Financial Samurai Mid-Year 2017 Investment Review

To eliminate financial distortion, make sure I’m within my risk tolerance band, and push myself to continuously reinvest cash flow in order to survive permanent unemployment, every quarter I’ll be reviewing my investments. I’ve found that after even just a couple months, if I don’t write things down, I simply cannot remember how much and what I invested in.

For the past five years, my goal has been to earn a conservative 4% – 6% yearly return on my overall net worth given I reached my target number. It felt so amazing to escape the rat race in 2012, I was comfortable with what I had. Now, however, thanks to hedonic adaption, I’ve become used to the freedom and have turned greedier with my desired returns.

Today I’m shooting for a 10% yearly return based on my following new money investment allocation for 1H2017: 57.4% Real Estate Crowdfunding (10% target return), 11.27% Bonds (4% target return), 9.41% Stocks (10% target return), Venture Debt 3.3% (12% target return), 8.27% Mortgage (4.25% return), and Home Improvement 10% (20% return).

Let’s dig deeper into the numbers!

Financial Samurai Mid-Year 2017 Investment Review

April Investments

Stocks: Unlike in 1Q2017, where I just increased my exposure to the S&P 500 through an index ETF, I purchased $10,000 of Netflix at $141/share after 1Q results. At the time it felt a little painful to purchase since my original position was at $92/share. But I loved their portfolio of original content despite their massive cash hemorrhaging. Their business is sticky and inelastic. They can easily raise prices by 20% a month and lose less than 20% of their customer base to increase revenue. Reed Hastings, the founder, spoke at my 2006 Berkeley-Haas MBA commencement. Wish I had put my life savings in the name at the time!

Mortgage: Paid down $3,000 of my 4.25% Lake Tahoe vacation property mortgage. My goal is to pay random small amounts each month so that I feel no pain paying down my worst investment ever. If I see a Bank of America branch on my way back from lunch, I may swing by and pay down whatever is in my wallet. The goal is to pay the $346,000 mortgage off by June 15, 2022.

Real Estate Crowdfunding: I invested $250,000 in the RealtyShares fund in January 2017. Instead of inputting the entire $250,000 in January, I spread it out over a six month period. It’s really just accounting as I didn’t know exactly how quickly they’d be able to invest in the 10+ deals they have in their mandate.

In April, the fund made a $600,000 investment in the acquisition and renovation of College Town Tucson, an 88-unit, 247-bed student housing apartment complex several blocks from the main campus of the University of Arizona in Tucson, AZ. Constructed in 1972 and partially renovated in 2006 and 2013, the Property consists of a mix of two, three and four-bedroom units and includes amenities such as a clubhouse, fitness center, swimming pool and property-wide Wi-Fi.

I’ve always wanted to gain exposure to an apartment complex in a college town due to the consistent high demand. I just never wanted to physically own and manage such a property due to the frequent turnover. Can you imagine what a PITA is to be a landlord of a student housing complex?

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.

Home Improvement: After my landscaper finished my backyard, I asked him to landscape my side yards and front yard. I was extremely pleased with his workmanship and his price. As a result, I referred him to a friend who hired him to do ~$25,000 of work. I’m now 100% done with my home remodeling/expansion projects for the fixer which I bought in early 2014. It was a long journey due to the complexities of the inspection system and the idiosyncrasies of each contractor.

May Investments

Bonds: Invested $26,600 in two, 20-year maturity, California municipal bonds with a yield to worst of 3.8%. Based on my estimated 32% effective tax rate (federal and state), the gross yield is therefore 5.5%. Instead of putting more into bond funds, like I did between November 2016 – January 2017, I decided to focus more on individual bonds so that I know I’ll get par value ($100/share) back upon maturity plus the coupon payments for all those years.

Many bond funds have rallied back to pre-election levels, so I felt hesitant allocating more money. If you add 1.5% for the 6-month yield to the principal appreciation so far, we’re talking a pretty healthy ~6% total rate of return.

Related: The Case For Buying Bonds

Mortgage: Paid down another $5,000 of my 4.25% Lake Tahoe vacation property mortgage. I decided to rationally no longer pay down my 2.375% rental home mortgage and my 2.5% primary home mortgage until the Lake Tahoe vacation property mortgage is paid off.

Real Estate Crowdfunding: The RealtyShares fund made a $700,000 common equity investment in the Virginia Crossing Hotel and Conference Center, a full-service hotel located in Glen Allen, Virginia.

Opened in 2001, the Hotel comprises three colonial-style buildings with guest amenities, including 2 full-service restaurants, an outdoor swimming pool, fitness center, 24 conference rooms and a 4,700 SF ballroom. The Hotel is located adjacent to The Crossings Golf Club, one of the greater Richmond area’s premier semi-private courses, and is strategically located at the convergence of Interstates 95 and 295.

I’m very excited about this acquisition and repositioning because there’s a special place in my heart for southern Virginia since I went to school 40 minutes south of this hotel at The College of William & Mary. I love colonial style buildings and would happily retire in Williamsburg for three months of the year if I wasn’t living on the west coast.

Home improvement: I decided to fulfill my dream of getting a hot tub for $15,825 now that the back yard is done. The whole process took nine months since I first visited the show room. Since installation, I’ve averaged about five hours a week in the hot tub. The maintenance is easier than expected. What is kind of scary is how much home improvement costs add up. I can see how a homeowner can spend an endless amount of money upgrading their home if they don’t set a limit. I’ll be putting together a home remodeling guide in the future.

June Investments

Venture Debt: I received a capital call of $3,001 for my second venture debt fund investment. For these types of funds, you commit a certain amount of money, and the fund will call a percentage of your commitment over a certain period of time, usually within two years. The first venture debt fund I invested in almost three years ago is looking like it will return 13% a year net of fees because they’ve almost returned all the capital. As a result, I’m considering investing more capital into the second fund now that the guys have even more experience and a larger fund to spread out the expenses.

Mortgage: I was paralyzed with what to do in June since bonds and stocks did well, so I decided to pay down $22,000 more of 4.25% mortgage debt. When in doubt, pay down debt.

Related: Debt Optimization Framework For Financial Independence

Real Estate Crowdfunding: The RealtyShares fund approved a $775,000 JV equity investment in the Sheraton Dallas Forth Worth Airport Hotel, a 302-key full-service hotel located in Irving, Texas. DFW International Airport is ranked the 4th busiest airport in the US, and the DFW region is booming. The Hotel is approximately 15 miles northwest of downtown Dallas, one the region’s largest employment centers.

I’m bullish on the heartland of America. The fund had already made an Austin, Texas multi-family residential property investment in December 2016, and I was hoping they’d continue to invest more in Texas. The Dallas area has one of the most robust income growth trends in the nation.

Capital Commitment Review

$272,426 of new capital was put to work in 2Q, which equates to $90,808 a month on average. This figure surpasses my goal of $30,000 – $50,000 a month, but it’s due to arbitrarily spreading out my original $250,000 RealtyShares investment across six months.

If I take out the entire $250,000 real estate crowdfunding investment, I ended up investing $32,333 a month on average. With a baby on the way, I knew I wouldn’t have as much time to focus on my investments this quarter. Hence, I knew that if I invested in nothing else, I would average $41,667 a month for six months ($250,000 / 6 months).

When income generation is good, it’s important to stay disciplined and maximize your investments in order to prevent lifestyle inflation. Pay yourself AND your investments first! When difficult times inevitably come, your investments will hopefully carry you through until the next bull run.

Pro Forma Performance Analysis

I’ve allocated capital to achieve a potential 10% objective return based on my risk tolerance (green). Of the $435,571 in 1H invested capital, I’m looking to return roughly $42,744 based on my base case objective.

I’ve also included my current estimated returns, which comes out to about 15% (blue). The only thing that looks aggressive is a 50% return on Home Improvement. But the 50% return could be conservative because competing landscaping bids were 100% – 150% higher since my guy did the job as a side hustle for cash. For example, one competing landscaper quoted me $50,000 to do my front yard, and my guy did it for $17,000, including materials. Further, it’s a bull market on the west side of SF. Remodeled houses are going for tremendous premiums.

Although the RealtyShares fund has a 15% target IRR over five years, and all three investments in 2Q2017 have target IRRs greater than 15%, I’m keeping the current estimated return at 10%. All the deals are equity deals, so it’s good to stay conservative until there are exits.

Bonds have done very well as you saw in the chart above, and my stock returns have been solid due to investments in Amazon in 1Q and Netflix in early 2Q. Due to valuations, I still can’t get excited about putting a large allocation into stocks, so I’ll just wait for a pull back if one ever comes to invest a more meaningful amount of capital. At least I didn’t short the market!

Going forward, my Home Improvement weighting will decline, but my Real Estate Crowdfunding, Bonds, and Venture Debt weightings will increase. The total return target will still be 10% a year.

My biggest financial fear is not a bear market, but a precipitous decline in income. I feel like a young man again because contributions are currently far surpassing returns. I also want to have enough fire power to invest during a downturn. Therefore, despite the constant sleep deprivation of being a new father, I promise to keep slicing away. After all, a 50% increase in family size warrants a 50% higher wealth target right? Let’s rock.

Investment Management Recommendation

Run your investments through Personal Capital’s free Investment Checkup feature to see how you’re doing and analyze your current asset allocation versus their recommended asset allocation based on your financial objectives.

According to the chart below, my public investments are up 9.78% YTD, which is underperforming the S&P 500 by 3.9% and outperforming the US Bond index by 6.74%. I’m happy with the results so far, because I’m shooting for a 10% annual return with my new investments, and a 4-6% annual return in my overall net worth.

Here is a chart highlighting my current public investment allocation versus Personal Capital’s recommended investment allocation. The 16.6% weighting in Unclassified are manual entries of my private fund investments in venture debt, private equity, and real estate crowdfunding. Therefore, my Alternatives weighting is closer to 17%. Because I just sold my house, my cash portion is much higher than recommended.

Overall, I’m quite happy with my investment allocation in the current environment. You can find your custom Personal Capital Investment Checkup under Planning -> Investment Checkup to see if your investments are matched up with your financial objectives.

Graphic by https://ckongsavage.com/