As someone who has been consistently invested in private real estate deals since late 2016, I’m now firmly in the window for receiving distributions. My investment thesis to invest in heartland real estate has turned out well, partially thanks to the bad luck of the pandemic.

Although a couple of my investments in one fund turned sour due to a lack of equity cushion, poor execution, and the shutdown of commercial offices, the vast majority of investments have provided positive returns.

One such investment was a multifamily investment that paid out $122,423.04 in distributions on July 6, 2022. The invested capital should be about $60,000 for a ~15.3% compound annual return over five years. I say should be because it is part of a fund that invested in over 10 properties.

Private real estate passive income

Seven Takeaways From Investing In Private Real Estate For Over Five Years

Receiving $122,423.04 in private real estate distributions is a significant amount for us. It can happily provide for my family of four in expensive San Francisco for a good period of time.

This real estate distribution is also a relative surprise, since I only received $2,603 in distributions year-to-date before this July distribution. As a result, I do want to share some thoughts about long-term private real estate investing.

Takeaways From Investing In Private Real Estate For Five Years
Only received $2,603 in distributions in April 2022 until July’s $122,423 distribution

1) Investing is a temporary expense

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 head into a recession. The timing is fortuitous because the property was sold in early 2022. However, this still means I have over 10 positions that have not yet exited.

My investment expenses from 2016-2017 have now turned into a liquid asset. The trend should continue for years as more distributions are paid and reinvested.

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.

2) 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 $810,000 into various funds and individual investments.

Because I had also come up with the BURL real estate investing rule, 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 real estate crowdfunding.

If you come up with a thesis and don’t act on it, you are wasting your time. You must take risks to earn higher rewards. You will lose money along the way, as I have many times before. However, by losing you will learn how to diversify your portfolio and hone in on better investments along the way.

If you have not taken any risks, please don’t rail against those who have. Instead, try to learn about investing and take more risks yourself.

3) 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. Most of the private funds I invest in invest their raised capital over a three-year period and plan to pay distributions over 5-10 years.

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. Sometimes, it’s just hard to hold on, especially when recurring tenant and maintenance issues pop up.

Landlord issues as well as becoming a new father were the main reasons why I sold my physical rental property in 2017. I just didn’t have the patience and the bandwidth to deal with so many rental properties anymore. The “juice was no longer worth the squeeze.”

But with private real estate investments, you do not need to deal with any of the property maintenance hassles. You just need to find the right sponsors and the best real estate deals, which can also be a challenge.

This challenge of evaluating deals in a timely manner is why I prefer to invest in real estate funds. With a real estate fund, you have the fund manager or an investment committee who tries to invest in the best deal for its investors.

Investing long-term provides mental relief

Once you make a capital commitment to a private investment, you tend to forget about it for years. Sure, you will get quarterly statements on the progress of the fund or investment. However, for the most part, it feels great to have the capital be out of sight and out of mind. This way, you are able to free up time to make more money elsewhere.

It’s comforting to know a team of professionals is looking after your best interests. They are also incentivized to perform if they want to do more business in the future. As a father who is responsible for the financial security of his family, farming out capital to people who spend their careers investing relieves me of this mental burden.

You’ll discover the more capital you accumulate, the more pressure you might feel to do something with it. Money starts “burning a hole in your pocket,” if you are not intentional with your spending.

4) To invest easier, think of your capital being in separate buckets

The reason it was relatively easy for me to reinvest $550,000 of my rental house sale proceeds into private real estate investments was that the capital came from the same real estate bucket. Normally, I would have invested at most $50,000 at a time.

After reducing my SF real estate exposure by $2.74 million (~$800,000 mortgage, $2.74 million selling price), I wanted to diversify and reinvest some of the proceeds back into real estate elsewhere in America. I figured, if I was only receiving a cap rate of 2.5% in SF, if I could find real estate opportunities elsewhere that provided an 8% cap rate, I could invest 1/3rd less and still earn the same amount of income.

After selling my physical rental property, I wasn’t 100% confident I wanted to reinvest the ~$1.75 million in proceeds all into private real estate. Therefore, I spread the remaining $1.25 million to stocks and California municipal bonds.

As soon as I became a father in 2017, I became even more risk averse with my money and with my time. With a helpless baby depending on me, I felt like I needed to be more protective of our family’s finances.

By thinking in buckets, you may be able to better asset allocate your capital. Oftentimes, investors will just sit on their cash for long periods because the amount of money to be reinvested is too intimidating. Thinking in buckets and percentages may make reinvesting easier.

5) You will likely lose money, so don’t forget to diversify

Although I received this nice $122,423 windfall, one of the investments in the fund was a complete wipeout. As a result, my $50,000 position went to zero.

The failed investment was called Student Housing at College Town in Toledo, Ohio. It was an acquisition by the sponsor, William Fideli Investments of a 590-room student housing complex located at 1120 N Westwood Ave, Toledo, OH 43607. The sponsor projected an 18% IRR over two years.

Failed real estate crowdfunding deal
Looked like a good deal to me

When I first saw this investment, I was excited. Student housing generally provides sticky rental income. Property prices in Toledo were also dirt cheap. This was exactly the type of investment I was happy to diversify into given I owned mostly expensive single-family San Francisco real estate.

Alas, the property was a failure because the sponsor had spent too much, there wasn’t a large enough equity cushion in case things turned sour, and COVID happened. COVID was terrible for student housing in 2020 and 1H of 2021 because all students were sent home. Being in a social-raging apartment complex was the last place you wanted to be during a pandemic.

Unexpected bad things happen all the time! This is why diversifying your private real estate portfolio is important.

Do not get easily smitten by amazing marketing material either. Every deal always seems amazing if marketing is doing their job right. Doing your due diligence is a must! Before making any investment, always view a real estate deal with skepticism. Figure out what could go wrong.

Accept losing money is inevitable when it comes to investing in risk assets. Therefore, you must invest in a risk-appropriate manner and diversify.

6) Live where you want, invest where the returns are potentially the highest

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

Whatever your living preference may be, being able to invest in private real estate syndication deals enables you to invest where you think the potential returns are greatest. Your money can now be in more profitable places at once.

Money is more fungible and more fluid than ever before. Take advantage of innovation and the internet. Millions already are by relocating to lower-cost areas of the country.

7) To reduce tax liability, 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.

Conversely, if you have a dearth of private investment distributions coming, you can earn more without paying as large of a tax bill. You can pick up extra consulting jobs. Or you can reduce Capex to earn more business income.

Map out your potential distributions on a spreadsheet by year. Then plan accordingly. For 2022, I had forecasted $112,800 in total real estate crowdfunding distributions. Once the quarterly report comes out, I will do a post-mortem analysis on exactly how much the $112,800 is profits versus original invested capital. I estimate $72,800 in taxable gains.

How I’ll Reinvest The Real Estate Proceeds

Fortunately, I don’t need the $122,423 in proceeds to survive. Therefore, here’s how I plan to reinvest my real estate investment distributions:

  • 30% to a Fundrise fund that focuses on single-family homes in the Sunbelt
  • 20% to fund my capital calls for two Kleiner Perkins venture funds
  • 10% to a new venture debt fund
  • 20% to invest in the S&P 500 and other single stocks if the S&P 500 gets below 3,700
  • 15% to keep in cash to feel more secure and spend on fun things
  • 5% to donate to the Pomeroy Rehabilitation Center for disabled youth and adults

The goal is to be methodical with how we continuously invest and reinvest our capital. Otherwise, the natural course of action is just let our money sit and earn nothing.

My hope is that five years from now, I’ll write another similar post about how the $122,423 turned into $200,000. I’m looking forward to investing in more deals over the next 12 months.

Real Estate Is The Gift That Usually Keeps On Giving

Your goal as a real estate investor is to hold on for as long as possible. It’s the same with owning stock index funds. The longer you can hold on, the more you will likely make. Eventually, however, you should start spending your proceeds to live a better life.

Receiving private real estate investment distributions is like receiving surprise gifts. You don’t know exactly how much you will get each time, nor do you know exactly when you will get the gift. You just know they will eventually come thanks to the investments you made in the past.

Today, roughly 50% of my passive income portfolio comes from real estate. Without a severance and rental income, I wouldn’t have had the courage to leave my job in 2012.

Investing In Physical Assets Is The Best

For the future, I’m investing in real estate for my two young children. I know in 20 years they will marvel at how cheap real estate prices are today. Therefore, I want to invest in real estate for them now because they don’t yet have the ability or education to do so themselves.

The same thing goes for investing in rare books with autographs. People might think my investment thesis is stupid. But I don’t care. I love to read and I love to collect physical products that can be enjoyed. The initial investment cost is minimal. But the returns could be enormous.

The great thing about investing in a physical asset is that even if the returns don’t pan out, you will have at least enjoyed your investments during your holding period. Books, for example, already provide a much greater return than their costs.

I’ve had so many great memories in the various properties I’ve owned. And it’s been fun to flip through my Chinese coin collection or my dad’s baseball collection while sipping on a 2009 Chateau d’Yquem purchased over a decade ago.

Enjoy your investments while enjoying your life! It’s one of the best combinations for utilizing your money.

private distributions
Total private real estate distributions so far

Reader Questions And Action Items

Readers, are you a private real estate investor? How has your experience been, especially since the pandemic began? If you recently had a real estate investment windfall, how are you reinvesting the proceeds?

For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. To get my posts in your inbox as soon as they are published, sign up here. 

By AKDSEO