Individual REIT portfolios

[kork13]

We're about to close on the sale of our previous house, and will net just over $361k. We don't really have anything specific planned for what to do with the money, besides just throwing it into our investments per AA... We won't need to but another house for at least 2.5 yrs, and we already have a pretty heavy chunk of money available got that eventuality. However, I've recently started coming across a few opportunities to join limited partner investor pools in what basically seem to be individual REIT portfolios for a handful of development properties.

I've always been interested in real estate as an investment, and have had a rental property for almost a decade .... But we're starting to get a bit burned out with some of that stuff, and I've been getting more & more interested in real estate investment deals instead.

So back to these investment deals ... I'm pretty interested with two projects in particular. If I'm able to join them, they look like a couple great mid-term investments, and the firms/managing partners have a great track record. Not to mention, the anticipated returns look pretty fantastic -- 20-25% IRR in one converting big-box retail to self storage (plus long-term income), and 28-35% IRR in a multifamily development deal... And both deals are structured for an initial return of investment within a couple years (while retaining a continuing stake for more returns). My plan is to use $250k with the storage conversion, and $100k with the multifamily development.

I've reached out to the firms to get some more detail & do what research I can ... Though being my first forays into investing like this, I'll definitely have alot to learn as we go. The 2 big question marks in my mind are due diligence & taxes. But research & learning is ongoing!

[riverwed070707]

Excited to see how this plays out for you! Those are some massive returns. I spent some time looking at REITs and crowdsourced real estate investing, but ultimately decided to go with hard money lending. While my returns are less than what you're projecting, they are more than my current rental portfolio returns. The draw for me over other options was the default process. When its a REIT or crowdfunded investment, you are sort of just a bystander and may or may not recover your losses. With HML, I am the primary lean holder and can solely foreclose on the property and re-sell it to recoup my investment. I still get to participate in analyzing deals and decide whether its a risk I'm willing to take on. I have 3 loans being repaid this month and 3 new going out which will be my... 10th? I have a post here somewhere detailing how my first couple went I can dig up if it interests you.

[LivingAlmostLarge]

What are the firms you are reaching out to? What made you pick them? I am curious about it as well.

[kork13]

It's a pair of smallish real estate investment developers. One I was introduced to through my university's alumni group, the other I learned about through a founder's interview by someone I follow/trust.

As I've discussed it with both firms, these are not actually REITs, they're really syndication deals -- pooled investors who fund/manage the development of properties before a REIT might later come in & purchase the operational property. 100% "alternative investment" that carries its own style of risk... But promising reward structures too, and somewhat diversified by a portfolio of 4-8 properties across the southeast US (to mitigate risk).

I'm probably jumping in a bit too heavy, but I'm intrigued & ready to play. I'm making a few extra moves to get there, but I'm going to actually end up doing $250k apiece with each deal. It'll put me in for basically 20% of my net worth between them ... But I view it as comparable to using the money to buy a pair of rental properties, except other folks will handle all the decisions & dirty work of earning a (much higher) profit off of it, and I'll just collect distributions.

[riverwed070707]

keep us posted!

Side note, what happened to the Like button? I can't like posts anymore, just quote and flag.

[Jluke]

Is there a way to exit this “position”?

I really don’t understand it so I’m seeing red flags that might not really exist and I won’t go into.

[james.hendrickson]

keep us posted!

Side note, what happened to the Like button? I can't like posts anymore, just quote and flag.

Riverwed - we had to upgrade the forums software, and the newer version of the software stopped supporting the like button.

[riverwed070707]

Riverwed - we had to upgrade the forums software, and the newer version of the software stopped supporting the like button.

I would thumbs down this but we don't have that emoji option

[kork13]

Is there a way to exit this “position”?

I really don’t understand it so I’m seeing red flags that might not really exist and I won’t go into.

Yes, within some limits. Both deals require minimum holding period of 3 years, at which point I can step out if truly needed ... But I'd miss out on alot of the profits.

One deal plans for 8% quarterly distributions then aims for a 5-6yr final liquidation. The other (longer term) deal expects distributions to start in year 2-3, and also includes a full return of principle at year 5 via cash-out refi (while retaining my share position), with the intention to retain the properties potentially indefinitely for income, or until liquidation makes more sense.

There are definite red flags to beware of, mostly surrounding management & developer proficiency/awareness. That's where I've tried to research the firms' history & relevance/similarity of past deals to have faith in their ability to replicate past successes. Maybe this is or isn't a healthy way to look at it .... But I considered "if one of these deals turns out to be a ponzi scheme or just a loser deal & I lose every cent I invest, how does my life change?" The answer is very little, besides the anger of getting screwed. Yes, it's alot of money, but it's not life-changing money. That still lives in our retirement & brokerage accounts.

[LivingAlmostLarge]

Are you doing a k1? Are you signing a partnership? If it goes bellyup what are the ramifications for the BK? Do you know how it all works tax wise? 8% quarterly can it be changed if they need more cash flow?

this will be taxed at short term capital gains which is your income rate. Is it still a better deal than others? What are the pros and cons versus just being partner with someone doing real estate management or flipping? I have no experience but I'm just asking questions I personally would ponder before doing this.

I was asked about doing private equity and my take on it was not at this time. You have $800k in taxable from other thread but that includes this $361k? Or you have $361k on top of the $800k?

What does your retirement look like? How many more years until you get out? And what's your pension going to be at that time?

[kork13]

I have no experience but I'm just asking questions I personally would ponder before doing this.

Lots of questions! Love it ... this is actually alot of what I've considered, though admittedly I don't have great answers for all of them yet. Answers included below in the quote for simplicity...

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Are you doing a k1? Yes, that's my assumption. Are you signing a partnership? Yes, I'm basically joining as a limited partner in an LLC managing the developments portfolios. If it goes bellyup what are the ramifications for the BK? As an LLC, and as an LP, I'm insulated from the impact of a BK beyond my investment amount. I could lose it all, or if anything exists after the BK concludes, I'd have rights to a proportional amount of the residue according to my ownership share percentage (~2-4%). Do you know how it all works tax wise? No, which is definitely a shortfall in my knowledge. I'm likely gonna just have to hire a CPA for a few years and try to learn what I can. 8% quarterly can it be changed if they need more cash flow? The 8% is the entitled dividend on both deals, and assuming the portfolio is ulitmately profitable, I'll be entitled to either the 8% at the time of distribution, or catch-up distributions up to that amount when future proceeds (from new income, property sale, or otherwise) become available. So yes, the 8% is changeable during the course of the partnership as capital requirements allow/disallow ... but ultimately I'm entitled to that as my minimum return (assuming the profits to provide that return exists).

this will be taxed at short term capital gains which is your income rate. My understanding is that tax status will depend on how distributions are realized. Normal distributions from tenant rents WILL be normal income; return of capital is untaxed; profits from eventual sale would be LTCG (assuming they meet the 1yr holding period -- plan is 5yr hold on one, 10yr hold on the other). Is it still a better deal than others? I can't immediately speak to relative comparison, but I believe the answer is a qualified "yes" -- the equity multiple (at termination) in both deals is estimated to be around 2x-2.5x on the 5yr deal, 3x-3.5x on the 10yr deal, which from my limited research appears to be typical or slightly above average. Honestly, how good/less good it is will yet to be seen, but I'm willing to take the ride & see.What are the pros and cons versus just being partner with someone doing real estate management or flipping? Biggest advantage is almost totally passive growth with a reasonable expectation of high returns; yes, potentially lower returns than a typical flip, maybe equal or +/- to managing individual properties. But the 100% passive growth at this level is a HUGE advantage IMO. Cons: Higher than normal risk profiles, locked in for minimum 3 years, and as a limited partner, little-to-no voice in management decisions. I have no experience but I'm just asking questions I personally would ponder before doing this. Agreed, and I appreciate the questions to think through them. As I said, I see this as a learning process.

I was asked about doing private equity and my take on it was not at this time. You have $800k in taxable from other thread but that includes this $361k? $800k taxable includes the $361k. I've decided to throw a total of $250k into each syndication deal. I do also still have the SFH rental property (for now, plan to sell next summer), worth $260k. Or you have $361k on top of the $800k?

What does your retirement look like? Retirement accounts currently around $1.2M. How many more years until you get out? Eligible to retire in 3.5 years. And what's your pension going to be at that time? 50% of my base pay, which right now would amount to ~$5250/mo (before taxes), though it'll step up 2.5%/yr if I stay in longer. Those facts (plus DW's currently-paying $2k/mo pension) are prime reasons I feel pretty comfortable here. Yes, any losses would hurt (both our portfolio & my pride), but once I retire, we're set on monthly income, with strong retirement accounts (80% in Roth) to back it up.
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Thank you for the questions!! I know I'll keep learning alot, but I'm excited about the opportunities here.

[LivingAlmostLarge]

Does the $800k not include the $261k rental? How long are in Japan? And what is the plan for buying in 3.5 years when you come back? Are you planning on paying cash for a house? And not working? The retirement is incredible that you have what you saved but the pensions are insanely good. $1.5M worth for you and $500k for DW. I mean that's a substantial lifetime amount of money.

[kork13]

Does the $800k not include the $261k rental? How long are in Japan? And what is the plan for buying in 3.5 years when you come back? Are you planning on paying cash for a house? And not working? The retirement is incredible that you have what you saved but the pensions are insanely good. $1.5M worth for you and $500k for DW. I mean that's a substantial lifetime amount of money.

Agreed, the pensions are extremely valuable & the cornerstone of our planning at this point. I can only be grateful for the series of events & opportunities that have gotten us where we are. We've mostly always kept our non-home living expenses relatively in check (currently ~$60k/yr). Add to that our intention to generally avoid all debt (mortgages included), and the pensions makes life 100% doable indefinitely, even if we choose to mostly retire in our early 40s.

As I said, the pensions + retirement accounts allow us to be alot more aggressive with our other investing. Thus far, that's merely been by keeping a 90/10 AA into our late 30s. Now, it's why I'm willing to be so quick to adopt this syndication idea, in spite of the higher risks.

To your questions:
- $800k taxable does not include the rental property, at least until we do actually sell it next summer.
- We should be in Japan through June 2027. At that point (assuming it makes sense to buy a house at our next base), our plan will be to drain the taxable investments to buy the next house in cash if at all possible. I'm estimating we'll have built back up to ~$700k by then (now including the rental property's proceeds), not counting any distributions from the LLCs (though the 5yr deal should have distributed ~$60k by then).
- Our working plans are still TBD, but I'd call it a low chance of DW not practicing as a PT until the kids are out of the house (15ish yrs). For me, I'm maybe 70% convinced that I want to be a SAHD & maybe casually work small jobs or attend classes as desired for fun.

[LivingAlmostLarge]

Agreed, the pensions are extremely valuable & the cornerstone of our planning at this point. I can only be grateful for the series of events & opportunities that have gotten us where we are. We've mostly always kept our non-home living expenses relatively in check (currently ~$60k/yr). Add to that our intention to generally avoid all debt (mortgages included), and the pensions makes life 100% doable indefinitely, even if we choose to mostly retire in our early 40s.

As I said, the pensions + retirement accounts allow us to be alot more aggressive with our other investing. Thus far, that's merely been by keeping a 90/10 AA into our late 30s. Now, it's why I'm willing to be so quick to adopt this syndication idea, in spite of the higher risks.

To your questions:
- $800k taxable does not include the rental property, at least until we do actually sell it next summer.
- We should be in Japan through June 2027. At that point (assuming it makes sense to buy a house at our next base), our plan will be to drain the taxable investments to buy the next house in cash if at all possible. I'm estimating we'll have built back up to ~$700k by then (now including the rental property's proceeds), not counting any distributions from the LLCs (though the 5yr deal should have distributed ~$60k by then).
- Our working plans are still TBD, but I'd call it a low chance of DW not practicing as a PT until the kids are out of the house (15ish yrs). For me, I'm maybe 70% convinced that I want to be a SAHD & maybe casually work small jobs or attend classes as desired for fun.

Will you have another posting? Won't this take you to the 3.5 year to retirement with stint in japan so you come back to retire? So you are at $361k deal plus rental $261k in taxable with $500k in real estate investment? What are you thinking of spending on a house when back stateside? It's probably fine no matter what since you'll be covered by the pensions.

The amount you spend on the house in the future is what would influence my decision to invest in the reit. I would likely hold back and not do $500k if you think the house you'll end up with will be $500k? Or do you plan on spending $361k?

[kork13]

Will you have another posting? Won't this take you to the 3.5 year to retirement with stint in japan so you come back to retire? So you are at $361k deal plus rental $261k in taxable with $500k in real estate investment? What are you thinking of spending on a house when back stateside? It's probably fine no matter what since you'll be covered by the pensions.

The amount you spend on the house in the future is what would influence my decision to invest in the reit. I would likely hold back and not do $500k if you think the house you'll end up with will be $500k? Or do you plan on spending $361k?

Yeah, by the time I finish my tour here, I'll only have 1 year until I'm retirement eligible. So I'll probably get at least one more assignment, and our house situation will depend on where that is.
Maybe I've been confusing & it's most clear to use post-investment numbers.
- $500k is currently on the way to the syndication deals.
- $216k remains in the brokerage
- $260k rental house, planned for sale in 2025.
.... And that's all of the relevant money involved. The rest of our taxable money is in 529/UTMA accounts for the kids, I-bonds, and assorted cash.

Going forward, I'll be building up our brokerage again... And the proceeds from selling the rental house will go into the brokerage. Including that, by 2027 (at the end of this assignment), I expect that we will have built the brokerage back up to ~$700k, which will be available for buying the next house.