Lessons_from_investing_in_private_real_estate_for_5_years
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai.
00:00:02.880 | Long time no chat.
00:00:04.560 | I've been busy, very busy focused on marketing.
00:00:07.760 | Buy this, not that.
00:00:08.760 | You can pick one up at financialsamurai.com/btnt.
00:00:14.760 | And the good news is that it made the Wall Street Journal bestseller list.
00:00:18.280 | It was the only new entrant out of a sea of incumbents to make the list.
00:00:22.600 | The only person with black hair too, so I feel very, very proud to have made the list.
00:00:27.480 | But I didn't realize how hard it is to make the Wall Street Journal bestseller list based
00:00:32.940 | on so many books that I thought made it, but they actually didn't make it.
00:00:36.220 | So I'm really proud of that fact and I will be sharing more about how to become a professional
00:00:41.500 | writer in another episode.
00:00:44.120 | But for this episode, I want to talk about lessons learned after five plus years of investing
00:00:49.420 | in private real estate.
00:00:51.620 | Private real estate is real estate syndication deals, real estate crowdfunding.
00:00:57.440 | This is what I've been investing in since the end of 2016 and early 2017 to diversify
00:01:03.300 | my real estate portfolio and to earn more passive income.
00:01:08.060 | As a 45 year old father of two young children, I got to say being able to invest in real
00:01:14.180 | estate passively without leverage has been a godsend.
00:01:19.140 | Not everything has worked out well, which is why I want to share this episode.
00:01:23.220 | But for the most part, the trend has been great, investing in the long term trend of
00:01:28.180 | the heartland of America where real estate valuations are lower and cap rates are higher
00:01:33.300 | and net rental yields are higher.
00:01:35.220 | I think this trend is going to continue for the next several decades and I want to be
00:01:39.120 | on this trend, but there are some bumps and bruises along the way.
00:01:43.300 | So here are seven takeaways from investing in private real estate for over five years
00:01:48.060 | because I had just received in July a huge distribution, relatively huge for me, it's
00:01:53.140 | $122,423.
00:01:56.420 | And that was somewhat of a surprise, but I also knew that I am now in the window, the
00:02:01.820 | window of receiving distributions because it's been five years and the fund that I invested
00:02:06.800 | in, which had something around 20 investments, is now in the heart of distributing capital
00:02:12.700 | back to limited partners over the next probably two years.
00:02:16.300 | So here are some seven lessons.
00:02:17.660 | First, investing is a temporary expense, folks.
00:02:21.180 | As I wrote in a previous post, treat your investments as expenses if you want to get
00:02:25.780 | richer.
00:02:26.780 | Such expenses are there to help take care of you in the future when you no longer want
00:02:31.220 | to work or are unable to work.
00:02:33.980 | This latest financial windfall has made me feel better about raising a family as we are
00:02:38.900 | now in a recession, but hopefully we're coming out of the recession as inflation peaks, mortgage
00:02:43.500 | rates come down, things get a little bit better or more hopeful going into 2023.
00:02:48.620 | But you never know, it's time, this is a time of uncertainty.
00:02:52.720 | So my investment expenses from 2016 to 2017 have now turned into a liquid asset.
00:02:59.240 | And the trend should continue for a couple more years as distributions are paid and reinvested.
00:03:03.940 | So really change your mindset.
00:03:06.020 | If you want to build more wealth and love to spend, trick yourself into spending as
00:03:10.320 | much as possible on investing.
00:03:12.940 | The more you investment spend, the more you may make.
00:03:16.820 | Two, take action on your investment thesis.
00:03:20.960 | When I initially made my private real estate investments in 2016, 2017, and 2018, I didn't
00:03:26.820 | know for certain how Heartland Real Estate would turn out.
00:03:29.820 | I had come up with a thesis in 2016 after Trump's election victory and proceeded to
00:03:34.960 | plow a total of about $810,000 into various funds and individual investments.
00:03:41.480 | Because I had also come up with the Buy Utility Rent Luxury Real Estate Investing Rule, or
00:03:46.640 | BRL, I wanted to continue taking action based on my beliefs.
00:03:52.020 | Investing in real estate that provided the most utility made sense because now we had
00:03:56.320 | a way to easily do so thanks to private real estate investing.
00:04:00.700 | The thing is, if you come up with a thesis, an idea, and don't act on it, you're wasting
00:04:06.340 | your time.
00:04:07.460 | You must take risks to earn higher rewards.
00:04:10.760 | You will lose money along the way.
00:04:12.320 | That's for certain in any risk asset.
00:04:15.480 | However, by losing, you will also learn how to diversify your portfolio and hone in on
00:04:21.160 | better investments along the way.
00:04:23.160 | This is one of my key points in Buy This, Not That, to think in probabilities, not absolutes.
00:04:28.920 | If you believe with a 70% probability or greater your investment thesis will turn out correct,
00:04:35.440 | I would go with a 100% conviction on that investment idea and buy it or short it, whatever
00:04:42.160 | it is you want to do.
00:04:43.800 | And then know with humility and humbleness that 30% of the time you're going to get it
00:04:48.840 | wrong, but that's okay.
00:04:49.840 | You're going to learn and get better over time.
00:04:52.880 | The third takeaway from private real estate investing is to give your investments time
00:04:56.800 | to compound.
00:04:58.280 | One of my favorite reasons to invest in private investments is they often take years to pay
00:05:03.800 | out.
00:05:04.800 | This is contrary to the attitude of expecting immediate rewards, the day trader mentality,
00:05:09.800 | the short term trader.
00:05:11.160 | It doesn't work over the long run, folks.
00:05:13.200 | You want to have your investments compound over time.
00:05:16.820 | Get that nice IRR, that internal rate of return.
00:05:21.200 | Most of the private funds I invest in, invest their capital over a two to three year period.
00:05:27.060 | And then they plan to pay distributions over a five to 10 year period.
00:05:31.860 | The longer you can let your investments compound, oftentimes, the greater your overall absolute
00:05:37.080 | dollar returns.
00:05:38.720 | As a real estate investor, your goal should be to buy and hold for as long as possible.
00:05:44.400 | And the thing is, sometimes it's just hard to hold on, especially when recurring tenant
00:05:48.320 | and maintenance issues pop up.
00:05:50.200 | I couldn't hold on to a property I'd held for 13 years.
00:05:53.560 | I think it was 13 years.
00:05:55.280 | Yeah, 13 years, because I just couldn't handle the tenants and the maintenance issues, deferred
00:06:01.200 | maintenance issues, the upcoming maintenance issues.
00:06:03.720 | And also, I was a new father in 2017, and I just wanted to focus.
00:06:07.740 | But with private real estate investments, you can easily hold on because once you invest
00:06:12.520 | your capital, it's done.
00:06:14.420 | It's in the hands of the sponsors to make sure that the investment turns out okay.
00:06:21.420 | And it has a projected timeline for distributions and so forth.
00:06:26.260 | So it's actually much easier to invest for the long term in private investments.
00:06:31.120 | Because once you make the commitment, you've got to stick to it.
00:06:34.260 | The challenge, obviously, is to find the right sponsors and the best real estate deals.
00:06:39.760 | So you've got to spend your time investigating, researching the sponsors and their track record
00:06:45.240 | and their history and their failures.
00:06:47.640 | Because hopefully they do have failures in the past that you didn't partake in, that
00:06:52.920 | they can learn from to make better investments in the future.
00:06:57.340 | Once you make a capital commitment to a private investment, you actually tend to forget about
00:07:01.680 | it for years.
00:07:03.500 | It's like a mental burden relief.
00:07:05.920 | There's something about accumulating more capital, you might feel more pressure to do
00:07:10.080 | something with it.
00:07:11.880 | Money starts burning a hole in your pocket.
00:07:13.720 | If you've ever proposed to someone and got that ring, that ring starts burning a hole
00:07:19.520 | in your pocket and you want to propose ASAP because it's just there.
00:07:24.760 | And if you have a lot of cash in a high inflationary environment, it's losing its purchasing power.
00:07:30.040 | So farming out capital to professionals who are looking out for your best interests, hopefully,
00:07:35.360 | does feel good.
00:07:36.360 | All right, the fourth point.
00:07:38.760 | To invest easier, think of your capital being in separate buckets.
00:07:43.280 | The reason why it was relatively easy for me to reinvest 550,000 of my rental house
00:07:48.960 | sale proceeds in 2017 into private real estate investments was that the capital came from
00:07:54.800 | the same real estate bucket.
00:07:57.000 | Normally, I would only invest about 50,000 to 75,000 at a time.
00:08:02.800 | This was literally 10x the amount I was investing in.
00:08:06.240 | However, I had reduced my San Francisco real estate exposure by 2.74 million because that
00:08:12.840 | was the selling price of the home.
00:08:14.920 | 800,000 was a mortgage and then the rest was home equity.
00:08:19.080 | And then obviously there's commissions and taxes and so forth.
00:08:22.000 | I wanted to diversify and reinvest some of the proceeds back into real estate but elsewhere
00:08:27.280 | in America, not San Francisco.
00:08:29.120 | And I figured if I was only receiving a cap rate of 2.5% in San Francisco, if I could
00:08:34.240 | find real estate opportunities elsewhere that provided an 8% cap rate, I could reinvest
00:08:41.040 | a third less capital and still earn the same amount of real estate income.
00:08:47.860 | So that's basically what I did.
00:08:49.520 | I divided the proceeds, 550 to real estate crowdfunding, private real estate investments,
00:08:55.880 | about 600,000 to stocks and another 500,000 to California AA municipal bonds for that
00:09:02.800 | tax-free income.
00:09:04.840 | By thinking in buckets, you may be able to better asset allocate your capital.
00:09:09.520 | Think in percentages, not absolute dollars because what you'll find is that the wealthier
00:09:14.120 | you get, these numbers just kind of seem a little unwieldy because probably you're not
00:09:21.080 | going to be spending as much as your wealth accumulates, especially if you've been frugal
00:09:25.240 | and a disciplined investor over 10, 20, 30, 40-year period of time.
00:09:29.120 | So it gets a little bit scary sometimes to say, "Wow, that's a big number what you're
00:09:34.160 | used to.
00:09:35.160 | It's much bigger than what you're used to."
00:09:36.160 | But if you start thinking in percentages such as you like 40% of your net worth in real
00:09:41.560 | estate, 30% in stocks and so forth, then it makes reinvesting or investing in general
00:09:48.600 | easier.
00:09:49.600 | All right, the fifth lesson, you will likely lose money.
00:09:52.760 | So don't forget to diversify.
00:09:55.160 | It is a fact that if you invest in risk assets, you will lose money.
00:10:01.040 | Now, although I received this nice $122,423 windfall in July, one of the investments in
00:10:07.440 | the fund was a complete wipeout, a donut, a zero.
00:10:11.160 | The $50,000 position went to zero.
00:10:13.680 | And the failed investment was called Student Housing at College Town in Toledo, Ohio.
00:10:18.920 | It was an acquisition by the sponsor William Fidelity Investments of a 590-room student
00:10:24.540 | housing complex located in Toledo, Ohio.
00:10:28.760 | The sponsor also projected a very attractive 18% internal rate of return over two years.
00:10:34.920 | Now, if you click over to the post, you'll look at the image of the deal and you'll probably
00:10:39.920 | think, "Wow, that sounds great.
00:10:42.280 | 18.4%, two years, student housing, so cheap.
00:10:46.800 | Sign me up."
00:10:48.480 | So I was pleased with this investment by the fund managers and it turned out to be a bagel.
00:10:54.400 | And why is that?
00:10:55.400 | Well, the property was a failure because the sponsor had spent too much on the remodeling,
00:11:00.720 | refurbishing, and more importantly, there was not a large enough equity cushion in case
00:11:06.760 | things turned sour.
00:11:08.920 | And then of course, COVID happened.
00:11:10.640 | COVID was terrible for student housing in 2020 and in the first half of 2021 because
00:11:15.920 | all the students were sent home.
00:11:17.600 | Nobody was going to be in a social raging party apartment complex during the first year,
00:11:23.320 | year and a half of COVID.
00:11:25.080 | And why was it just a zero?
00:11:26.520 | Because obviously the property is worth something and you have to understand the capital stack
00:11:30.680 | when you're investing in private real estate deals.
00:11:33.440 | And I'll include this in the show notes.
00:11:35.540 | But if you only have a, let's say, 10% equity cushion and you're the equity investor and
00:11:40.240 | the property is resold for 10% less than what it was projected to sell for or the acquisition
00:11:47.440 | price, you could get crushed.
00:11:50.380 | And obviously if it sells for 20% less, then you're definitely crushed.
00:11:54.320 | You're definitely going to zero.
00:11:55.700 | So equity investing in private real estate is riskier, but the upside is also greater.
00:12:01.360 | If you want to be a debt investor, it is less risky.
00:12:05.080 | However, the returns are lower.
00:12:07.760 | So there's no free lunch folks.
00:12:09.900 | So do your diligence, do diligence, diversify, understand that you will lose money.
00:12:15.400 | Thankfully, the fund still has about 17 other investments.
00:12:20.240 | Some are performing well, some are underperforming.
00:12:23.380 | But I've already received about 70% of my capital back.
00:12:27.080 | So I'm bullish that the overall IRR of this fund will do pretty well over a five to 10
00:12:33.000 | year period.
00:12:34.000 | However, let me just warn everybody again, unexpected bad things happen all the time.
00:12:40.320 | Do not get easily smitten by amazing marketing material.
00:12:45.380 | Every deal always sounds and seems amazing.
00:12:48.560 | If it doesn't, marketing is not doing their job.
00:12:52.040 | And as we know, not all investments turn out well.
00:12:55.620 | So doing your due diligence is a must before making any investment.
00:13:00.120 | Always view a real estate deal with extreme skepticism.
00:13:04.100 | Any investment you make, anything you want to put your hard earned capital towards, view
00:13:08.920 | it with skepticism.
00:13:10.920 | View anything with skepticism.
00:13:12.120 | Obviously, have some balance and look at the other side as well and figure out what could
00:13:16.480 | go wrong.
00:13:18.200 | But losing money is inevitable when it comes to investing in risk assets.
00:13:22.240 | Therefore, you must invest in a risk appropriate manner and diversify.
00:13:27.240 | So six, live where you want.
00:13:30.000 | Invest where the returns are potentially the highest.
00:13:32.900 | This is one of the best things about the internet and technology.
00:13:36.040 | We can now live wherever we want.
00:13:38.280 | Many of us can work from home and we can invest more strategically.
00:13:41.880 | My ideal real estate lifestyle is living in Hawaii or San Francisco and investing in the
00:13:46.640 | heartland for greater passive income.
00:13:49.800 | Your best real estate life might be living in Texas and investing in Los Angeles before
00:13:54.440 | foreigners begin buying up massive amounts of coastal city real estate once the borders
00:13:59.120 | reopen.
00:14:00.120 | Take a look at what's going on in China.
00:14:01.820 | They're locking down hundreds of thousands, if not millions of people in random cities
00:14:06.760 | because they're trying to go for a COVID zero policy.
00:14:09.760 | If you are a multi-millionaire or a billionaire and you've been living through that for the
00:14:13.840 | past two and a half years, you're logically going to think, "How do I get some of my capital
00:14:18.200 | out of China?
00:14:19.200 | How do I get myself out of China to live in a more free world like America or Canada or
00:14:23.620 | somewhere in Europe?"
00:14:25.120 | Because man, even if you are a billionaire and you've got to be locked down and face
00:14:29.440 | all these stringent protocols, that crimps your lifestyle tremendously.
00:14:34.000 | So I do believe in this thesis, folks.
00:14:36.200 | Foreign investors are making a comeback.
00:14:38.920 | 53 billion in investments over the past 12 months, that was a big uptick recently, this
00:14:45.760 | past 12 months.
00:14:46.760 | And I think that's going to continue to 100 billion a year in 2023 and so forth.
00:14:50.920 | So as the real estate market fades with a rise in interest rates and a slowdown in the
00:14:55.000 | economy over the next 12 months, you should strategically be thinking about trying to
00:14:59.400 | pick up deals for maybe 10% off January 2022 prices.
00:15:04.480 | And the final takeaway from investing in private real estate and also any private investment
00:15:09.960 | is to forecast your real estate investment distributions.
00:15:14.360 | If you know a large amount of investment distributions are coming one year, then you may want to
00:15:19.480 | work less or reduce your side hustles.
00:15:23.040 | If you are a small business owner, you can pay yourself less and spend more capex that
00:15:27.040 | year.
00:15:28.040 | So the idea is you want to smooth out your income so you pay less taxes.
00:15:33.760 | Conversely, if you have a dearth of private investment distributions coming, you can earn
00:15:39.400 | more without paying as large of a tax bill.
00:15:42.280 | You might want to job hop for that better job opportunity.
00:15:45.520 | You might want to do more side hustles or work on your business.
00:15:49.120 | You can pick up extra consulting jobs, no problem.
00:15:51.880 | Or you can reduce capex if you're a small business owner to earn more business income.
00:15:57.240 | Map out your potential distributions, your private investment distributions on a spreadsheet
00:16:02.020 | by year, then plan accordingly.
00:16:05.220 | For 2022, I had forecasted 112,800 in total real estate crowdfunding distributions.
00:16:11.680 | And once the quarterly report comes out in another quarter, I'll do a postmortem analysis
00:16:16.900 | on exactly how much of the 122,423 is profits versus original invested capital.
00:16:23.920 | I'm estimating about $62,423 of that 122,423 in distributions is taxable gains, but I won't
00:16:33.900 | know for sure.
00:16:34.900 | But I have a good idea.
00:16:36.540 | This is what helps me manage my time and my efforts because I am technically a small business
00:16:42.580 | owner, right?
00:16:43.580 | Financial samurai is technically a business.
00:16:46.360 | So I can decide what to do.
00:16:48.100 | I can write more.
00:16:49.280 | I can write less.
00:16:50.700 | I can relax.
00:16:51.920 | And this will help you plan out your time.
00:16:55.960 | Most important asset you have is your time and your energy and your stress.
00:16:59.420 | I know a lot of us have spent a lot of time during the pandemic working hard, taking care
00:17:04.180 | of our families, solidifying our finances.
00:17:07.380 | But it could be that, you know, things are slowing down now and it's time to take back
00:17:11.940 | our time and relax more.
00:17:14.820 | That's exactly what I want to do.
00:17:16.300 | So those are my seven key takeaways from investing in private real estate over the past five
00:17:20.920 | years.
00:17:21.920 | In Buy This, Not That, I go deep into talking about real estate, strategic investments,
00:17:27.060 | where to live, when to buy and so forth.
00:17:29.780 | So I hope you pick up a hard copy of the book.
00:17:31.880 | And if you see a paperback version of the book, it's actually unauthorized.
00:17:36.040 | It's a copy by someone else who's trying to pick off my work.
00:17:39.160 | How crazy is that?
00:17:40.160 | But you know what?
00:17:41.160 | It's funny.
00:17:42.160 | Every time I publish something new on financial samurai, at least three sites scrape 100%
00:17:47.520 | of my content.
00:17:48.900 | And then at least several more sites try to repurpose my content for their own.
00:17:53.960 | And that's the funny thing.
00:17:54.960 | It's just the way it is.
00:17:56.000 | The world is so competitive and it's so hard to be an original thinker and to come up with
00:18:00.920 | new ideas.
00:18:02.120 | So oftentimes, it's easier to just game the system and copy.
00:18:06.980 | But if you copy, steal, cheat, you're not going to feel good inside.
00:18:11.720 | So I hope everyone continues to think creatively, support the creators, especially if the content
00:18:17.460 | is free, and to encourage original thinking.
00:18:22.320 | Thanks so much everyone for supporting Buy This, Not That.
00:18:25.560 | You can find it at financialsamurai.com/btnt or wherever books are sold.
00:18:31.300 | And also shout out to Fundrise, my favorite real estate investing platform that focuses
00:18:36.660 | on single family and multifamily homes in the Sunbelt, which I think is going to be
00:18:42.000 | a multi-decade trend, folks.
00:18:43.860 | And I plan to be there and ride that wave.
00:18:46.240 | You can sign up for Fundrise at financialsamurai.com/fundrise.
00:18:54.060 | I hope you enjoyed this podcast and I will speak to you all later.