you invest in individual properties is good for “play money” but if you have serious assets to invest, funds are the way to go – better diversification, less diligence to do, etc. It looks like some of the crowdfunding sites now offer a mix of individual properties and funds, it will be interesting to see how it all plays out.
It’s been a fascinating journey so far. We’re in about year 5-6 as I track it.
Most of the RealCrowd deals have $25 to 50k minimums and the deals are usually raising $2 or 3 million plus. RealCrowd also has an excellent series of podcasts, great lace to learn more about real estate crowd funding.
Thanks for the info. I’m still in the research phase with crowdfunding before getting my feet wet. I don’t want to have to choose individual deals and so have been looking into Fundrise. However I am concerned that the dividends would be taxed at my income rate. If returns are 6-8% is it even worth it unless its through an IRA?
I guess it’s up to you whether fully taxable returns of 6-8% are worth the risk. Consider the risk and return of your other alternatives (including spending the money) and make a decision.
Thank you for the great detail into your investments. I appreciate the real world examples. I’d like to find out how you invested in other websites (physician on fire and passive income md) in terms of structure and numbers. Real estate is certainly nice for passive income but as physicians we play in a different sandbox than others. Can you give some insight into how you invest in businesses/ start ups for passive income?
I buy part of their business, I help them succeed, they send me checks, and I expect will eventually buy me out in 5-10 years. Pretty simple model really.