Recently, I received a capital distribution from a private real estate fund, and it couldn't have come at a better time. The experience brought me both joy and relief, prompting me to share it in the hope that it might inspire you to invest more for your future.
After purchasing a new home in October 2023, my liquidity resembled a lake after a three-year drought. I felt like a fish flopping around on the cracked lakebed, desperately in search of water. Furthermore, I was bombarded with unexpected capital calls from various private funds.
As the primary financial provider for my family, I experienced heightened stress for six months, knowing that a single large expense could force me into expensive consumer debt. Please roof, don't blow off during the storm!
However, with this recent capital distribution of $105,951.76, I now have some much-needed liquidity and relief. The initial investment was $47,000 for a compound annual return of roughly 12.2% after seven years.
This post will discuss:
- The benefit of treating your investments like expenses
- Why investing in private funds and companies is good for patience, which in turn, is good for your future
- The importance of responsibly buying big ticket items like houses or cars
- How so much can change over a 5-10-year time period, so you must invest for the unexpected
- Not to take your liquidity for granted.
Investing Is An Expense Until It Isn't
Two years after graduating college, I began treating investing as an expense. It was a strategy to deceive myself into investing more, knowing my tendency to splurge on unnecessary things.
In those early days of employment, I made impulsive purchases like a Honda CBR 600 motorbike, even though I didn't have an official license. Racing up and down Joe Dimaggio Highway was undoubtedly risky. To counterbalance this, I then bought a Volvo 850 GLT, all while living in Manhattan where the subway system was highly efficient. What a dummy.
No one advised me to save and invest diligently, preparing for the possibility of burning out from a miserable job. Consequently, I spent lavishly until the dot-com crash in 2000 and after not being renewed for a third-year analyst position at Goldman Sachs. These events were stark reminders of the fragility of my financial situation.
Since becoming an accredited investor around 2003, I've focused on investing in private funds and individual private equity and private real estate deals. Between 15-20% of my investable capital is in private investments.
Each investment entails a leap of faith, requiring locking up capital for 5-10 years with no liquidity and no certainty of what the fund investments will be. However, I reasoned that by consistently investing in private opportunities each year, I would eventually receive regular capital distributions.
The Importance of Patience To Build Wealth
My approach to private investing resembled waiting for the latest movie to hit Netflix twelve months later. While my friends discussed their favorite films immediately, I patiently waited. By waiting, I could watch new movies every month on streaming and save a significant amount on movie tickets and transportation.
The initial waiting period poses the challenge.
Some individuals are unwilling to wait twelve months to save money on a movie; they'd rather pay a premium to watch it in the theater immediately. YOLO, baby!
Similarly, few are willing to lock up their capital for 5-10 years with no liquidity and no guarantees of investment returns. But I need to because I also want to remove the temptation of selling at the wrong time.
If you can convince yourself that investing money is akin to spending it on a movie ticket, a luxury car, or a family skiing trip, you might find yourself investing more and ultimately becoming wealthier as a result.
Every New Expense After A Big Investment Can Feel Like Bad Luck
The reason why you should follow my 30/30/3 home buying guideline is because once you buy a house, every new expense may seem unexpected or larger than it really is. You might even start feeling cursed if you didn't buy a home responsibly.
For example, two months after purchasing my house, my check engine light came on. I thought it was just time for a routine oil change, but it turned out to be a $1,200 expense for an oil change, a new PVC valve, and a new vacuum pump. Then two months later I had to change a battery and a leaking coolant house for $535. Curses! What bad luck!
Then, I received another $20,000 capital call from a venture debt fund that had already called $20,000 in capital in November 2023, just a month after I closed on my house. After being dormant for a year, why was the venture debt fund suddenly making two relatively large capital calls within five months? Curses again!
The reality is, these capital calls and car maintenance issues would have occurred regardless of my home purchase. They just felt much more painful and unfortunate because I was living paycheck-to-paycheck at the time.
The Joy of Receiving Capital Distributions
Even though I'm well within the window to receive capital distributions for this particular fund I started investing in 2016, it still feels like a surprise to receive them.
As a private fund investor, you tend to forget or mentally write off each private investment after a year. Part of the reason why is because unlike investing in public stocks, private investment valuations are harder to track day-to-day. You appreciate the mental relief of no longer having to manage this money.
If you consistently invest most of your savings, as most people in the FIRE community do, you naturally adapt to a lower-than-normal cash flow situation. Because you've been accustomed to living on a minority of your income for so long, receiving a capital distribution can feel like winning the lottery!
In your mind, you either forgot about the investment or expected the money to never come back. So when it does, it feels like a brave son returning home after the war. You feel blessed.
To a lesser extent, receiving a capital distribution feels like getting a tax refund. Even though the money is yours to begin with, you're still grateful.
So Much Can Happen Since You First Invested
After eight years of investing in this private real estate fund, the fund has had some decent wins (~55%), some great wins (~30%), and some total losses (~15%). The fund invested in a mix of multifamily, student housing, hotels, and office buildings mainly in the heartland of America.
Most of the 17 deals were going well until COVID hit. Unfortunately, office properties around the country have taken a big valuation hit due to the slow adoption of the return to work. For the sake of my investments, it would be nice to see everybody return to work and stop playing pickleball while working from home!
A downtown Minneapolis office property deal, which accounted for 6% of the fund, failed. The equity cushion wasn’t large enough to withstand the valuation decline. As investors, make sure you understand the capital stack before committing capital.
Meanwhile, a Boston office property deal (7% of the fund) is sucking wind partially thanks to a tenant called Pharma Models, who signed a 10-year lease at the end of 2022, but hasn't paid rent since March 2023. Do the right thing Pharma Models!
Unless you have a tremendous amount of capital to build your own select real estate portfolio, most people are better off investing in a diversified real estate fund. Losses are inevitable when it comes to investing in risk assets.
Didn't Have Kids In 2016 When I Made My Initial Investment
When I began investing in this private real estate fund, I also didn't have kids yet. My household expenses were about half of what they are today. Consequently, I ended up investing the majority of my cash and free cash flow. Ah, the good old days before I blew up my passive income!
In 2014, I had already purchased a modest home and spent a year renovating it. I was also leasing a Honda Fit for $220 a month in 2016. So, I had no other major expenses or desires.
Now that I do have kids, this capital distribution feels especially gratifying since it will be used to support my family. The gears in my Provider's Clock just received a nice greasy injection.
Back in 2016, while I certainly wanted to have kids, I wasn't sure if it would happen thanks to biology. I was just investing in hopes of one day having a family. Today, with the high cost of raising kids in San Francisco, I have a clear purpose for this capital distribution.
Please note that when you make a capital commitment to a private fund, it often takes 2-4 years to fully deploy 100% of your capital. The fund issues capital calls as it invests in new deals.
Keep Investing For An Unknown Future Purpose
Investing is enticing because of the potential to generate a return with minimal effort. The best passive income investments provide the greatest effort-adjusted returns. The longer we remain invested, usually, the greater our chances of achieving positive returns and overall success.
When you find yourself with surplus cash, even without a clear investment purpose, it's wise to invest most of it anyway. In ten years, you'll likely be glad you did. There are countless unforeseen expenses your future self may encounter, making saving and investing for the future imperative.
With the IPO market gradually reopening, M&A activity picking up, and more capital distributions occurring from private funds, I'm optimistic about the private markets.
My Investment Plan Moving Forward
Over the next one-to-two years, I'm focused on rebuilding my liquidity. This entails saving approximately 60% of my cash and cash flow in 5%+ yielding money market and Treasury bonds, aiming to reach a cash reserve of ~$200,000.
Simultaneously, I plan to invest half of the remaining 40% of cash into the S&P 500 after every 0.5% or greater pullback. It's challenging to consistently outperform the S&P 500 long-term, and the liquidity of an S&P 500 ETF provides flexibility if needed.
My remaining cash will be dollar-cost averaged into the Fundrise Innovation Fund, given its low investment minimum of $10. The other benefit of the fund is that I can gain liquidity if I need it.
Over the next three years, my objective is to establish $500,000 of exposure to private artificial intelligence companies. This way, I hope to benefit if AI revolutionizes the world. If it doesn't, then at least I’m hedged and my children will still have jobs 20 years from now.
Here's my latest conversation with Ben Miller, CEO of Fundrise on investing in artificial intelligence.
Never Want to Feel So Illiquid Again
The past six months of experiencing a liquidity crunch were unpleasant. It was manageable when I didn't have kids and held a day job, but now too much is at stake. Please do not underestimate the importance of having at least six months of living expenses saved up.
For the next three years, I'll prioritize investments in Treasury bonds, the S&P 500, individual stocks, and open-ended real estate and venture capital funds with liquidity. I'm going to reduce my allocation to illiquid, closed-end venture capital funds by 50% going forward.
Best of luck diversifying your wealth and investing for the future. Here's to more unexpected capital distributions!
Reader Questions And Suggestions
Have you received any large capital distributions recently? How do you account for future capital distributions for cash flow and tax minimization purposes? Are the private markets finally thawing?
To invest in real estate without all the hassle, check out Fundrise. Fundrise offers funds that mainly invest in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher. The firm manages over $3.5 billion in assets for over 500,000 investors looking to diversify and earn more passive income.
I've personally invested $954,000 in private real estate since late 2016 to diversify my holdings, take advantage of demographic shifts toward lower-cost areas of the country, and earn more passive income. We're in a multi-decade trend of relocating to the Sunbelt region thanks to technology.
Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.
I’d be very wary of investing in RE syndications, or Fundrise, which is effectively the same thing, in today’s market. BiggerPockets has multiple posts on capital calls and people loosing their investments. The issue is that syndicators make money by soliciting for investments. They operate in good and bad markets. So during the good times of 2014-2019 nearly every idiot in syndications made money in just about all markets and product types. And from 2022+ most funds will loose money. You can speculate on the turn around for real estate, but you’re taking big risks right now IMO. And real estate is very market and product specific, so you need to choose wisely. I personally prefer direct ownership of RE where I can control more variables. But I wouldn’t invest in todays climate; I’d wait for a better sense of market direction.
Sounds good to me. Always invest in what you know and where you have confidence.
Personally, I’m trying to buy as many single-family homes on the west side of San Francisco as possible. There are many local economic catalysts that are going to drive prices higher.
At the same time, I continue to dollar-cost average into private funds in today’s market. I’m finding deals because demand has waned due to higher mortgage rates. But if you have the cash, you can take advantage of deals.
Given you mention “loose” a couple times, I say, “Keep it loose!” My favorite saying when playing poker with my buddies.
Feel free to share some of your current real estate investments.
Ha ha, I may be keeping it “loose” but you’re dealing with the higher mortgage “rats” :)
As for RE I basically think that these days San Francisco is a great asset class for legacy investors, who already own appreciated properties here. Personally I’m more in wealth preservation than creation mode, and I am dollar cost averaging my excess rental profits in S&P 500 index fund. Keep in mind that I made virtually all my money in San Francisco RE over the past 20 years. Buying 2-4’s and adding value by upgrading to market rate tenants, renovations, legalizing units, etc. Plus I also chose gentrifying neighborhoods so got a market boost from that. In this mode you’re basically cash poor and asset rich. So post Covid I made a big change by slimming my property portfolio down, and only keeping my best properties mortgage free (I used the sales proceeds to pay down all debt). I’m trading security for less potential upside because I basically reached my number. That and I’m also circumspect about San Francisco’s comeback- meaning I live and believe in the city, but I don’t expect the kind of outsize appreciation and rent growth that we had over the last 2 decades. I agree with you that single family homes (or condos in small buildings) in good neighborhoods will be safe investments, that’s a pretty expensive investment asset with relatively low returns…which is basically what I have now, but owing that debt free with a low property tax basis is different from buying them in the future from scratch, especially with today’s mortgage rates. Plus I’ve never invested seriously in the stock market, so playing around with that is where my head is at. That, and I need to diversify from real estate.
Do you agree that this make sense for my situation?
Do you know other successful investors in San Francisco real estate? What has their strategy been?
I have seen flippers succeed with high end home flips, though market timing is critical, like getting in early in a boom cycle. I also know long term investors in apartment buildings, though they must contend with strict rent control. And third are already wealthy people buying homes as investments, though they must have made their money elsewhere already.
Otherwise I think it’s very hard to get into the San Francisco market as an investment asset class. Your opinion?
The single-family home market in San Francisco is heating up again. I’ve seen crazy bidding wars and massive price increases so far this year.
Wall Street Journal just came out with the headline on April 25 “ San Francisco buyers brings it’s luxury market back to life.”
Just look at your stock portfolio, especially your tech stocks. They are on fire! Now multiply that by hundreds of thousands of people in the bay area and this RE price rebound is an inevitability.
The key is holding for the long term. The other key is buying a fixture and expanding the livable space. Final key is buying an extra large lot or a home with ocean views.
Although I’ve never had a capital distribution as large as yours, I’ve had some great “oh wow” moments when an investment paid out that I totally forgot about. The only downside I’ve felt is paying capital gains taxes, but at least I had some losses to offset my gains last year. I like how you mention the mindset of investing as an expense. I’ve tried to that with my own disposable income – invest a percentage first no questions before I even think about spending it on “fun.”
Congrats. You also handily beat the VTI – total stock market – return over that period. Your 47k would be worth approx 96k now. While you sacrificed liquidity you also protected yourself from selling out during one of those many market selloffs over the last 7 years.
Thanks. Not a big outperformance, but I’ll take it all the same.
The one thing about investing in a private closed-end fund is that it forces you to commit and keep meeting capital calls throughout the cycle. Otherwise, you get blacklisted from ever investing in new funds the firm offers again.
For me, there’s a greater chance of selling stocks or other highly liquid investments since the end of 2016, which may have hurt my overall returns. For example, when the world was coming to an end in March 2020, the temptation was high to sell and get liquid instead of buy more, like discussed in: How To Predict A Stock Market Bottom Like Nostradamus
Fundrise has STUNK the last two years and I am flat on the $30,000 I invested. I am seriously considering pulling the plug as I too am experiencing lower liquidity than I like and my family wants another, larger home.
Sorry to hear Tim. I would say it’s much more about the timing of when you bought, than Fundrise. Fundrise has outperformed many other private funds due to its lower leverage and focus on residential properties in the Sunbelt.
Investing in real estate in 2022, at the start of the aggressive and historic Fed rate hikes was unfortunate timing. But as you may have read from Fundrise’s 1Q2024 report and performance, there was a rebound. I wouldn’t be selling now, I would be buying.
The Fundrise Credit / Income fund has done very well in this high interest rate environment.
Related: Past The Bottom Of The Real Estate Cycle
Thanks, Sam. I get that. It’s just frustrating to see no gains in 2 years. Our savings made tens of thousands! The Credit Fund is great but you need Min. $100k and it’s not liquid.
Do you have a favorite S&P 500 ETF? VOO or SPLG? Also, why S&P 500 and not total market? Thanks
I just buy SPY or IVV for the majority of my S&P 500 investment for the past 25 years. S&P 500 gives me enough exposure and concentration in the strongest publicly-traded companies in America.
How about you?
Yeah, I hear you bro. We also invested over $1MM into syndications the last 5 years as well. Not great. Most of them have stopped distributions altogether. A lot of capital calls, some are probably going to go out of business. If you have the experience, direct investments would be a good way to go. Even if it’s small and it’s free and clear, it’s better than throwing money at these syndicators/sponsors that just got lucky over the last 10 years. lesson learned. nothing is really passive. Just make sure the sponsors that you invested have experience and a track record instead of focusing on PROJECTED returns. Hopium is not an investment strategy…
If you invest in individual deals, it’s imperative to build a portfolio of at least five, if not 10-20 investments. Everything always looks great in the marketing materials when raising funds. But as any veteran investor knows, not everything works out as planned.
Good to always discount projected returns for sure.
Your capital calls are normal because that’s the nature of private investing. Commit capital, and capital calls come over the next 2-3 years to fund the various investments.
Thanks for sharing!
On this statement: “After eight years of investing in this private real estate fund, the fund has had some decent wins (~55%), some great wins (~30%), and some total losses (~15%)”, would you hazard a guess as to what your aggregate annualized growth (CAGR) would be over those 8 years on the portfolio as a whole?
Pre-COVID, the overall returns were probably tracking close to 13-16%. Post-COVID, the returns are probably closer to 8-11%. COVID did a number on the funds office and hotel deals.
There are still 8 live deals and anything can happen over the next 1-3 years.
One of the things I like about private funds is that it relieves my mental load of managing money.
Unlike investing in public equities, where I feel more viscerally the ups and downs, I don’t feel anything with Private Funds because I have already mentally committed capital and mentally prepared to wait for 10 years to get it back.
I also feel more at peace when I invest in structured notes that have five year exits and hedges.
I found that a big part of the battle of investing is having enough courage to invest. Otherwise, you tend to just spend your money or hold cash over the long term which is sub optimal.
So investing in private closed-end funds commits me to meeting capital calls over usually a three-year period. During the height of Covid, this was helpful to keep dollar cost averaging in a down market.
Fascinating and thank you for sharing again. Agree with everything you said.
Residential real estate did have a boom during the COVID years and presumably a part of your portfolio did benefit, but unfortunately looks like a small part of your portfolio was impacted severely (commerical presumably) and the capital writeoff hurt your post-COVID returns relative to pre-COVID. That said, you still did very well (8-11% over an 8 year period is very, very good), so congratulations!
My gut also is that your lower valuation today is also reflective of increased cap rates, so who knows, if rates go down and cap rates reduce, you will get a valuation increase again on your portfolio (those 8 live deals). We’re rooting for you!
Follow-up question: Looking at your investment plan goign forward, I understand the need to build cash reserves and public equities (S&P 500) liquidity. But why would you go “all-in” on AI (your Fundrise Innovation Fund strategy) to build to $500K? Real estate has been very good to you, so why not, say $250K each?
All-in as as all-in on the available capital I have available to invest at the time.
My real estate exposure already accounts for slightly over 50% of my net worth after buying a new house last year, so I’m diversifying. My overall real estate holdings are far greater than $500K. I have almost $1 million in private real estate alone.
But I will continue to dollar-cost average into private real estate as well as we’re likely past the bottom. But higher rates for longer are throttling the commercial real estate recovery.
How about you? What are you investing in? And do you invest in private real estate funds and venture-capital as well? Thanks for sharing
I’d say our real estate exposure is much less than yours, so there’s room to increase it (especially when long time investors like you share your stories of multi-year returns) but we continue to think about when-and-how. I believed that we are past the bottom but the recent caution on “higher for longer” would certainly stress the real estate market. Dollar-cost-averaging does seem the right strategy, though (as opposed to trying to time the market). Fundrise seems a good option with a selection of funds and low minimums.
We do believe venture (and perhaps AI within that) is an opportunity as well. The Fundrise Innovation Fund is a good option certainly, but there are venture secondaries funds out there (with more diversified holdings) and secondaries markets for more well-known private companies. So here too, we’re thinking about it