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I 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 ten 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
Unfortunately, the Indianapolis apartment complex is not the worst of my equity real estate investments. That would be a preferred equity deal purchased through EquityMultiple and managed by a sponsor by the name of . This has been a disaster almost from the beginning. Here’s what the initial investment projected
So the bottom line is I have to put in at least $15K, I’ll be illiquid for 3 years, I’m supposed to get a distribution every month (10% cash on cash), and then I’m supposed to make 15% a year. What has actually happened? Well, here’s my cash flows:
See the problem? That’s right. The monthly payments dried up after a year. There were none in 2019 and none in 2020. Given the illiquidity of the investment, I’m pretty much stuck until it is done. So what happened?
Basically, the sponsor fraudulently obtained two additional mortgages on the property to keep the rest of his real estate empire afloat. When his highly-leveraged house of cards crashed, the lenders (including the original one) initiated foreclosure proceedings. When EquityMultiple found out, they exercised their ability to remove the sponsor but the entire thing has been held up in legal wranglings ever since. EquityMultiple has been trying to buy the property from the original lender and even held a webinar suggesting that a capital call (50% of investment) would be required to pull this off, but it sounds like the entire investment will be lost in the end. The only reason it hasn’t been yet is that foreclosure proceedings are closed due to the COVID-19 Pandemic. Now it is hard to fault EquityMultiple for the fraud of the sponsor, but one reason you go through a crowdfunding platform is to take advantage of their expertise to vet the sponsors. Here’s what they said about this guy originally:
Sounds pretty good right? Well, it might have been a good idea to look at all of those other properties currently underway to see how highly leveraged he was there. 50 years of experience and it all melts down while I’m invested. This is by far the worst investment I’ve ever had. Barring a near miracle, I’ll likely walk away having lost over 90% of the money invested.
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 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
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.)
Latest CityVest Access Fund
Speaking of our blog partner and advertiser CityVest, they’ve got a new fund out this month called the JKV Access Fund (that invests in the JKV Opportunity Fund II) and have made some special considerations for interested white coat investors.
The JKV Opportunity Fund II is an LA-based Fix and Flip Fund. The strategy is to buy distressed workforce ($350-750K) single-family homes in LA (think “bad house in good neighborhood”), renovate it over 60-90 days, and sell it 120-180 days after purchase for a profit. You’ve probably seen the billboards from time to time of fix and flip companies (“We’ll buy your house this week for cash”). They get a low price, renovate efficiently, and sell quickly for a profit. JKV is raising $20 Million for fund II. Fund I was a $10M fund. If I’m calculating the numbers right, JKV has done this so far with about 170 homes, although one of the principals has 5,000 homes worth of experience. Their advantage is that they are fully integrated with the deal finders, contractors, and brokers all working for the same company.
Here is their track record. You’ll note a particularly good 2019.
17% overall since 2017 with 29% in 2019 is obviously attractive. Their targeted return is 20% to investors after fees.
The terms of the underlying fund (JKV Opportunity Fund II) include:
$100,000, of course, is a lot of money, even for doctors who might only be investing $50-150K a year. In comes CityVest with an access fund to provide “access” to the underlying investment. There is always a value proposition to an access fund and this one is no different. The access fund provides:
- Lower minimum investment ($25K for White Coat Investors)
- Better preferred return (12% instead of 10%)
- Better promote structure (80/20 after the preferred return instead of 70/30)
Naturally, those benefits don’t come free. The access fund introduces an additional level of fees:
- Technology fee of 0.75% per year (0.375% for the first year for White Coat Investors)
- Organization fee of a one-time $50,000 for the fund (1.25% of the targeted $4M raise)
- Administrative fee of $500 per investor per year
For a $25,000 investor in a $4M fund that lasts three years, those add up to about 3.2% per year. For a $50,000 investor in a $4M fund that lasts 5 years, those add up to 2% per year. So if the fund makes its targeted 20% after its fees and the access fund raises its targeted $4 Million, an investor in the access fund should expect a 16.8-18% return. Here are the published terms for the access fund (JKV Access Fund):
Now obviously everybody likes earning twice as much money as one might reasonably expect from a diversified stock investment, but as in most of investing, higher returns come with higher risk. I like the integrated nature of the company. I like the waterfall structure of the deal, especially after going through the access fund which will help make up for a significant portion of the additional expense of the access fund. But there are significant risks to be aware of here. While the past returns are good, 3 years is not a very long time. The fix and flip market can be challenging too. The buying and fixing is relatively straightforward to execute, but the tricky part comes in at the end when it is time to flip it. In times of rising property values, you get a tailwind to the process. In times of falling property values, you face a headwind. The company believes they will continue to have a tailwind due to limited workforce housing starts (because you still can’t build homes in this price range from scratch in CA profitably) and a continued massive supply-demand mismatch.
I don’t know if they are right or not about what the future holds in this niche market, but I think it’ll be hard to provide 20% to investors if they are not. That said, even 1/3 of the targeted return seems pretty good these days. If you’re interested in learning more, check out the link below:
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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.
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? Comment below!
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