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.