Have I Found the Holy Grail of Passive Real Estate Investing? (Part 2)
I now have three full quarters of reports and payments received on my first investment with this crowdfunding company. Along the way I made two additional investments. That is, I am a passive co-owner in three portfolios now. All three are equity investments, and had projections of 9-11% annually cash flow on rental income. I am delighted to report that all three are outperforming those projections.
On my first two investments I was able to calculate my annualized returns from the point of when the homes in that particular portfolio were fully occupied. That is not necessarily the same as from the time the investment was made. Due to demand, the company now allows investors to invest once all ten properties are fully owned by the company, and are at least 50% stabalized (rented out).
My first investment portfolio was fully occupied on January 1, my second on May 1, and my third, well as of the end of the reporting quarter (it’s first) was still only 80% stabilized. So, I calculated Portfolio 3 just from the time of the investment, which was July 1.
Portfolio 1 (9 months): 12.0%
Portfolio 2 (5 months): 12.8%
Portfolio 3 (max of 80% occupancy, 3 months): 11.5%
Of course I am delighted with these returns, but it is important to recognize that in all cases these are still very early indicators (of less than a year), and it would be unwise to assume that they will continue to perform in a similar manner going forward. Still, it adds to my increasing confidence that these portfolios will continue to perform to at least the more conservative level of projections over the expected 3-5 year holding period. The total IRR projections, which range in the high teens up to 20%, also seem to be that more achievable.
Like any young company that is rapidly growing and learning, they are constantly making adjustments which they feel are improvements to their investors’ experience. Last month they launched a fully new website, which they are still tweaking. I have been giving lots of feedback, but I immediately found the site vastly more user friendly and visually appealing.
They also launched a second type of portfolio investment, which is debt, rather than equity, focused. From what I understand these initial debt portfolios will pay out 8% interest on the loan (which is a guaranteed minimum), plus a 25% net profit share of the rent and 50% of profits on refinancing or sale of the properties will go to the investors, the other 50% kept by the managers. The cash flow projections on these initial debt portfolios are conservatively estimated at 9-10%, with IRR at 11-16%. That is about 2-3% lower projected returns than the equity portfolios. They tell me the trade off is the lowered risk with the guaranteed returns, and the mortgage held against the properties. However, another disadvantage of this investment is there is no tax depreciation write off available on the returns, as it is not an equity (ownership) position.
I am told they created these Debt structured portfolios to meet the demand of quite a few investors who were looking for a more secured investment - thus the guaranteed minimum and mortgage.
My initial response to the announcement to these debt portfolios was negative, and I preferred to hold out for the equity investments. However, as I have learned more I did decide to try one out, and just made my smallest investment yet with this company. I do think that these debt portfolios are particularly well suited for my self-directed retirement funds, as they are not eligible for the depreciation deduction anyway. It looks like they will be doing a good many of these debt portfolios going forward.
Finally, the company very recently announced they are opening their first portfolio in a second city for reservation next month (November), and I am very interested in seeing how that unfolds.
Performance Update 2 (January 2017)
It’s three months later and I now have reports and payments received for all of 2016, a full year for what I call Portfolio 1. As you will see below, with this and the other portfolios I hold and report on, the fourth quarter brought the overall returns down a little bit. From what I can gather this is primarily due to the fact that property taxes were paid for all properties during this time, bringing the net for the quarter down considerably from previous quarters.
In addition, Portfolio 3 is still not fully occupied, as there remained one property at the end of the year not rented (November and December are very difficult rental periods), but I’m told probably will be by Feb 1. So again I calculated based on the beginning of the investment. Not surprisingly this was the lowest performing of the equity portfolios I hold. However, it still is near the middle of the range of the projected 9-11% cash flow. 1 is at the very top of the projection, 2 is running 1% over. So these two still look very good.
Portfolio 1 (1 year): 11%
Portfolio 2 (8 months): 12%
Portfolio 3 (max of 90% occupancy, 6 months): 9.7%
As I previously wrote about, I also made a smaller investment in the company’s first debt portfolio. Returns on this portfolio, which still had two properties unoccupied at end of year, covered only November & December, and I was paid the guaranteed 8% return. I do expect that to improve as the portfolio becomes fully stabilized.
Portfolio 4 (max of 80% occupancy, 2 months): 8%
Finally, I just made my fifth investment with this company, and it is an equity portfolio (like 1, 2 & 3). This is their first offering for 2017, and the first to include properties from a second city – actually half of the properties are in each city for further diversification. The investment will not become effective until February 1st, and I expect only about half the properties will be occupied at that time. Their apparently was a lot of pent up demand for another equity portfolio, as this one was fully invested within just a few days.
This was also my first investment with them that is from personal funds, as opposed to self-directed retirement accounts. The advantage with this type of fund source is that I will reap the depreciation deductions with this investment. The disadvantage is that the returns will be subject to taxation (state & federal) at all.
So I am in for all flavors now.
Quick Update (February 2, 2017)
The company just announced their first apartment building investment, a 46 unit. The details of the structure of this investment are still being worked out apparently, but what is clear is that this will be a Debt portfolio that is projected to conservatively cash flow 9-13%. They are taking reservations with a $15,000 minimum, which is higher than all their previous portfolios. I made a reservation knowing that it is just a place holder, not a commitment to invest, and I will wait to learn the actual details of the offering before deciding whether to make an investment. Still, I am pretty excited about diversifying into apartments via this model.