Month: March 2023

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By Dr. James M. Dahle, WCI Founder

It’s been a while since we updated you on the performance of our portfolio. Long-time readers will recall we first added private real estate to our portfolio in 2012, and then, we more earnestly continued in 2014. At that time, we underwent some direct real estate investing from our accidental landlord situation, but we finally sold that property in 2015. We now have only passive real estate investments.

Here’s where things stood after 2022.

 

Our Portfolio

As a reminder, our asset allocation consists of:

60{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} stocks, 20{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} bonds, and 20{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} real estate

In detail, it looks like this:

60{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} stocks:

• 25{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Total Stock Market Index Fund
• 15{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Small Value Index Fund
• 15{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Total International Stock Market Fund
• 5{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Small International Stock Market Index Fund

20{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} bonds:

• 10{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Nominal bonds
• 10{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Inflation-protected bonds

20{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} real estate

• 5{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Publicly traded REITs
• 10{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Private equity real estate
• 5{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} Private debt real estate

 

Stock and Bond Performance in 2022

Before we get into the real estate numbers, let’s first discuss how our stocks and bonds performed. The numbers reported are our actual return numbers, verified using the XIRR function. Our numbers may be slightly better or worse than the fund numbers due to cash flows in and out of the investment. Also, we don’t consider a tax-loss harvesting transaction to be a withdrawal from that asset class, so the returns are often a mix of two tax-loss harvesting partners. We’re also only considering money we have designated for retirement, whether that’s in a taxable account or a retirement account. We’re not counting UTMAs, 529s, our kids’ Roth IRAs, HSA, cash reserves, small businesses, etc. It also ignores a small cash balance plan (which returned -15.38{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} in 2022.) Here’s how we did in 2022 overall:

• Overall Portfolio Return: -9.92{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}
• Total Stock Market: -16.38{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}
• Small Value Stocks: -5.10{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}
• Total International Stock Market: -15.66{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}
• Small International Stocks: -17.38{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}
• TSP G Fund: 2.98{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}
• Municipal Bonds: -7.09{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}
• TIPS: -11.66{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} on our fund, 2.39{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} on a small amount of individual TIPS bought at the end of the year
• I Bonds: 5.45{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}

2022 was a bad year for stocks and a disaster for bonds. I was actually pretty pleased with how my bonds did compared to many common bond holdings. How did real estate, especially private real estate, do in comparison?

More information here:

The Nuts and Bolts of Investing

Real Estate Investing 101

 

2022 Real Estate Performance

Let’s go through each of our real estate investments and how they did in 2022.

 

Publicly Traded REITs – 5{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} of Portfolio

Our first real estate investment and the one we have held the longest (since 2007) is the Vanguard Real Estate Index Fund, available in both traditional mutual fund and ETF flavors. We use both, depending on the account it is held in. 2022 was a bad year for publicly traded REITs. They tend to have moderate correlation with the stock market, so the poor performance in an overall market downturn was not a huge surprise. Our return in this asset class for 2022 was -23.31{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. While that looks terrible, it was actually a little better than the fund return of -26.24{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. That’s just due to the fact that we were adding money to it as the year went on and because later dollars missed out on some of the losses. The same thing happens in reverse in good years. Overall since 2007, our return in this investment has been 5.50{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year. The 2022 and 2023 returns (this post was written on Feb 11, 2023, to be published in March) really brought that average down sharply as we have been adding quite a bit to this in 2022 and 2023. A year ago, the long-term average was closer to 12{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}.

 

Private Equity Real Estate – 10{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} of Portfolio

As a general rule, our private real estate creamed our public real estate in 2022. Whether that is due to the lower correlation with stocks, superior manager skill, or the fact that it is not marked to market as quickly is not clear. But either way, we’ll take it. Our overall return for private equity real estate was 8.84{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} in 2022. Yes, that’s a positive 8.84{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. Long-term return is hard to say because we used to include some small businesses in this category that really did great. But since we separated those out on our spreadsheet after 2019, returns have been 8.07{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} 10.83{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} (see the italicized note below). These returns are somewhat inaccurate, though, as many of these investments are not marked to market each year. That causes returns to be understated in good years and long-term and perhaps overstated in bad years. You can really only judge the return of closed-end funds and syndications AFTER they go completely round trip, and that is often a 5-10 year process. Let’s talk about each investment individually.

 

Practice Office Building

This is the “syndication” that I’m in charge of, at least for a few more months. It only gets appraised and revalued once a year in the middle of the year, so this return is really from the last half of 2021 and the first half of 2022. But it returned 14.67{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. I don’t expect that for this next year!

 

Indianapolis Apartment Building

Careful readers will recall this syndication, bought through blog sponsor and real estate crowdfunding platform Realty Mogul, was sold in 2020. But in each of the last two years, I received another check that further boosted its return. This year’s return was almost 10{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} of the original investment! Since I had no capital at risk, I guess that’s an infinite return as calculated for just 2022. In the end, this $10,000 investment that we made in 2014 paid me $16,214 between 2015 and 2022. XIRR tells me my return was 9.96{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year, which was a little less than pro-forma.

 

Origin Fund III

This fund ($100,000 investment), run by blog sponsor Origin Investments, has been returning a lot of its capital and earnings in 2022. I’m told it will probably wrap up completely by 2024 and probably underperform pro-forma by a bit. Management blames that underperformance on being overly conservative during the pandemic. I calculate my 2022 return at 29.91{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}, and my overall return (2017-2022) at 14.22{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}.

 

Houston Apartment Building

This is the disaster of my portfolio, due to operator fraud. I’m still expecting a full loss here, but it’s not done yet. My K-1 from this investment last year had literally no numbers on it anywhere. I marked it down from its original value to $0 this year, so my return for 2022 was -100{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. Overall, my return is -97.55{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year. That was $20,000 invested, and I only got $1,906 out of it before it stopped paying. This might be the biggest reason I stopped doing syndications in favor of funds. Diversification matters.

 

Fort Worth Apartment Building

This $100,000 investment is a long-term (8-10 years) syndication purchased through blog sponsor 37th Parallel in 2018. I’m still valuing my share at the original purchase price so the return reflects only the income, which has been below pro-forma. The 2022 return is 2.47{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} with an overall return of 2.86{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year. You can’t judge a book by its cover and you can’t judge the returns on a syndication until it goes round trip. For this one, that is still many years away.

 

Origin Income Plus Fund

This was another $100,000 investment from blog sponsor Origin Investments. This is its evergreen fund that’s more focused on income but still with lots of equity and preferred equity in it. This fund returned 10.2{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} in 2022, and overall, it’s had a return of 9.66{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} for me. Too bad every year couldn’t be like 2021 (22.49{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}). Still, in a year like 2022, I’ll take it.

 

37th Parallel Fund I

This $100,000 investment from blog sponsor 37th Parallel had a return of 3.56{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}, and overall, it’s had a return of 3.45{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. Note that I am still valuing this investment at its original purchase price, so the return only reflects the income.

 

Alpha Investing Fund I

The first fund from a previous blog sponsor, this was another $100,000 investment made just before the pandemic. It has returned just a little bit of the capital and some income over time. The 2022 return was 3.33{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} with an overall return of 6.35{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year.

 

MLG Fund 4

This is a newer investment made in late 2020, via blog sponsor MLG Capital. It has already returned a small amount of capital. The 2022 return was 10.47{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} with an overall return of 7.17{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year. I still consider the value of my holding to be the capital I paid in minus the capital returned so far. So, that return is mostly income but also some from the property or two that have been sold. Like with the 37th Parallel investments and Alpha Fund, these properties are not appraised every year because there is no liquidity. While that saves costs, it does mean that interim returns aren’t so accurate.

[Update prior to publication: Interestingly, this investment started reporting a Net Asset Value in between the time I wrote this post and when it was published. So, the value of this investment “instantly” went from $236,000 to $349,000. That increased my overall IRR on it from 7.17{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} to 31.95{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year. My IRR for 2023 alone is nonsensical (3,177{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}) now that it has increased in value 48{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} in just six weeks. That also increased the overall return on all of our private equity real estate from 8.07{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} to 10.83{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. Imagine if that happened for the other seven of these investments that don’t report a NAV regularly.]

 

Unnamed Fund

Another multi-family equity fund we own was purchased in mid-2021. The capital is only about half called so far. I’m calculating the 2022 return and the overall return as 0{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} still since it hasn’t paid any dividends and none of the properties have been appraised since purchase.

 

DLP Housing Fund

This open multifamily fund from blog sponsor DLP Capital provided us with a 2022 return of 18.93{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}, with an overall return of 14.62{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. Like the Origin Income Plus Fund (but none of the others mentioned above), this one is evergreen/open. You can still invest in it with a $100,000 minimum.

 

Peak Housing REIT

This one from blog sponsor The Peak Group is different from most of those above in that it does not invest in multi-family but in single-family homes. As a REIT, it just sends you a 1099 (no K-1 requiring multiple state returns). Our $25,0000 investment returned 18.23{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} in 2022 by my calculations. However, I noticed its value has been marked down in the first part of 2023. Our overall return on it is currently 1.27{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. You can still invest in this one ($25,000 minimum), and I expect to put some more money into it in 2023.

 

Wellings Fund

This one from blog sponsor Wellings Capital invests in mobile homes and self-storage. It was brand new for us in mid-2022, so there’s no return on it yet. I’m still calling it 0{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. You can also invest in this with a $50,000 minimum.

 

Since stocks, bonds, and public REITs were all down sharply in 2022, that’s where most of our new money went in 2022 to rebalance those portions of the portfolio. As a result, we didn’t invest much in private real estate in 2022. We expect to invest more there in 2023 (and already have). Our first investment in 2023 was a dedicated self-storage fund. We’ll report on that next year. Otherwise, we expect to see some more money going into funds we already own, like the DLP Housing Fund, Origin Income Plus Fund, Peak Housing REIT, and Wellings Fund. We’ve already got enough complexity here, so we’re trying not to add a lot of new investments to keep track of if we can help it.

 

Private Debt Real Estate – 5{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} of Portfolio

One of our favorite portions of our portfolio—although it’s, by far, the least tax-efficient—is debt real estate. My preferred vehicle here is funds, especially funds run by people with experience running equity funds. That’s because the risk with a debt fund is that, in a really bad real estate downturn, that debt fund will become an equity fund as the fund forecloses on the properties it has lent on. Essentially all of the loans in this portfolio are in first-lien position with conservative loan-to-value ratios. But they do have occasional defaults. Our 2022 return for this asset class was 9.47{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}, and our overall return since 2017 in this asset class has been 9.50{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}.

 

AlphaFlow

I was pleased to FINALLY wrap this investment up in 2022. It was originally a $20,000 investment made in 2017. I haven’t been happy about it either. As soon as I got the capital invested with this RIA, the operators decided they didn’t want to serve small investors like me and started liquidating the fund—in drips and drabs over four years. It was like exiting Lending Club and Prosper all over again with $40 at a time hitting my checking account, making for an accounting/return tracking nightmare. They finally either got the money back from the developers or wrote it off. The 2022 return was -50.78{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} as they wrote off the last few notes that were in default. The overall return was 5.34{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} per year. It seemed like a good idea, but in practice, it was super annoying. I’m glad to have it out of my portfolio.

 

Arixa Secured Income Fund

This debt fund out of California is incredibly boring. It tends to have a little bit lower returns than some of the others we have invested with over the years, but I think Arixa does a nice job. It was very much a “steady Eddie” in our portfolio with a 6.88{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} return for us in 2022, with overall returns since our original investment in 2018 of 7.12{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. I love that they’re evergreen/open and that they reinvest my dividends. We’re actually making a change here in 2023. We’re pulling out of this fund, which has been in taxable, and we’re reinvesting a larger amount in Katie’s self-directed 401(k). This fund had been, at least temporarily, closed to new investments so our new investment is in its other fund, the Enhanced Income Fund. That fund tends to have a little bit higher returns but also uses significant leverage. We’re in talks with Arixa to possibly sponsor the site in the future, maybe even by the time this post runs.

 

CityVest DLP Access Fund

A former sponsor of this website, this was CityVest’s feeder/access fund into the DLP Lending Fund (more on that later). Many WCIers invested alongside me in this one. It wrapped up in late 2022. I calculated my 2022 return at 5.69{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} with an overall return of 8.57{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. Not too bad, especially with minimal hassle for me. Basically, it did what it said it was going to do: provide a lower minimum investment in exchange for an additional layer of fees. Lots of WCIers complained about communication and customer service issues with CityVest, although I never experienced them personally.

 

Unnamed Debt Fund

We’ve been in this fund for almost three years now. It’s with the same company as the unnamed equity fund above. The 2022 return was 10.11{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. The overall return has been 8.44{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. It’s actually probably slightly better, as their reporting mechanism seems to lag behind that of others by a few weeks. Maybe someday they’ll let us (or maybe even pay us) to tell you who they are.

 

DLP Lending Fund

Another sponsor of this site, I like this fund just as much as I liked Broadmark (which went public a couple of years ago, causing us to sell the investment after a nice run-up). It’s in my self-directed WCI 401(k). In part, due to many white coat investors investing with them, DLP is expanding operations lately with more funds, more staff, and larger funds. Fees on this fund went up too, unfortunately, although DLP still expects to provide similar preferred and projected returns. Our 2022 return on this fund was 11.74{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} with our return since early 2021 at 8.97{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d}. The only reason we don’t invest more here is because we want to maintain diversification between different companies. But there’s a good chance they’ll get some more money from us in 2023. We expect this fund, the new Arixa fund, and the unnamed fund to make up our long-term holdings in this asset class. It’s only 5{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} of our portfolio; we really don’t want to deal with more than three holdings to minimize complexity.

 

If you’re interested in pursuing real estate investing and working with some of the WCI-vetted partners that I invest with, here are some of the best companies in the business.

 

Conclusion

Overall, private real estate investments took a victory lap in 2022. They smoked stocks, bonds, and public REITs. Not just positive returns while everything else was doing poorly, but solid returns that definitely helped our portfolio to only have single-digit losses in 2022. People ask me, “Why do you invest in that complex, expensive, opaque stuff?” Now, I’ll be pointing to 2022 as Exhibit A.

Is it worth this complexity (13 equity holdings and three debt holdings) for just 15{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} of our portfolio? I think so, but those equity funds have definitely brought on a lot of hassle and expense at tax time. We filed in 12 states last year, and without private real estate, it would have only been three. As investments get larger (and each time we invest in a new investment, it’s a larger amount), the relative tax cost (currently tax prep fees are just under 0.3{0cd64a0a8f98edc6e1a333a4649a39f4fde229418ea626ab6b5ac18b9de2691d} of our private real estate portfolio) becomes less. But it is never going to be as simple as the mutual fund portion of the portfolio.

We’ve done a great job increasing the tax-efficiency and decreasing the complexity on the debt side. We’re down to just three holdings now, and two of them are in tax-protected accounts. We hope to also cut the number of our equity investments in half, but it’s going to take some time.

What do you think? How did your private real estate do in 2022? Do you expect much worse returns in 2023 as assets are marked to market? Comment below!