Thursday, May 30, 2024

Every Strategy I Used To Build My Portfolio for Financial Independence

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You may not be familiar with modern portfolio theory, but you probably know its core tenet: Investors should diversify among uncorrelated assets to maximize returns while minimizing risk. 

Soren Godbersen at EquityMultiple makes a strong case that if you subscribe to modern portfolio theory, private equity real estate belongs in your portfolio. In fact, he points to data that shows it actually boosts your risk-adjusted returns. 

I couldn’t agree more—which is why I invest in private real estate through many channels and along many timelines. 

These investments serve different purposes in my portfolio. Some generate instant and ongoing income, others offer liquidity, and still others offer high long-term growth. The equity investments also provide me with tax deductions and depreciation

Short-Term Real Estate Investments

Contrary to popular belief, you do have options for short-term real estate investments beyond public REITs. These investment choices don’t come with the same volatility or correlation to stock markets

The following real estate investments typically let you access your money within a year. Use them for immediate income, liquidity (in some cases), and diversification.

Real estate notes

Some real estate-related notes repay in a year or sooner. EquityMultiple offers some, as do 7e InvestmentsNorada Capital, and others. They may or may not allow non-accredited investors or be backed by real estate deeds or liens, but you have plenty of options. 

Earlier this year, in fact, our Co-Investing Club invested in a nine-month note with Norada at 15% interest. So far, it’s paid us monthly interest like clockwork (not that I’m endorsing any specific investment; just sharing our experience). 

But you don’t have to go through a company. If you know any real estate investors personally, you can always offer to lend them private notes as well. 

Groundfloor notes

Groundfloor deserves its own subsection, given how accessible it is. It allows non-accredited investors to participate, and many of their notes allow a relatively low minimum of $1,000. Note terms range from one month to two years. 

I’ve personally invested in Groundfloor notes, and they’ve always repaid my interest and principal on time. 

Concreit fund

Concreit follows a similar model, letting you invest in a pooled fund of secured property notes. 

The difference? You can invest as little as $1, and you can withdraw your money at any time. 

Those advantages come with an equal and opposite downside: Concreit pays lower interest than the other options outlined here, currently 6.5%. If you withdraw funds in under a year, they also ding your earned interest by 20% but don’t penalize your principal. 

I like using Concreit as a high-yield holding account for funds slated for longer-term real estate investments. For example, if I know I want to invest $5,000 in a real estate syndication through our investment club but don’t know when I’ll need it, I might stash it in Concreit and earn interest on it in the meantime. 

Concreit also adds another layer to my emergency fund. I can’t access it as quickly as a savings account, but it still offers fast access in a pinch. 

Ark7 property shares

While smaller than its competitors, Ark7 offers something those bigger competitors don’t: a secondary market for selling fractional property shares at any time. 

Well, almost any time. They do impose a one-year hold period. But that still qualifies as a short-term investment. You can buy shares in a single-family rental property without the long-term commitment, enjoy the rental cash flow, and sell any time after the first year. 

Medium-Term Real Estate Investments

Investors have fewer options for medium-term investments between one and three years, but they let you plan for the not-too-distant future without locking your money up indefinitely. 

All the short-term investments mentioned here can, of course, be held longer than a year. That goes for Ark7 property shares and Concreit fund shares, and of course, some real estate notes offer terms in the one-to-three-year range. 

Consider these options if you don’t want to lock up your money into the mists of time but don’t mind committing to a couple of years. With these medium-term investments, you can start taking advantage of equity tax benefits, infinite returns, faster velocity of money, and, of course, cash flow. 

Shorter real estate syndications

Most real estate syndications make it very clear that you should expect to leave your money locked up for five years or longer. That’s most—but not all. 

Some sponsors plan on faster turnaround times, perhaps because their business plan doesn’t require as much value add, or they have teams that can move fast. In some cases, they might be stepping into a deal midway through unit renovations and simply need to complete an existing business plan.

We invested in such a deal not long ago in our Co-Investing Club. The seller was in their 90s and had been renovating units and successfully turning them for high markups. But their health gave way before they could finish executing the plan. 

The new sponsor stepped in to finish the job and plans to sell the property within 18 months. In the meantime, the property cash flows well and will pay distributions. 

Another sponsor our club just invested with told me candidly: “We underwrote this deal conservatively, telling everyone we plan to refinance and return capital in three years. But we actually expect that to happen between 18 and 24 months from now. We know we can finish the value-add before then because we’ve already done it at two similar properties down the street. We just haven’t marketed the deal that way because no one would believe us.”

Groundfloor LROs

Groundfloor made its name letting retail investors put money toward individual hard money loans. They call these LROs, short for limited recourse obligations.

These loans sit in first lien position, and if the borrower defaults, Groundfloor forecloses to recover your money. While many of these repay in four to 12 months, you don’t control when you get your money back—it’s based on when the borrower repays the debt. So you have to accept that some of these may not repay you for a year or two. 

Over the course of Groundfloor’s history, these have performed with remarkable consistency, averaging 9.5% to 10% per year. I invest $10 to $30 apiece in these, spreading my money among thousands of loans. Some repay on time. Some repay in full but late, and others default and repay later with some loss of principal. Averaged together, I still come out in that 9% to 10% range of returns. 

I’ve now invested in so many that every week, some of these repay for consistent passive income. I consider these an income and diversification play. 

Long-Term Real Estate Investments

Real estate is a notoriously illiquid investment, which makes most real estate investments long-term. 

I used to buy rental properties directly, and they certainly qualify as long-term investments. It costs thousands of dollars to buy and tens of thousands to sell even a modest property, and it takes years of appreciation to break even. 

Today, I only invest passively in real estate. I don’t have the free time or patience to put up with landlord headaches

Real estate syndications

Instead of rental properties, I primarily invest in real estate syndications. I buy a fractional interest in a large property rather than the entire ownership of a small one. 

That leaves someone else to hassle with lenders, contractors, tenants, property managers, city inspectors, and the like. I just sit back and collect the cash flow, appreciation, and tax benefits. 

In our Co-Investing Club, we typically review deals targeting 15% to 30% annual returns. Some are more income-oriented, paying high distributions almost immediately. Others are more growth-oriented, with big payouts slated at the sale or refinance. 

By investing as a group, we can each invest small amounts, and sometimes we can negotiate higher return splits than solo investors get. I might only invest $5,000 personally, but I get the preferential returns of a $500,000 minimum investment. 

Today, it’s the bread and butter of how I invest in real estate, which is my core strategy for reaching financial independence within the next few years. 

Fundrise

The last year has not been kind to Fundrise investments, but then again, it hasn’t been kind to many real estate investments. 

I have some money invested in Fundrise for diversification. But I no longer invest new money with them, as I feel more confident in the other real estate investments outlined here. I also don’t like that they penalize you if you withdraw money in under five years, although it’s a lower penalty than most of their competitors. 

Arrived property shares

I’ve bought shares in a handful of properties on Arrived, mostly as an experiment. I like the low minimum investment per property ($100), but I don’t like the lack of liquidity and long time horizon (five to seven years). 

To be fair, Arrived just launched a fund with the same minimum investment and a redemption option to sell shares. It comes with a minimum six-month holding period, a 2% penalty for selling between six and 12 months of buying, and a 1% penalty for selling between one and five years of buying. 

Again, I no longer actively buy property shares on Arrived, but that’s simply because I’d rather invest in syndications for my long-term investments. 

A Portfolio for Financial Independence

I invest in stocks for long-term growth, liquidity, and ease of diversification. Plus, stocks offer easy investing in tax-advantaged accounts such as IRAs without needing to hassle or pay for a self-directed IRA custodian. 

I invest in real estate for both income and longer-term growth. Real estate also comes with enormous tax advantages baked in without needing help from tax-sheltered accounts. Best of all, it achieves all this while reducing risk in my portfolio, as real estate has less volatility than stocks and adds the diversification of a low-correlation asset class. 

If you wanted to, you could invest only in short- and/or medium-term real estate investments. And if you’re new to real estate investing and cautious about it, start small with short-term investments. 

I don’t worry about the lack of liquidity in my medium- and long-term investments because I can access my short-term investments in a pinch. Each of these investments I’ve discussed plays a role, whether it’s the liquidity of Concreit, or the income of my note investments, or the growth and tax benefits of my private equity real estate investments. 

As a small business owner, my active income fluctuates wildly. The passive income and growth of my investments help stabilize my finances and provide peace of mind. I can sleep at night knowing that every month brings me closer to financial independence, regardless of the monthly income from my business. 

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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