Hello everybody, it's Sam from Financial Samurai. Long time no chat. I've been busy, very busy focused on marketing. Buy this, not that. You can pick one up at financialsamurai.com/btnt. And the good news is that it made the Wall Street Journal bestseller list. It was the only new entrant out of a sea of incumbents to make the list.

The only person with black hair too, so I feel very, very proud to have made the list. But I didn't realize how hard it is to make the Wall Street Journal bestseller list based on so many books that I thought made it, but they actually didn't make it. So I'm really proud of that fact and I will be sharing more about how to become a professional writer in another episode.

But for this episode, I want to talk about lessons learned after five plus years of investing in private real estate. Private real estate is real estate syndication deals, real estate crowdfunding. This is what I've been investing in since the end of 2016 and early 2017 to diversify my real estate portfolio and to earn more passive income.

As a 45 year old father of two young children, I got to say being able to invest in real estate passively without leverage has been a godsend. Not everything has worked out well, which is why I want to share this episode. But for the most part, the trend has been great, investing in the long term trend of the heartland of America where real estate valuations are lower and cap rates are higher and net rental yields are higher.

I think this trend is going to continue for the next several decades and I want to be on this trend, but there are some bumps and bruises along the way. So here are seven takeaways from investing in private real estate for over five years because I had just received in July a huge distribution, relatively huge for me, it's $122,423.

And that was somewhat of a surprise, but I also knew that I am now in the window, the window of receiving distributions because it's been five years and the fund that I invested in, which had something around 20 investments, is now in the heart of distributing capital back to limited partners over the next probably two years.

So here are some seven lessons. First, investing is a temporary expense, folks. 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 are now in a recession, but hopefully we're coming out of the recession as inflation peaks, mortgage rates come down, things get a little bit better or more hopeful going into 2023. But you never know, it's time, this is a time of uncertainty.

So my investment expenses from 2016 to 2017 have now turned into a liquid asset. And the trend should continue for a couple more years as distributions are paid and reinvested. So really change your mindset. 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. Two, take action on your investment thesis. 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 about $810,000 into various funds and individual investments.

Because I had also come up with the Buy Utility Rent Luxury Real Estate Investing Rule, or BRL, 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 private real estate investing.

The thing is, if you come up with a thesis, an idea, and don't act on it, you're wasting your time. You must take risks to earn higher rewards. You will lose money along the way. That's for certain in any risk asset. However, by losing, you will also learn how to diversify your portfolio and hone in on better investments along the way.

This is one of my key points in Buy This, Not That, to think in probabilities, not absolutes. If you believe with a 70% probability or greater your investment thesis will turn out correct, I would go with a 100% conviction on that investment idea and buy it or short it, whatever it is you want to do.

And then know with humility and humbleness that 30% of the time you're going to get it wrong, but that's okay. You're going to learn and get better over time. The third takeaway from private real estate investing is to give your investments time to compound. 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, the day trader mentality, the short term trader. It doesn't work over the long run, folks. You want to have your investments compound over time. Get that nice IRR, that internal rate of return. Most of the private funds I invest in, invest their capital over a two to three year period.

And then they plan to pay distributions over a five to 10 year period. 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. And the thing is, sometimes it's just hard to hold on, especially when recurring tenant and maintenance issues pop up.

I couldn't hold on to a property I'd held for 13 years. I think it was 13 years. Yeah, 13 years, because I just couldn't handle the tenants and the maintenance issues, deferred maintenance issues, the upcoming maintenance issues. And also, I was a new father in 2017, and I just wanted to focus.

But with private real estate investments, you can easily hold on because once you invest your capital, it's done. It's in the hands of the sponsors to make sure that the investment turns out okay. And it has a projected timeline for distributions and so forth. So it's actually much easier to invest for the long term in private investments.

Because once you make the commitment, you've got to stick to it. The challenge, obviously, is to find the right sponsors and the best real estate deals. So you've got to spend your time investigating, researching the sponsors and their track record and their history and their failures. Because hopefully they do have failures in the past that you didn't partake in, that they can learn from to make better investments in the future.

Once you make a capital commitment to a private investment, you actually tend to forget about it for years. It's like a mental burden relief. There's something about accumulating more capital, you might feel more pressure to do something with it. Money starts burning a hole in your pocket. If you've ever proposed to someone and got that ring, that ring starts burning a hole in your pocket and you want to propose ASAP because it's just there.

And if you have a lot of cash in a high inflationary environment, it's losing its purchasing power. So farming out capital to professionals who are looking out for your best interests, hopefully, does feel good. All right, the fourth point. To invest easier, think of your capital being in separate buckets.

The reason why it was relatively easy for me to reinvest 550,000 of my rental house sale proceeds in 2017 into private real estate investments was that the capital came from the same real estate bucket. Normally, I would only invest about 50,000 to 75,000 at a time. This was literally 10x the amount I was investing in.

However, I had reduced my San Francisco real estate exposure by 2.74 million because that was the selling price of the home. 800,000 was a mortgage and then the rest was home equity. And then obviously there's commissions and taxes and so forth. I wanted to diversify and reinvest some of the proceeds back into real estate but elsewhere in America, not San Francisco.

And I figured if I was only receiving a cap rate of 2.5% in San Francisco, if I could find real estate opportunities elsewhere that provided an 8% cap rate, I could reinvest a third less capital and still earn the same amount of real estate income. So that's basically what I did.

I divided the proceeds, 550 to real estate crowdfunding, private real estate investments, about 600,000 to stocks and another 500,000 to California AA municipal bonds for that tax-free income. By thinking in buckets, you may be able to better asset allocate your capital. Think in percentages, not absolute dollars because what you'll find is that the wealthier you get, these numbers just kind of seem a little unwieldy because probably you're not going to be spending as much as your wealth accumulates, especially if you've been frugal and a disciplined investor over 10, 20, 30, 40-year period of time.

So it gets a little bit scary sometimes to say, "Wow, that's a big number what you're used to. It's much bigger than what you're used to." But if you start thinking in percentages such as you like 40% of your net worth in real estate, 30% in stocks and so forth, then it makes reinvesting or investing in general easier.

All right, the fifth lesson, you will likely lose money. So don't forget to diversify. It is a fact that if you invest in risk assets, you will lose money. Now, although I received this nice $122,423 windfall in July, one of the investments in the fund was a complete wipeout, a donut, a zero.

The $50,000 position went to zero. And the failed investment was called Student Housing at College Town in Toledo, Ohio. It was an acquisition by the sponsor William Fidelity Investments of a 590-room student housing complex located in Toledo, Ohio. The sponsor also projected a very attractive 18% internal rate of return over two years.

Now, if you click over to the post, you'll look at the image of the deal and you'll probably think, "Wow, that sounds great. 18.4%, two years, student housing, so cheap. Sign me up." So I was pleased with this investment by the fund managers and it turned out to be a bagel.

And why is that? Well, the property was a failure because the sponsor had spent too much on the remodeling, refurbishing, and more importantly, there was not a large enough equity cushion in case things turned sour. And then of course, COVID happened. COVID was terrible for student housing in 2020 and in the first half of 2021 because all the students were sent home.

Nobody was going to be in a social raging party apartment complex during the first year, year and a half of COVID. And why was it just a zero? Because obviously the property is worth something and you have to understand the capital stack when you're investing in private real estate deals.

And I'll include this in the show notes. But if you only have a, let's say, 10% equity cushion and you're the equity investor and the property is resold for 10% less than what it was projected to sell for or the acquisition price, you could get crushed. And obviously if it sells for 20% less, then you're definitely crushed.

You're definitely going to zero. So equity investing in private real estate is riskier, but the upside is also greater. If you want to be a debt investor, it is less risky. However, the returns are lower. So there's no free lunch folks. So do your diligence, do diligence, diversify, understand that you will lose money.

Thankfully, the fund still has about 17 other investments. Some are performing well, some are underperforming. But I've already received about 70% of my capital back. So I'm bullish that the overall IRR of this fund will do pretty well over a five to 10 year period. However, let me just warn everybody again, unexpected bad things happen all the time.

Do not get easily smitten by amazing marketing material. Every deal always sounds and seems amazing. If it doesn't, marketing is not doing their job. And as we know, not all investments turn out well. So doing your due diligence is a must before making any investment. Always view a real estate deal with extreme skepticism.

Any investment you make, anything you want to put your hard earned capital towards, view it with skepticism. View anything with skepticism. Obviously, have some balance and look at the other side as well and figure out what could go wrong. But losing money is inevitable when it comes to investing in risk assets.

Therefore, you must invest in a risk appropriate manner and diversify. So six, live where you want. Invest where the returns are potentially the highest. This is one of the best things about the internet and technology. We can now live wherever we want. Many of us can work from home and we can invest more strategically.

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

Take a look at what's going on in China. They're locking down hundreds of thousands, if not millions of people in random cities because they're trying to go for a COVID zero policy. If you are a multi-millionaire or a billionaire and you've been living through that for the past two and a half years, you're logically going to think, "How do I get some of my capital out of China?

How do I get myself out of China to live in a more free world like America or Canada or somewhere in Europe?" Because man, even if you are a billionaire and you've got to be locked down and face all these stringent protocols, that crimps your lifestyle tremendously. So I do believe in this thesis, folks.

Foreign investors are making a comeback. 53 billion in investments over the past 12 months, that was a big uptick recently, this past 12 months. And I think that's going to continue to 100 billion a year in 2023 and so forth. So as the real estate market fades with a rise in interest rates and a slowdown in the economy over the next 12 months, you should strategically be thinking about trying to pick up deals for maybe 10% off January 2022 prices.

And the final takeaway from investing in private real estate and also any private investment is to forecast your real estate investment distributions. 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.

So the idea is you want to smooth out your income so you pay less taxes. Conversely, if you have a dearth of private investment distributions coming, you can earn more without paying as large of a tax bill. You might want to job hop for that better job opportunity. You might want to do more side hustles or work on your business.

You can pick up extra consulting jobs, no problem. Or you can reduce capex if you're a small business owner to earn more business income. Map out your potential distributions, your private investment distributions on a spreadsheet by year, then plan accordingly. For 2022, I had forecasted 112,800 in total real estate crowdfunding distributions.

And once the quarterly report comes out in another quarter, I'll do a postmortem analysis on exactly how much of the 122,423 is profits versus original invested capital. I'm estimating about $62,423 of that 122,423 in distributions is taxable gains, but I won't know for sure. But I have a good idea.

This is what helps me manage my time and my efforts because I am technically a small business owner, right? Financial samurai is technically a business. So I can decide what to do. I can write more. I can write less. I can relax. And this will help you plan out your time.

Most important asset you have is your time and your energy and your stress. I know a lot of us have spent a lot of time during the pandemic working hard, taking care of our families, solidifying our finances. But it could be that, you know, things are slowing down now and it's time to take back our time and relax more.

That's exactly what I want to do. So those are my seven key takeaways from investing in private real estate over the past five years. In Buy This, Not That, I go deep into talking about real estate, strategic investments, where to live, when to buy and so forth. So I hope you pick up a hard copy of the book.

And if you see a paperback version of the book, it's actually unauthorized. It's a copy by someone else who's trying to pick off my work. How crazy is that? But you know what? It's funny. Every time I publish something new on financial samurai, at least three sites scrape 100% of my content.

And then at least several more sites try to repurpose my content for their own. And that's the funny thing. It's just the way it is. The world is so competitive and it's so hard to be an original thinker and to come up with new ideas. So oftentimes, it's easier to just game the system and copy.

But if you copy, steal, cheat, you're not going to feel good inside. So I hope everyone continues to think creatively, support the creators, especially if the content is free, and to encourage original thinking. Thanks so much everyone for supporting Buy This, Not That. You can find it at financialsamurai.com/btnt or wherever books are sold.

And also shout out to Fundrise, my favorite real estate investing platform that focuses on single family and multifamily homes in the Sunbelt, which I think is going to be a multi-decade trend, folks. And I plan to be there and ride that wave. You can sign up for Fundrise at financialsamurai.com/fundrise.

I hope you enjoyed this podcast and I will speak to you all later.