A Peek Inside My 7 Figure 2017 Real Estate Portfolio
How I'm preparing for the next recession with "quick" and "slow" investments.
This is an older update of the continuing series on my portfolio. The latest Q4 2019 update of this article is available here.
(Usual disclaimer: I'm just an investor and not a financial advisor or attorney. Consult your own financial professional before making any financial decisions). Navigating the perils of today's investment world isn't always easy. So many readers of the site have asked me "What are you invested in right now?". And I've written several articles outlining my current high-level strategy of "quick" and "slow". But even with that, people still want to know more details. Which specific investments are you in? Which are you ramping up and which ones are you leaving? How do you structure your overall portfolio? So in today's article, I'm lifting the veil on my portfolio, and showing exactly what I'm investing in and why. And I'll show you how they're performing too. My risk profile In my opinion, it's a mistake to emulate any investor without first understanding their financial situation and risk profile. Sam Zell is a very successful real estate billionaire. And at the same time, blindly copying him can leave you high and dry. That's especially true if you don't have $ billions to fall back on when an aggressive bet doesn't pan out! In my case, I'm a conservative investor because I rely on my investments for income. I'm more like a retired person who's most concerned about preservation of principal. It rarely makes sense for me to stretch for a point or two of additional yield if it means ratcheting up the risk disproportionately. It also rarely makes sense for me to "shoot the moon" on speculative offerings with extraordinarily high reward but also a decent chance of losing everything. For me I can usually find more productive uses for my money. What I stay away from and what I like For those that didn't see the 2 previous articles I wrote, here's a quick summary of what I avoid and what I like. I don't like high leverage, value-added and opportunistic strategies, and exits targeted in the next 2 to 5 years. (More detailed information on what I avoid is here). And I like quick investments that I can liquidate in a year or less, as well as slow investments that ride long-term macro trends that should help them push through the next downturn. (Here's more details on what I like.) So how does this translate into an actual portfolio? My portfolio I (along with my wife, since we share financial decisions) have 7 figures invested in "alternative finance". This is almost all real-estate but also a little peer-to-peer. Overall, I had an 8.1% return over the last year, which I was very happy with, given the risk/reward. (Note that my actual final return was significantly more that 8% due to an unusual situation. I got an additional 20%+ boost from price increases on the largest part of my portfolio… residential rentals. However, I'm not including this in my return calculations here, since it was a one-time thing from being in the right place at the right time in a hot property market. I don't believe that out-performance will continue past another year or two, so including this wouldn't be helpful for someone looking to compare my portfolio to theirs.) How it breaks down Here's how it was invested:
1) Residential rental properties (45% of portfolio). Return: 7% (income only)
This is the biggest part of my real estate portfolio, and my "bread and butter". These were purchased with no debt, which I believe hardens them well against a severe downturn. Residential renters tend to be more stable and longer term than multifamily/apartment renters. I target working class neighborhoods with affordable rents (to maximize the renter pool, and align myself with the long-term trend of a growing lack of affordable housing). I also pick neighborhoods that are low in crime and properties that meet my yield and other minimums. (Finding great properties like that by hand, is actually really time-consuming. So I wrote software that goes in and does the analysis on thousands of properties at a time.I might write about it in a future article if people ask about it.) The 7% return only includes what it made in income. And as an extra bonus, due to a hot property market, the price has appreciated over 20%. (I don't expect that to happen every year, so I didn't include this in my returns here.). 2) Short-term 1st position debt (37% of portfolio): Return: 9.5%. This is my 2nd biggest strategy. First position debt is the safest part of the capital stack, and short-term allows me to liquidate quickly if conditions change. (Here's a three-part article on how I do due diligence on hard money loans.) I started the year 100% in a regional construction focused hard money loan series of funds called BroadMark Capital Fund 1 and 2 (averaged about 11% over the last year). It has a 65% loan-to-value maximum, a good uncured default rate (less than 2%), no leverage, and only loans in non-judicial states. While I'm very happy with the performance, I wanted to harden my portfolio for a downturn with some diversity. So I've put about half into a local acquisition/rehab hard money loan funds called Arixa Capital Secured Income Fund. (It averaged about 8% over the last year, although this is a recent acquisition for me so I didn't participate for the whole year). They target 60 to 65% loan-to-value maximum, a very good < 1% uncured default rate, non-judicial states and no leverage. Doing this meant accepting a lower overall yield next year, but I feel the diversification protection is worth it. (If you'd like more details on all the things I look for in a hard money loan investment, check out this three-part article series.) 3) Long-term NNN leases (10% of portfolio): Return: 6% income, 5.2% price appreciation = 11.2% total. The next largest part of my portfolio is invested in a triple net lease (NNN) fund from Broadstone Triple Net Lease Fund. A triple net lease is a lease in which the tenant is responsible for almost everything (maintenance, taxes, etc.) and the landlord's responsibilities are very minimal. The leases lock the tenant in for 15 to 20 years with built-in escalations, so it makes for a much more predictable income stream than a typical real estate investment with much shorter leases. The Broadstone fund specializes in recession resistant and Amazon resistant industries like medical, fast casual restaurants, etc. And it has extremely low leverage at 40% LTV, is a very hard to find core plus investment and generates healthy income and price appreciation. This is a recent acquisition for me, but it returned a little over 6% in income last year, and 11.2% total after also including price appreciation. 4) Peer to peer (7% of portfolio). Return:4.8%. This is one of my least favorite parts of my portfolio at 7%. I used to be a huge cheerleader for both Lending Club and Funding Circle. But over the years, I've grown increasingly unhappy with the quality of the underwriting and the annoyance of the "tax inefficiencies". My returns have dropped from the high 9% in early years, to under 5% now, and I'm concerned with what will happen if we have a downturn. So as I described in this article, my allocation here used to be much higher, but I've been liquidating this portion. 5) Other (3% of Portfolio) Return: 0%. 3% of my portfolio is in a deal for development of raw land I entered several years ago when I wasn't as concerned about a recession. It was supposed to run only one year but is still going due to numerous and ongoing problems. This is returning 0%, because I don't make anything unless the land is successfully developed and purchased by developer. My lesson's learned: I'm not re-entering anything like this anytime soon. Going forward: I'm going to continue to liquidate my peer to peer holdings. I'm also going to be considering diversifying into other short-term debt offerings if I like how they're underwritten. I'd like to buy a multifamily property directly (with no debt) in Tampa, but it's extremely competitive, so I'll see how that goes. I'll continue to look for long-term holds at attractive prices riding long-term trends. And I'm also staying open to new alternate asset classes. For example, I'm looking right now at p2bi which offers short-term loans to businesses, backed by the collateral of invoices in service contracts (sometimes called "accounts receivable financing"). Cash is King I also have a fair amount of cash waiting for new opportunities that may arise after we go through the next downturn.