Financial Samurai 1Q2017 Investment Recap

One of the best ways to eradicate financial distortion is by meticulously tracking all investments. I’m pretty sure none of us will remember the exact details of what we bought, when we bought, and how much we bought years from now. This may lead to a significant miscalculation in cashflow during retirement. As a result, I’ve decided to start a quarterly investment tracking series.

The other reasons for this new quarterly series include: 1) earning enough to invest $20,000+ a month, 2) getting feedback about my investments since I’ve made terrible choices before, 3) starting an ongoing discussion about any new investments to consider, and 4) discussing the current investment landscape. The ultimate goal for all of this is to be able to spend maximum time with the kid(s) when they arrive. I’m deathly afraid of having to go back to work full-time.

Most people in America just spend most of what they make. Others just contribute to a 401k or IRA and then spends the rest. I want you guys to max out your pre-tax retirement accounts AND invest an additional 20%+ in post-tax investments each year. If you want to achieve financial freedom sooner, you need to have a sizable after tax portfolio that throws off livable income.

1Q2017 Financial Samurai Investment Review

Because I’ve achieved my net worth target, I’m not looking to take on too much risk. Instead, if I can grow my net worth by ~5%, or 2X the risk-free rate of return, I’m content. I no longer look at my investments as a way to achieve financial freedom. Instead, I look at my investments as a way to maintain financial freedom while providing a slight tailwind for net worth growth.

The main driver of my net worth growth is my online business, which is currently trouncing every other asset class due to a high correlation with effort and reward. I worked my ass off in November, December, January and February to take advantage of the inevitable new year’s rush. I’m now reinvesting that income to generate more passive income. Start your X Factor now while you still have the energy. It might change your life forever.

Here’s my 1Q2017 investment tracker spreadsheet.

January Investments Overview

Stocks ($21,000): I was cautious on the stock market in January, but couldn’t resist investing $21,000 in an Amazon structured note paying a 9% annual dividend net of fees for two years with a 25% downside barrier. I basically made a bet that Amazon would not decline by more than 25% for the reward of earning a 9% dividend. Amazon is a monopolistic juggernaut with two main businesses. They will use their monopoly to subsidize new businesses and crush the competition, exactly like Google.

Real Estate Crowdfunding ($25,000): I committed $250,000 to real estate crowdfunding because I’m bullish on the real estate crowdfunding sector, don’t want to buy more physical property due to maintenance hassles, love having a real underlying asset, and figure who best to pick the best deals on their platform than the very people who vet all their deals? The preferred return is 8% with a target IRR of 15% over five years with a 0.8% management fee. Given the fund’s goal is to invest in roughly 10 deals, each deal will be valued at $25,000 ($250,000 / 10 deals) in my portfolio. The money that is not invested sits in my account accruing interest.

I’m very happy the fund decided to invest in an Austin, Texas multifamily property with a 13% preferred return since I’m bullish on Texas, and other heartland states. Although prices have moved higher in Austin like most of the country, valuations are still so much cheaper than coastal city real estate.

Update: Unfortunately, RealtyShares is no longer accepting new investors on their platform. I suggest taking a look at Fundrise, the pioneer in eREITs. They are also currently working on an Opportunity Fund to take advantage of tax-efficient Opportunity Zones. Fundrise was founded in 2012 and is open to all investors – accredited and non-accredited alike.

February Investment Overview

Stocks and bonds ($0): The S&P 500 performed incredibly well, making up the lion’s share of 1Q’s 5% gains. I could not commit any more money to the stock market due to valuation worries and a lack of attractive hedged investments. Instead, I rebalanced my SEP IRA, Solo 401k, and Rollover IRA from roughly 65% stocks / 35% bonds to 50% stocks / 50% bonds at the end of the month.

Real Estate Crowdfunding ($25,000): The real estate crowdfunding fund continued to stay active by investing in a Hayward, California multifamily project with a 19.2% target IRR. The fund targeted this project because of strong job growth in the East Bay as more people migrate out of more expensive San Francisco. The off-market transaction was acquired below replacement cost, providing for an attractive post-renovation yield.

Given I’m already long three properties in San Francisco, this project is not a property I would have invested in. I’m looking to diversify away from expensive coastal city markets because property prices are finally slowing. In the event of a tech/internet downturn, I don’t want to be over-levered here. Having no investment say is one of the downsides of investing in a fund.

For those who don’t live in the SF Bay Area, this investment looks intriguing because more companies are setting up shop in the East Bay (15-30 minutes across the Bay Bridge) due to lower costs (but it’s getting pricey quick). I went to Berkeley for business school (East Bay) so I’m relatively familiar with the area, the warmer weather, and the price arbitrage opportunity. If the project can earn half its target 19.2% IRR, I’ll be happy.

Home Improvement ($8,000): I started on the final phase of my home improvement plans with the landscaping of my backyard. Given I live on a hill, my backyard wasn’t very user-friendly. The yard had also become overgrown with prickly blackberry briars. I decided to de-weed the entire yard and construct flat, multi-level tiers. The first tier is actually a 300 sqft kids playground. I’ve now got roughly 1,500 square feet more of flat lands. I’ll show you the final pics in a future post.

March Investment Overview

Stocks ($10,000): Despite rebalancing all my pre-tax retirement funds to a 50/50 stock/bond allocation, I decided to invest $10,000 in a 5-year buffer note on the Russell 2000 Index (RTY). The upside participation rate is 140% with a capped maximum total return of 50% net of fees. The note has a 15% downside buffer at maturity. I like buffer notes because if I’m down 20% on my RTY investment in 5 years, I’m actually down only 5%. The 140% upside participation rate is interesting because if RTY is up 25% in 5 years, I’ll actually be up 35%. The downsides of this note are the return cap and no dividends.

Bonds ($22,500): The 10-year yield reached 2.6% in March, so I bought more California municipal bonds. I purchased a $22,500 position in California Health Facilities Revenue Bond, with a 4.000% yield due 2/01/42. Getting a 4% net yield (equal to a 5.7% gross yield) because I was able to buy the bond close to par ($100) was enticing. 25 years left until the bonds expire is a long time, but I believe interest rates will stay low for the rest of our lives, thereby allowing bonds to maintain their value. I can always sell the bond before expiration.

My California municipal bond portfolio is now over $330,000, yielding roughly $8,800 a year in tax-free income. Since March, the 10-year bond yield has declined to 2.38% after Trump’s failure to pass Trumpcare. As a result, my bond portfolio is currently slightly in the money.

Venture Debt ($11,345): I received a capital call of $11,345 for my second venture debt fund investment. The total investment in this second fund is only $50,000 (compared to $115,000 in the first fund). The latest debt investment is in a gaming device technology company and a cosmetic company. Both investments seek to earn 12%+ a year in interest payments for three years with warrant kickers that could bring total returns to over 20% a year. Pretty interesting huh? I have zero expertise in these investments, but I do like the business of lending to well-funded startups and making a double-digit return without the need for a liquidity event that may never come. Related: Investing In Venture Debt

Home Improvement ($9,300): I paid the remaining $9,300 for the backyard landscaping for a total cost of $17,300. I’m really pumped with how things turned out, especially since I got bids for $50,000+! Instead of going with a large landscaper, I directly hired the guys working for a large landscaper. They were working for three months on a neighbor’s ~$120,000 project. So I just had a conversation with them one day to see if they wanted to work on mine on the weekends. Once you see the pictures, you’ll realize how large my project was. All I need to do now is spend ~$1,000 (!) on plants.

Real Estate Crowdfunding ($25,000): The fund invested in Avesta Biscayne, a 402-unit apartment community located near the Biscayne Bay shoreline in Miami, FL. Avesta Biscayne was built in 1985, but is located in a growing submarket and has in-place cash flow with an average occupancy of 94%.

Florida is not a heartland state, but it is a red state. I’ve always liked Florida given the warm weather and no state income taxes, so I don’t mind gaining exposure here. Miami is booming again. However, let’s hope job growth continues because Miami also went through a massive condo bust during the downturn.

Ideally, I want to focus on Colorado, Utah, and Texas real estate, which can still be done with individual investments on Fundrise platform. You can also invest in their eREITs.

1Q2017 Investment Wrap Up

So far this year, I invested $163,145 in 1Q2017 compared to my objective of investing at least $60,000 a quarter. This difference makes me want to slow down because it seems like my new year’s enthusiasm is overly influencing how much I should be investing.

That said, there were a number of positive financial events that occurred in 1Q17 including: 1) record online revenue growth, 2) getting my final severance check of $65,695, and 3) a $331,718.41 CD that came due seven years later ($250,000 initial value).

The image below shows my closed USAA CD hitting my bank account and a $225,000 transfer the very next day to invest in the crowdfunding fund. I reinvested so quickly because I spent 8 months researching the space prior in anticipation of the CD expiring.

I had already transferred $25,000 to the fund in January. Only ~$75,000 of the $250,000 has been deployed because only three investments have been made so far. The rest of the $175,000 is accruing interest at an 8% preferred rate. In upcoming quarterly updates, I’ll add the remaining $175,000 balance as investments are made.

In order to maintain a passive income goal of $200,000 a year, I’ve got to find ways to prudently reinvest the $331,719 closed CD because it was providing a gross $13,268 a year in guaranteed passive income (4%). One way to recover the lost passive income is to earn an 8.13% return on the $163,145 I invested in 1Q17. It’s possible, but I’m not banking on it.  If my entire $250,000 allocation in the REC fund achieves a 8% return, that equals $20,000.

* The $200,000 income figure is important to me because I believe $200,000 – $250,000 is the ideal income for maximum happiness. It’s also the income level required to live comfortably in an expensive city like SF. 

The below chart shows my estimate total return for each asset class and the corresponding passive income amount for the quarter. I’ve tried to be on the conservative side, while also assigning zero returns for home improvement. For example, I’m confident the $21,000 Amazon position will pay out a 9% annual return because the stock is now 10% higher than where I bought it. Meaning, the stock has to go down 35% from here for me not to earn my 9%.

Future Investments

After paying 1H2017 property taxes, I’ll have ~$205,000 in cash left over to invest. The problem is, I don’t find stocks, bonds, or any private equity investments attractive at the moment. Do you? We just launched a missile strike against Syria, which means we’re now vulnerable to more attacks at home.

I plan on making extra principal payments towards my 4.25% vacation property mortgage, meeting capital calls for my venture debt fund, and deploying real estate crowdfunding capital through various Fundrise funds per their investment schedule. Any money left over will simply be saved until the 10-year bond yield breaches 2.6% or the S&P 500 corrects by at least 5%.

The bull market has turned out far better than I could have imagined. I was serious in my April Fools Day post about how I couldn’t bear buying a fancy car when the money could be invested for potential gains. Now the upside seems much less exciting, which conveniently makes it easier to spend.

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