Slicing Through Money's Mysteries

Published: 07/25/2022 by Financial Samurai 24 Comments

As someone who has been consistently invested in private real estate deals since late 2016, I’m now firmly in the window for receiving distributions. My investment thesis to invest in heartland real estate has turned out well, partially thanks to the bad luck of the pandemic.

Although a couple of my investments in one fund turned sour due to a lack of equity cushion, poor execution, and the shutdown of commercial offices, the vast majority of investments have provided positive returns.

One such investment was a multifamily investment that paid out $122,423.04 in distributions on July 6, 2022. The invested capital should be about $60,000 for a ~15.3% compound annual return over five years. I say should be because it is part of a fund that invested in over 10 properties.

Receiving $122,423.04 in private real estate distributions is a significant amount for us. It can happily provide for my family of four in expensive San Francisco for a good period of time.

This real estate distribution is also a relative surprise, since I only received $2,603 in distributions year-to-date before this July distribution. As a result, I do want to share some thoughts about long-term private real estate investing.

As I wrote in a previous post, treat your investments as expenses if you want to get richer. Such expenses are there to help take care of you in the future when you no longer want to work or are unable to work.

This latest financial windfall has made me feel better about raising a family as we head into a recession. The timing is fortuitous because the property was sold in early 2022. However, this still means I have over 10 positions that have not yet exited.

My investment expenses from 2016-2017 have now turned into a liquid asset. The trend should continue for years as more distributions are paid and reinvested.

If you want to build more wealth and love to spend, “trick” yourself into spending as much as possible on investing. The more you investment spend, the more you may make.

When I initially made my private real estate investments in 2016, 2017, and 2018, I didn’t know for certain how heartland real estate would turn out. I had come up with a thesis in 2016 after Trump’s election victory, and proceeded to plow a total of $810,000 into various funds and individual investments.

Because I had also come up with the BURL real estate investing rule, I wanted to continue taking action based on my beliefs. Investing in real estate that provided the most utility made sense because now we had a way to easily do so thanks to real estate crowdfunding.

If you come up with a thesis and don’t act on it, you are wasting your time. You must take risks to earn higher rewards. You will lose money along the way, as I have many times before. However, by losing you will learn how to diversify your portfolio and hone in on better investments along the way.

If you have not taken any risks, please don’t rail against those who have. Instead, try to learn about investing and take more risks yourself.

One of my favorite reasons to invest in private investments is they often take years to pay out. This is contrary to the attitude of expecting immediate rewards. Most of the private funds I invest in invest their raised capital over a three-year period and plan to pay distributions over 5-10 years.

The longer you can let your investments compound, oftentimes, the greater your overall absolute dollar returns. As a real estate investor, your goal should be to buy and hold for as long as possible. Sometimes, it’s just hard to hold on, especially when recurring tenant and maintenance issues pop up.

Landlord issues as well as becoming a new father were the main reasons why I sold my physical rental property in 2017. I just didn’t have the patience and the bandwidth to deal with so many rental properties anymore. The “juice was no longer worth the squeeze.”

But with private real estate investments, you do not need to deal with any of the property maintenance hassles. You just need to find the right sponsors and the best real estate deals, which can also be a challenge.

This challenge of evaluating deals in a timely manner is why I prefer to invest in real estate funds. With a real estate fund, you have the fund manager or an investment committee who tries to invest in the best deal for its investors.

Once you make a capital commitment to a private investment, you tend to forget about it for years. Sure, you will get quarterly statements on the progress of the fund or investment. However, for the most part, it feels great to have the capital be out of sight and out of mind. This way, you are able to free up time to make more money elsewhere.

It’s comforting to know a team of professionals is looking after your best interests. They are also incentivized to perform if they want to do more business in the future. As a father who is responsible for the financial security of his family, farming out capital to people who spend their careers investing relieves me of this mental burden.

You’ll discover the more capital you accumulate, the more pressure you might feel to do something with it. Money starts “burning a hole in your pocket,” if you are not intentional with your spending.

The reason it was relatively easy for me to reinvest $550,000 of my rental house sale proceeds into private real estate investments was that the capital came from the same real estate bucket. Normally, I would have invested at most $50,000 at a time.

After reducing my SF real estate exposure by $2.74 million (~$800,000 mortgage, $2.74 million selling price), I wanted to diversify and reinvest some of the proceeds back into real estate elsewhere in America. I figured, if I was only receiving a cap rate of 2.5% in SF, if I could find real estate opportunities elsewhere that provided an 8% cap rate, I could invest 1/3rd less and still earn the same amount of income.

After selling my physical rental property, I wasn’t 100% confident I wanted to reinvest the ~$1.75 million in proceeds all into private real estate. Therefore, I spread the remaining $1.25 million to stocks and California municipal bonds.

As soon as I became a father in 2017, I became even more risk averse with my money and with my time. With a helpless baby depending on me, I felt like I needed to be more protective of our family’s finances.

By thinking in buckets, you may be able to better asset allocate your capital. Oftentimes, investors will just sit on their cash for long periods because the amount of money to be reinvested is too intimidating. Thinking in buckets and percentages may make reinvesting easier.

Although I received this nice $122,423 windfall, one of the investments in the fund was a complete wipeout. As a result, my $50,000 position went to zero.

The failed investment was called Student Housing at College Town in Toledo, Ohio. It was an acquisition by the sponsor, William Fideli Investments of a 590-room student housing complex located at 1120 N Westwood Ave, Toledo, OH 43607. The sponsor projected an 18% IRR over two years.

When I first saw this investment, I was excited. Student housing generally provides sticky rental income. Property prices in Toledo were also dirt cheap. This was exactly the type of investment I was happy to diversify into given I owned mostly expensive single-family San Francisco real estate.

Alas, the property was a failure because the sponsor had spent too much, there wasn’t a large enough equity cushion in case things turned sour, and COVID happened. COVID was terrible for student housing in 2020 and 1H of 2021 because all students were sent home. Being in a social-raging apartment complex was the last place you wanted to be during a pandemic.

Unexpected bad things happen all the time! This is why diversifying your private real estate portfolio is important.

Do not get easily smitten by amazing marketing material either. Every deal always seems amazing if marketing is doing their job right. Doing your due diligence is a must! Before making any investment, always view a real estate deal with skepticism. Figure out what could go wrong.

Accept losing money is inevitable when it comes to investing in risk assets. Therefore, you must invest in a risk-appropriate manner and diversify.

My ideal real estate lifestyle is living in Hawaii and investing in the heartland for more passive income. Your best real estate life might be living in Texas and investing in Los Angeles real estate before foreigners begin buying up massive amounts of coastal city real estate once the borders reopen.

Whatever your living preference may be, being able to invest in private real estate syndication deals enables you to invest where you think the potential returns are greatest. Your money can now be in more profitable places at once.

Money is more fungible and more fluid than ever before. Take advantage of innovation and the internet. Millions already are by relocating to lower-cost areas of the country.

If you know a large amount of investment distributions are coming one year, then you may want to work less or reduce your side hustles. If you are a small business owner, you can pay yourself less and spend more Capex that year.

Conversely, if you have a dearth of private investment distributions coming, you can earn more without paying as large of a tax bill. You can pick up extra consulting jobs. Or you can reduce Capex to earn more business income.

Map out your potential distributions on a spreadsheet by year. Then plan accordingly. For 2022, I had forecasted $112,800 in total real estate crowdfunding distributions. Once the quarterly report comes out, I will do a post-mortem analysis on exactly how much the $112,800 is profits versus original invested capital. I estimate $72,800 in taxable gains.

Fortunately, I don’t need the $122,423 in proceeds to survive. Therefore, here’s how I plan to reinvest my real estate investment distributions:

The goal is to be methodical with how we continuously invest and reinvest our capital. Otherwise, the natural course of action is just let our money sit and earn nothing.

My hope is that five years from now, I’ll write another similar post about how the $122,423 turned into $200,000. I’m looking forward to investing in more deals over the next 12 months.

Your goal as a real estate investor is to hold on for as long as possible. It’s the same with owning stock index funds. The longer you can hold on, the more you will likely make. Eventually, however, you should start spending your proceeds to live a better life.

Receiving private real estate investment distributions is like receiving surprise gifts. You don’t know exactly how much you will get each time, nor do you know exactly when you will get the gift. You just know they will eventually come thanks to the investments you made in the past.

Today, roughly 50% of my passive income portfolio comes from real estate. Without a severance and rental income, I wouldn’t have had the courage to leave my job in 2012.

For the future, I’m investing in real estate for my two young children. I know in 20 years they will marvel at how cheap real estate prices are today. Therefore, I want to invest in real estate for them now because they don’t yet have the ability or education to do so themselves.

The same thing goes for investing in rare books with autographs. People might think my investment thesis is stupid. But I don’t care. I love to read and I love to collect physical products that can be enjoyed. The initial investment cost is minimal. But the returns could be enormous.

The great thing about investing in a physical asset is that even if the returns don’t pan out, you will have at least enjoyed your investments during your holding period. Books, for example, already provide a much greater return than their costs.

I’ve had so many great memories in the various properties I’ve owned. And it’s been fun to flip through my Chinese coin collection or my dad’s baseball collection while sipping on a 2009 Chateau d’Yquem purchased over a decade ago.

Enjoy your investments while enjoying your life! It’s one of the best combinations for utilizing your money.

Readers, are you a private real estate investor? How has your experience been, especially since the pandemic began? If you recently had a real estate investment windfall, how are you reinvesting the proceeds?

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Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.

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I looked into some of these real estate funds and I actually invested a bit but pulled out during the initial grace period. I probably would have made money, so was a good recommendation from a pure investment standpoint. However, I have read a lot about large investment banks like Goldman Sachs bankrolling these funds or using their own funds to buy up single family homes, which is not a good thing at all. Rental units are fine I guess, but large firms and corporations should not be buying single family homes and turning them into rentals. So much of the American dream and wealth building is tied to owning a home. Let them control the stock market, but we don’t need large corporate landlords and firms playing with people lives and trading single family homes as commodities…

I would be a little bit salty and blame institutional buyers as well if I missed out on some real estate investments.

But according to a survey of Realtors by the NAR, institutional buyers accounted for 15% of single-family home purchases in 2021.

And the major reason that homeowners sold to institutional buyers was that they offered cash.

So another words, institutional buyers is still a small minority of buyers. And those homeowners were able to sell to institutional buyers for profit. Nobody is forcing anybody to sell anything.

Hi Sam – zooming out a bit regarding “How I’ll Reinvest The Real Estate Proceeds”

Do you ever get cash deployment paralysis? I seem to nearly always have a cash “problem” with 20-25% or so of my net worth (im at a NW of about ~$7MM) sitting in cash because I cannot seem to pull the trigger on anything because I always think things are too expensive or the investment situation/type are not “obvious” enough a good value or I tell myself “well, at the next [election, fed meeting, etc], X will happen and likely things will Y change and then I will buy this or that then…” but then really just keep delaying. This cash position is after having adequate cash allocation for emergencies, 401k contribution, conservative LTV on real estate, etc. And mind you after I buy, I dont tend to sell either (basic stock indices, etc). I also think some “fat pitch” will come along but in reality, especially related to the market, i tend to buy in chunks on the way down and not all at once….

I think in times like these I would want to be closer to 15% and then down to 5% in bigger draw down scenarios, but easier said then done especially if I am too chicken to part with my cash in times like the present!

How did much distribution did you receive over the years before the big pay out?

I’m super interested in this. We own 9 detached single family homes and would like to expand but the landlord-work is getting too much for us working stiffs, and this seems to be the solution. A

Before July 2022’s distribution, I received about $501,000 in distributions. The distributions have been sporadic for the past several years, but are now steady and increasing since I’m in the distribution window.

I invested in a couple funds and multiple individual deals. Now I’m trending mainly towards funds because it’s easier.

My maximum land lording of properties is three. Anymore and it’s too much of a PITA. Hence why I sold one property in 2017 and reinvested the proceeds in 100% passive investments.

Wow. You invested 550K and received a total of 620K distribution over 7 years?

I’ve invested $810,000 total with $624K in distributions so far. It’ll be interesting to see how much more I will receive over the next several years.

How much have you invested in your 9 rentals and how have they done in terms of value and rental income?

Hmm, by heart: one property was bought in 1999 with 50K down; is now close to 1 mil. Primary residence: 350 down in 2005 and is now 1.5. Invested probably 1 mil after the real estate crash starting in 2011. It was pure luck we happened to get going during the dip. These 7 other homes are now worth about 5 mil. About 1.7 mil mortgage left total. Everything cashflows superbly, but of course current CAP rate is pretty poor after so much appreciation. Hate to sell them though; all are gorgeous prime real estate, we’ll-maintained in a very desirable part of the country and within a 10 minute drive in our own neighborhood. Also not looking forward to IRA bill if we sell. We have work retirement accounts and regular investment accounts with regular stocks. Stocks:real estate = 3:7. Still can’t cash flow enough to retire though (kids still in expensive out of state colleges). I look at our numbers and feel am doing something wrong with our ROI.

Could you do a 1031 exchange and re-invest in a cheaper area and get higher cashflow?

I noticed that Fundrise, along with other large investment firms, are trending toward single-family home rental communities. I’m worried about this for several reasons, not the least of which is that it’s pushing the purchase price for single family homes higher in what could be a pump-and-dump scheme. I’m also worried about this trend of the middle class being a class of renters, unable to build equity through their residence and eliminating a neighborhood pride of ownership. From the investment side, an economic disruption is more able to work against this investment, as higher cost rents will be the first to downsize and the vacancies will be plainly obvious (unlike say, an apartment community).

I wondered if you had any of the same concerns.

So far, Fundrise has been focused on acquiring rental properties to keep for long-term appreciate and rental income.

I also touched upon institutional investors, which still account for a minority of purchases in this post. In the post, Fundrise purchased an existing rental property community D.R. Horton. None of the properties were for sale.

Higher rents are unsustainable without a commensurate rise in incomes. Hence, it is good to be worried if rents rise too far out of line. Rents should start to fade along with inflation and the cooling housing market. I’m looking for opportunities over the next 6-12 months as I was looking for stock opportunities 2-3 months ago.

I always hold some cash to jump on a value opportunity. But in my opinion, apartments/condos have such an advantage over single family homes as a rental investment. Apartment/condo values rise with the rental tide, and they hold well during recessions.

Sounds good. In my experience, I’ve found condos have gone down the most during a downturn and gone up the least during an upturn.

The good thing about an institutional investor buying up a community is economies of scale. They’ve got the plumbers, Electrician, and handypeople more readily available and can negotiate lower maintenance costs.

See: https://www.financialsamurai.com/what-type-of-investment-property-should-i-buy-a-single-family-home-condo-or-multi-unit-property/

Thanks for the consistently insightful and thoughtful posts! I, too, hope you’re still writing in 5 years!

Since you mentioned Fundrise, have you heard about their new Innovation Fund? Would love to hear your thoughts on their democratizing venture investing in a future post!

I have! I just spoke to them last week and I will do a review of the phone with my thoughts on the whole idea. It was a surprise I am very interesting! The timing is actually really good after big declines in stock values.

Cool, I mentioned this a few weeks ago. Thanks for writing a future post about it; I’m looking forward to reading your post. I also decided to put some money in their iPO. It felt a little gimmicky, but I really like their management and decision-making process after listening to a few podcasts with Ben Miller and his staff. It beats public REITS, and I live abroad and don’t have to deal with directly managing properties. I have friends that have purchased properties in the US while living abroad, and they all have sold or lost money. This really works for me at this stage in my life/career.

Hi Sam – how does one go about getting access to a venture fund (the Kleiner Perkins venture fund you mentioned, or anything else?)

Also, Fundrise (one of the companies you’ve written about frequently) has a new “innovation” fund coming up fundrise.com/offerings/26/view), which seems to be directed at late-stage companies [so maybe not directly comparable to a typical venture fund]. Any thoughts about that?

You can contact their IR department and ask. However, the easiest way is to know someone who works there and join their friends and family around. The best and most well-known private funds have the most demand. So getting allocation can be quite difficult sometimes.

I will be doing a review of the Fundrise innovation fund soon. It does sidestep difficulty of getting into some of these private funds.

Anyone can invest in newer less conventional funds via the AngelList platform. Some are good. I am investing there and with Aura Funds (a relatively new firm) in Australia. The older more established firms will likely have very high minimum investments unless you have connections.

I also look at my investments as expenses that I bake into my monthly cash flow each month. It’s really helped me stay disciplined about regularly contributing over the years. I’ve dabbled a bit in REC here and there but not for nearly as long as you have. I’ve had a couple deals close but most of mine are still at least another 3-5 years out. I really do like the idea of having real estate exposure in various parts of the country that are totally hands-off for me. Property maintenance is no joke and I’m glad not to have that stress while being able to benefit from the returns. True on the importance of diversifying and expecting some flops. But that’s just the way it goes with all investing. I’d rather swing and have some misses than never get up to bat at all.

Hi, You mentioned two Kleiner Perkins venture funds above. Which funds are they? What does each fund focus on? Are they open to new funds/investors, provided the investor is qualified? Where are you finding venture debt opportunities? Time to finally get in to Fundrise…been procrastinating.

KP20 and KP Select Friends II fund.

I was one of the early limited partners in my business school friends new venture debt fund In 2017. So I have just been investing in every one of his fund since then. Helping him grow and supporting his endeavors.

You can click the link to learn more about venture debt. It is a more conservative way to invest in promising new companies with a higher yield.

My hope is that you’ll also be writing posts 5 years from now!

Your articles help me to think more strategically about my own investments. It’s easy to get caught up in inaction, especially at times of change (which tend to be most of the time!).

I hope so too. Alas, all good things come to an end. I will try my best while I’m still capable.

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