This is the Financial Samurai 2019 mid-year review.
After writing The Bear Market Checklist, I thought I'd follow my own advice and do a mid-year review. The last thing I want is to get broadsided because things feel so good.
So far, this year has been solid on the financial front. I haven't felt this good since 2007, the year before everything fell to pieces.
I truly hope all of you are benefitting from this extraordinary bull market as well. 4Q2018 was such a dicey time period. It was hard for me to imagine things turning out as well they have since.
I've been trying to live it up, especially now that my boy is over two years old and is able to communicate better. We're going on more trips and doing more things in public settings.
I'm also trying to be much more appreciative of the good times by constantly reflecting on the past. The more we can show gratitude, the better our lives will get.
Financial Samurai 2019 Mid-Year Update
I basically have five main types of assets that can help or hurt my net worth. They are: 1) public investments in stocks and bonds, 2) private investments in venture equity and venture debt, 3) physical real estate, 4) real estate crowdfunding, and 5) online real estate (this website).
I'm a real estate fanatic, but since becoming a father in 2017, my fanaticism has diminished. I don't have the desire, time, or energy to bother maintaining as many physical properties as I used to. Three physical rental properties plus a primary residence is the maximum I can take.
As Financial Samurai has grown, so has the percentage it makes up as part of my net worth. After 10 years, I still love to write and think about everything personal finance related. Having online real estate is extremely powerful because of leverage and low operating costs. Further, I have the most fun with online real estate.
Public Investment Performance (+11%): My stock and bond portfolio is up about 11% YTD, which is double my annual target. I've been very conservative this year, with a 40/60 stock/bond split, after squeaking out a positive gain in 2018.
In retrospect, I should have gone 100% into stocks (S&P 500 +19% YTD), but such an allocation would have given me nightmares about being forced to go back to work.
My #1 rule after reaching financial independence is to not lose money. I intend to follow this rule for the rest of my life. Below is the YTD chart of my stock and bond portfolio according to Personal Capital. To find your own portfolio performance on the app, just link your investment accounts and click Holdings & Allocations on the homepage, then customize the date range.
Private Investments (Uncertain): Based on a quarterly report, it looks like my venture debt fund is returning about a 16% IRR, but I can't be 100% certain until all my capital is returned. Perhaps some warrants will kick in that will boost the IRR to over 20%. Or maybe one of the investments goes bankrupt and drags the portfolio's entire performance down.
Uncertainty is the nature of investing in venture debt, but even more so in venture capital. Unlike venture debt where an investor gets a regular coupon payment, venture capital investors often have to wait 5-10+ years before experiencing a liquidity event.
I was only able to invest $140,000 in Kleiner Perkin's latest fund that launched this year due to excess demand. But that's fine because it is my first foray into investing in a venture capital fund. Now that I'm a limited partner, I should gain access to future KP funds as well.
Physical Real Estate Performance (+12%): San Francisco real estate snapped back to record highs in Spring 2019. If you want to buy a median-priced property, you now have to pay $1,700,000.
Despite the rebound, I have seen a noticeable rise in SF real estate inventory this summer, which is providing some relief for first-time homebuyers. The latest 2Q numbers show prices softening everywhere in the SF Bay Area except for SF. But I'm pretty certain that SF prices will dip lower in 3Q once the data comes out due to increased inventory plus normal seasonality.
I do expect Spring 2020 prices to rebound from a lull in 2H2019 due to the expiring lockup periods in November and December for employees at newly IPOed companies like Uber, Lyft, Zoom, Pinterest, and so forth. I've spoken to a handful of people who work at these companies and all of them are looking to buy their first house or upgrade.
Across the country, real estate has definitely slowed down despite a significant drop in mortgage rates. June existing home sales were down 1.7% vs. an expected 0.2% decline. If you've been waiting to buy, you've got a lot more options to choose from now. Just pay attention to the numbers and don't get too aggressive as we could be going through several years of weakness.
Real Estate Crowdfunding Performance (+14-16%): My $800,000, 17-property commercial property portfolio has performed well. Out of the 17 properties, three properties are underperforming projections (probably won't hit target IRR, but still providing positive return), while one property in Arizona is going to post a major loss.
If I had a 17 position stock portfolio where 16 out of 17 were showing positive gains, I'd be happy. But in a future post, I want to focus on the major loser and see what we can learn from it to become better investors.
Income has also been 2.5X stronger than I had anticipated. All my investments are in equity deals, not debt deals. As a result, the returns are generally back-end loaded as many of these deals have 4-to-5-year investment horizons.
I modeled $27,600 in real estate crowdfunding passive income for 2019, but I have already received $60,575 in 1H2019. At this rate, my final real estate crowdfunding income for 2019 will be 2.5 – 4X higher than anticipated. I may have to increase business capex to reduce my taxable income as a result.
Once I receive $200,000 in capital back from my existing real estate crowdfunding investments, I plan to re-invest $100,000 – $200,000 in a Fundrise eREIT. I've learned over the past three years that I simply don't have the time or desire to pick and choose individual deals. I'd much rather just buy a fund and forget about it.
I'm impressed with Fundrise's 5-year track record. I especially like the lower volatility and tremendous ~14% outperformance it had in 2018 versus the S&P 500 and the Vanguard Real Estate ETF. As an early retiree who is relatively conservative, such outperformance is very attractive. Of course, past performance is no guarantee of future performance.
It is important for me to continue diversifying away from San Francisco, Honolulu, and Lake Tahoe property. The trend towards remote work and living in lower cost of living areas is real. I want to ride this wave for as long as possible. Earning 100% passive real estate income rocks compared to being a SF landlord!
Online Real Estate (+30%): Financial Samurai has been blessed to see a 50%+ increase in YoY traffic this year. This traffic increase is not something I expected given the site has been around for so long already. There was a significant Google algorithm update in August 2018 that seems to have stuck. I've continued to be diligent in writing new articles and updating old articles.
If I had sold my site in 2018 after being aggressively approached by a number of parties, today I would be kicking myself. For example, let's say I had sold for an uninspiring 6X operating profit in 2018. If I grew profits by 50% in 2019, that would mean I really only sold the site for 4X operating profit.
I highly encourage everyone to start something online they'd do for free, forever. My #1 inspiration to keep on writing is my family. I want to create a massive treasure chest of verbal and written content for my son to go through when he's old enough to understand.
Things To Do For 2H2019
Increasing wealth during a bull market is easy. I'd be a fool if my net worth was going in reverse. The hard things are everything else. Here are some things I need to work on for the rest of the year:
Lose 7 pounds: Staying under 170 lbs at 5'10” is an ongoing battle for me. I fluctuate between 168 – 172 lbs. I used to be a ripped 155 lbs in high school, so that is what I aspire to be again. Instead of spending more time away from family working out, I should simply eat less. It's cheaper and more efficient. Once my boy starts going to pre-school in September, I will increase my exercise routine from 3X to 4X a week.
Slow the heck down: I've always been one to finish things quickly. But this celerity puts pressure on those who don't operate as quickly. Slowing down requires patience, something I desperately need. I will develop more patience through meditation and deep breathing exercises when I feel antsy. I will find a quiet place to work whenever I'm feeling agitated. I will drive the speed limit in the city, no matter how slow it seems.
Explore the job market: I told myself that I would look for work once my boy enters preschool, and that's exactly what I plan to do. It's probably going to be difficult finding the perfect fit, but it's worth a shot in this tight SF labor market. Even if I don't go back to work, I'll feel good knowing that I at least explored the option. Plus, I'll have a lot of fun writing about my experience.
Spend 20 minutes a day on Mandarin and Spanish: I finally downloaded a language learning app called Duolingo to brush up on my Mandarin and Spanish. I used to be advanced in both, having lived in Taiwan for four years and China for six months as a foreign exchange student. I also studied Spanish for seven years and lived in the Spanish house during college. My goal is to practice for 20 minutes a day, every day, for the remainder of the year.
Finish my mortgage refinance. My refinance to a 7/1 ARM at 2.75% is in its final stages. There was another hiccup along the way, which I'll write about in a future post. I'm confident it will get done. I never plan to refinance or take out a mortgage again.
Start building an Auxiliary Dwelling Unit (ADU). I've decided to build a 600 sqft ADU to create more space and value. The cost will likely be around $150,000 – $200,000 and take about six months or so. When done, I should be able to increase the property's value by $300,000 – $400,000. I've got to be careful not to let this project stress me out too much. I hate remodeling, but it's the easiest way to create value in real estate.
Fingers Crossed The Good Times Keep Going
Let's all hope the good times continue to last for the remainder of the year. But I'm pretty certain that we are going to see another 10%+ correction before year-end. The only thing we can really do is prepare.
Sometimes I feel like I have too much on my plate and don't know how to stop. Other times, I feel like I need to do more to take care of my family. I never would have thought that despite not having a day job, figuring out the right balance between providing and relaxing would still be such a huge challenge.
The problem with always planning for the future is that there's always something that needs to be done. I'd like to spend more time just appreciating what I have in the present.
Readers, how has your 2019 been so far? What are you working on for the rest of the year? Financial Samurai 2019 is a FS original post.
What are your thoughts on the LTV ratios for Fundrise? Ian at RE Crowdfunding review looked at the income reit and it has a median 80% LTV, which seems high to me.
Which ereits do you like other than the heartland one?
80% LTV is pretty standard. I would be concerned if it was under or 10%. The key is to look at the structure of the deal. How much debt is being raised in addition to equity, And what type of investor are you: debt or equity. You can get wiped out if you are in equity investor when the sponsor raises too much debt.
As the market slows, you want to have less leverage.
2019 has been really good so far but it needed to be. From 1/18 to 1/19 our investible assets dropped in value by 800K, mostly due to the drop in December. However, 2019 YTD we are back up 1M so we made it all back, plus 200K. I’m just glad we didn’t panic and start moving out of equities or we would have missed that recovery. Good article in IBD highlighting how the wealthy did just that.
https://www.investors.com/etfs-and-funds/personal-finance/stock-market-mistake-costs-millionaires-billions-2019/?src=A00220&yptr=yahoo
Going forward, I am looking to lighten up a bit on equities but nothing too dramatic. I think there is a lot of cash sitting on the sidelines looking to be put back to work that will serve as a buffer during the next correction and keep the floor from dropping too far.
I have found very little information anywhere regarding what I should do with a very large capital loss carry forward of nearly $300K. The short of it is I gambled with my stock accounts by playing options and leveraged ETF’s … would try to make up for a bad decision with another bad decision. My question is how would you change your overall investment strategy knowing you will not have to pay taxes on investment gains for a very long time? I have $250K in my 401K (again, investing in high risk stocks and losing consistently). $500K in primarily cash in multiple brokerage accounts. I am married and my wife has her own business. I make ~$250K / year. She is on track to make $130K this year before taxes.
This is going to sound harsh, but it’s meant to be helpful: See a therapist. Gambling on leveraged ETFs and options is not a great thing. Once you get to the core of why you did what you did, you’ll be ready to invest again.
Source: Gambled a bit in options and biotech stocks 7 years ago (but only lost about $8k…worth every penny in terms of lessons learned).
I’m aware it is an issue. I am looking for advice on an investing strategy to reflect the fact I have this large capital loss and will not have to pay capital gains for the foreseeable future.
Wow, that is an impressive Crowd F Real Estate portfolio,10M! With so many funds and in different states, has 17 fund portfolio complicated your tax return since you have to file tax returns with many different states? Also, have you gotten your k1 from Arcadia Gardens yet? So frustrating, since Realty Shares has dissolved, I have been getting the runaround and still waiting for my K1 from Arcadia Gardens. Which real estate crowdfunding platform do you use nowadays?
Thanks much! Really enjoy your posts!
Chris, he states he has $800K invested in the 17 properties, not 10M. The graph that was pasted in had me doing a double-take as well.
Yup, saw that after I had posted. The chart was confusing. Thanks!
I would love to see an article about ADUs and their ROI. I was considering building one but no one–not real estate agents, appraisers or mortgage brokers–could give me a good answer on how it affects home value. It’s just too new since California liberalized its ADU laws.
What I did glean is that the increase in home value from an ADU addition is less than an expansion of the primary structure. My neighborhood homes are selling for about $800 per square feet of the primary structure. Construction cost is $250 to $300 per square feet.
What features are new buyers looking for in a ADU? What features produce the highest ROI? Is there a sweet spot for ADU size? I was thinking 600 to 800 square feet.
If you can build for three and a dollars a square foot and sell for $800 a square foot, you should do that all day long. And if you can claim some of the garage space and make it livable space, that is the expansion within the footprint that is valuable.
Some cities have rules about how big your ADU can be – I think ~800 is the largest you can do. Also, I know Oakland distinguishes ADUs that are just built within an existing space (garage, basement, or other) and actually building a new ADU in a backyard.
I’d also just look at rental comps – how much can you make off the ADU and does it seem to make a big difference if you are trying to rent a 1 bed or a 2 bed? At 800 sq ft, 2 beds may be doable and may drive rents up a bit, even if you have 1 bathroom.
I agree I agree on your view of rental properties. They are great because they are real and easy to understand. You collect rent, pay utilities, repairs, and mortgage, then keep the rest. But people early on in their life don’t mind the time commitment. It’s important to treat an investment as an investment. When your investment takes up a lot of your time, then it becomes a job. I like your approach on investing in real estate through crowd funding instead, especially if you can participate in the equity upside! Congrats on the 50% YoY growth for FS, extremely impressive given your audience base.
Thanks. A lot of the growth of this site is data luck. I didn’t do that many different things from last year. Just kept on going that’s all.
Readers, how has your 2019 been so far? What are you working on for the rest of the year?
2019 has been going well. Since my wife and I are still accumulating and apparently are “risk numb/oblivious” we’re up about 18% since it’s all stocks. Talk to me again in 2 or 3 years to see how I’m feeling; which will probably be the same regardless of the markets.
The rest of the year is not stressing out spending money on valuable things to us, such as a nice, in our state vacation in August.
As for you, Sam, fun update. You are in a completely different place than me and I hope to someday be in your position of more protection of wealth instead of still striving for more. Glad things went well in 2018 and are going even better in 2019!
Being numb to risk is great if you can withstand the corrections.
That’s kind of the biggest irony is to creating wealth. The more you have, the more you’re afraid to lose it. I remember in my 20s, it was all about investing to the maximum. But once I know longer had a day job and once my son was born, it’s a completely different set of responsibilities.
Good luck on your journey!
Thanks as always. Love your posts.
Nice work, I always enjoy reading your updates Sam.
Hi Sam – nicely done for the 1st half of the year.
Did you have to transfer assets into your bank on the re-fi to obtain 2.75% on the 7/1 ARM? If yes, how much?
Also, were you invited to participate in the venture debt fund? Or is it open to the general public?
Yes, I plan on moving assets on a portfolio I never trade. Here is the readable WSJ story: https://www.mansionglobal.com/articles/when-lenders-take-relationship-pricing-to-the-next-level-129208
Venture debt is through a b-school classmate from Berkeley.
Getting quoted in the WSJ, very nice!
And thank you for sharing.
Great returns overall even with a more conservative portfolio. Do you think since you’re shifting away from individual deals with Fundrise you’ll stay away from more venture capital and private investment? Is the goal with it solid returns or trying to hit a 10x type company that takes off? Fundrise REIT looks solid, I think next year will be the year to jump in to it.
The 17 deals I have are in a domestic equity fund. Before that fund investment, I chose one PA office property deal when I first started, for a total of 18 deals in real estate crowdfunding.
The venture capital funds Are always looking for 10X investments. But they also invest in zeros. So the end result is hopefully a double digit annual return.
Sam,
Regarding your allocation to crowdfunding real estate, have you looked into Peerstreet? They fund short-term and bridge loans for rehabbers, with first position debt liens on the assets, which I believe are all SFH. I’ve been investing about a year and am seeing about a 7% return. I like the fact that they have first position in the case of default.
I’m having trouble finding yield in the bond market and am considering allocating some additional capital through an IRA to Peerstreet (as opposed to directly investing in notes), to reduce risk away from the stock market.
However, I own physical real estate through rental properties as well and don’t want to become too heavy in the sector overall.
Do you have experience or are you familiar with Peerstreet? If so, how do you stack up their model against a Fundrise or other real estate crowdfunding platform in the event of a downturn? Do you think first position real estate debt can supplement for poor bond yields?
Appreciate all your insights over the years!
-Paul
I met the founders of Peerstreet this year. The product seems decent, but I’m trying to diversify away from single family homes given I already own single-family homes.
Debt investing is generally safer than equity investing given its first position in the capital stack. One of my equity investments in my fund is getting wiped out to my dismay. I plan to do an analysis of what went wrong.
7% is not bad. Just don’t feel that great about SFHs currently.
Our total portfolio is up 8% YTD. It’s pretty conservatively allocated at the moment. There is lots of financial restructuring to do. First up is a trust fund or an “investment bond” (a little known Australian investment vehicle) for our newborn son (1 month old today) for the money (AUD 50k) he inherited from my mother who died last year. Need to work out whether the trust which has lower tax but much more bureaucracy can be done or not in his case. Then I am going to set up a “self-managed superannuation fund” – an IRA in American terms – but far far more bureaucratic and complex here in Australia.
Great performance Sam! Nicely done. This is a good reminder for me to check on my portfolio and put some more cash to work in the next few weeks.
I like your goals for the second half of the year! Spending 20 min a day on languages is a wonderful goal. I just took a look at my own 2019 goals and boy am I failing miserably behind. I haven’t looked at them since February so it’s no wonder I’ve only done a few and should really try to work on a few more in the coming months.
This year is slipping away fast for me so I hope to make better use of each remaining day. Even if I can’t get everything done if I can at least try my best each day I’ll feel better.
Thanks for sharing your recap and reminding us to check our own progress!
I really enjoy reading your posts and learning from you.
Congrats on the positive returns!
I know you are just exploring but I really doubt you will enter the work world again. Looking forward to reading your post about the adventure of the job hunt lol!
Thanks Lorette. I always like to keep my options open. And I think it will be fun to write about the journey no matter how short it is.
When my son goes to school full-time, I’ll definitely be tempted to go back to work again. But it Hass to be something really awesome of course.
I like the hint! Back to school to teach a personal finance or entrepreneurial class!!
I have three friends going into their 2nd year of the full time mba in the fall so hopefully this is the case.
Total portfolio (stocks, bonds, reits) up 15% YTD. That makes me more nervous than happy.
VC and angel investments — unknown, but no failures.
Crypto is even up.
Feels like a good time to lighten up equity exposure — if not in ETFs then in FANGs, at the very least. Facebook near all time highs, Amazon at $2000… we are likely not looking at the next leg up from here.
Things definitely feel toppy, I agree.
It’s always a battle of taking profits but not paying too much in taxes.
I’m in Kailua, happy to meet up as well with the FS Hawaii crew.
Saturday 1pm should be good!
Love your approach to real estate investing. It’s something I’ve been wanting to dive in to and I’ve been leaning toward buying physical properties (the biggerpockets route), but there is a lot to like about the crowdfunders.
Also I learned a new word today thanks to you… “celerity”. Thanks for that!
Good luck! Being a landlord is a young person’s game. I do like the idea of buying a primary residence every 2 to 5 years, and then renting it out. I have a primary residence was good enough for you, that should be good enough for the new buyer as well.
Howzit Sam! Would be happy to grab a beer while you’re here anywhere near Kaimuki. Drop me a line and we’ll set it up.
We’re meeting up at 1 PM on Saturday. I don’t have your line so you best drop me one instead.
The Surfing Pig, Sat, 1pm.
How can I invest in private funds like Kleiner Perkin?
There is usually a friends and family around for such funds during the fundraising process. Therefore, you have to be a relative or a friend of a friend.
KP is a big-name, but they haven’t done very well over the past 10 years. But they hired a new general partner and other investment professionals who have a good track record. I actually went hiking with him for serval hours in the desert earlier this year.
The fund size is $600 million, but they had $1.2 billion in demand.
Wow, I’d love to hear how you are building an ADU in San Francisco for <$200K. I'd like to do the same but cost estimates have been closer to $350k and I am in Seattle.
Well that is a lot, especially since the median home price in SF is 2X The median home price in Seattle. It doesn’t seem like spending $350,000 for an ADU in Seattle is worth it.
How big are we talking about here? Mine is going to be about 600 ft.². It’s the perfect size for an Inlaw, or a live-in nanny, etc.
Very impressive returns especially after you started de-risking your portfolio. I’m still more aggressively allocated (stocks represent 75% of my market portfolio but if you throw in real estate, it 1/2 of that with my total portfolio). (market portfolio I have is 75% stock (55% domestic, 20% international; bond 5%; alternative (primarily REIT 20%).
That brings me to a question I had been considering. If you put stock and real estate (which is mainly syndications I invested in) together in one pot, say my stock portfolio then is only 35-40%, would you consider that now a conservative allocation or do you view the market portfolio on its own and say I am still aggressive in equities?).
I look at equity investments completely different from real estate investments. I don’t think 75% equity waiting is that aggressive since it seems like you plan to work for a while longer and are making good income.
It’s been the right move so far.
“I’m pretty certain that we are going to see another 10%+ correction before year-end.”
With the S&P 500 at all-time highs (and volatility so low), I’m considering buying a out-of-the-money SPX put options. Nothing crazy, just some portfolio protection for six months with little downside at these prices.
Michael Oliver says the next 10% drop will open a trap door to much larger losses. The market has basically done nothing for 18 months. Each new high the market just rolls over instead of breaking out. This is how tops are made.
Put options could work out nicely, but you have CBs with printing presses out there. Instead of crashing downwards nominally, stocks might crash upward instead. 100K Dow but only worth 5000 Dow in today’s money.
I feel so smart for doing this just before Powell cut rates, the market tanked, and volatility spiked.
I guess that’s what riding the tsunami is about. Sometimes you get lucky.
Awesome recap and congrats on the positive returns! I have to do a similar exercise. A couple of quick questions:
Did you use Personal Capital to arrive at these performance metrics?
What do you plan to have/do in your ADU?
Those are impressive returns, particularly the RE crowd funding portfolio!
I actually transferred couple of thousands into Fundrise last year to get my feet wet. After going through their options, I selected their balanced REIT fund, but cancelled the transaction during the grace period.
The returns looked too good to be true and the news of Realtyshares (or was it Realtytrust) made me pull the plug out. I decided to buy REIT stocks instead but this post is making me want to pump some money back into RE crowdfunding…
Btw, exploring the job market?! To work a desk job?! I thought that was a typo! :D