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Financial Samurai Mid-Year 2017 Investment Review

Updated: 11/06/2018 by Financial Samurai 77 Comments

Financial Samurai Mid-Year Investment ReviewTo 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?

RealtyShares College Town, Arizona Investment

I can imagine all the parties in the hot tub now. IRR target: 16.5%. 5-year hold. $20K minimum investment. Reminds me of a scene from Breaking Bad.

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

Municipal Bond Returns

Municipal bond returns YTD are not bad once you include the coupon payment

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.

Virginia Cross Hotel and Conference Center RealtyShares

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.

Sheraton Dallas Forth Worth RealtyShares Deal

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

Mid-Year 2017 Investment Review Financial Samurai

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!

S&P 500 Valuation 2017 - Case Shiller P/E Ratio

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.

Financial Samurai Investment Performance

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.

Personal Capital Investment Allocation Recommendation

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/

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Filed Under: Investments

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.

2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.

Financial Samurai has a partnership with Fundrise and is an investor in private real estate. Financial Samurai earns a commission for each sign up at no cost to you. 

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Comments

  1. Derek says

    September 2, 2017 at 1:03 pm

    Sam,

    I’d be really interested in seeing a more detailed breakdown of your RealtyShares performance, as I had been bullish through 2017 as well (14 deals for $125k) but haven’t seen near the advertised returns. Here’s my August snapshot: $125k Capital active ($41k debt, $84k equity), zero (0) August return. It would be nice if this situation was at least explained with some communication, but the most communication I’ve received is when I should be expecting distributions. This would be great, except it hasn’t happened, ultimately making the company seem more unprofessional.

    This doesn’t even include another $25k that they had in their possession, interest free, for over 3 months for another deal that fell through. Their eventual communication included that they ‘accidentally’ debited funds before (months before…) an executed commitment letter.

    There have been interesting deals popping up, but until I see a real return I have to sit out.

    Reply
    • Financial Samurai says

      September 2, 2017 at 1:32 pm

      Hi Derek,

      I invested $250,000 in the RealtyShares Domestic Equity fund (invested in around 10 deals so far) earlier in 2017 and have had some minor returns here and there. But because it is a 5 year fund, and all the deals are equity, I don’t expect anything significant for at least 1 year if not 2 years because there needs to be renovations and a sale before I see any returns.

      It’s called the “J-curve” when investing in private deals. Returns go down or flat before going up.

      If I invested in debt, then I would expect to see the advertised rate of interest within a couple months. Are you not seeing interest payments on your debt portion yet?

      I just invested another $250,000 in the RealtyShares fund b/c I just sold my rental house. I was going to invest another $500,000 or $750,000, but I’m just legging in slowly.

      Sam

      Reply
      • Derek says

        September 2, 2017 at 8:12 pm

        Right, as the mortgager on debt deals, I’m due the monthly interest payments (at least), otherwise additional penalties and interest are due. It’s not that I haven’t received any payments for any of the deals… for a few I have… but even for them they’ve been inconsistent. For my first debt deal I was paid interest consistently for the first 3 months, but then haven’t been paid at all for the last two. Again, without any communication. Let’s just say that’s the highest performing deal so far. I don’t think the argument can be lack of diversification/’unique circumstances’ either… none of my eight (8) debt deals that are active and in-progress paid in August.

        I’m hoping for a turnaround, as the platform really fills a gap in my portfolio that also fits my lifestyle nicely. I want RE exposure, but already work 24/7 between a corporate job and side-hustle/startup.

        Reply
  2. Mike says

    August 15, 2017 at 10:18 am

    Out of curiosity, have you thought about investing in early stage companies on AngelList, SeedInvest, etc.? A lot of these investments look like total moonshots so the risk profile probably isn’t great for someone who’s already doing well, but I gotta imagine that a former banker has as good of a shot as anyone at figuring out a good mix of companies to invest in.

    Reply
    • Financial Samurai says

      August 15, 2017 at 11:15 am

      Thought about it, but I don’t want to do it anymore. I’ve seen so many failures, and so many disappointments. As an entrepreneur myself I know how hard it is to succeed.

      See: https://www.financialsamurai.com/just-say-no-to-angel-investing/

      Reply
      • Mike says

        August 15, 2017 at 1:18 pm

        Very fair response. Thanks!

        Reply
  3. Dave says

    August 5, 2017 at 5:03 am

    At the mid point, you are having a good year. Thanks for sharing your personal report card. I appreciate the content you publish. I enjoy learning about all of the alternative investments that you have in your portfolio.

    Reply
  4. SRJ says

    August 4, 2017 at 12:06 pm

    Solid planning and risk management! How do you approach tax minimization. Stocks vs real estate? With Realtyshares, are you expecting after tax returns on an equity deal to be more attractive than a debt deal ? I am considering 1031 exchange as a strategy as well while considering Realtyshares.

    Thank you very much.

    Reply
  5. Team CF says

    August 1, 2017 at 2:11 am

    Wow, that’s quite the money shuffling ;-). Considering the risk aversion, the return on investment is pretty impressive! Well done.

    Reply
  6. SMM says

    July 31, 2017 at 11:26 am

    Very nice and comprehensive rundown FS! :-) How are you calculating the Home Improvement 10% (20% return)? I see the table, but wouldn’t this be an improvement to be depreciated?

    I’ve invested a bit in REITs, but need to do a compare and contrast with that VS Real Estate Crowdfunding (REC). Do you think REC is better than REITs for now and if so, why?

    Reply
    • Financial Samurai says

      July 31, 2017 at 12:13 pm

      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.

      Reply
  7. Grand Dad Helper says

    July 31, 2017 at 11:11 am

    I have been 100% equity since 2008. Made sure I maxed out 401k and catchup since then and have done well. Since I started reading your blog a few months ago I am starting to get the feeling that I should reduce my risk just a tad. 4 more years in the corporate treasury world and I am headed to tax free Florida.
    I took your advice and started a blog over the weekend. GrandDadHelper.com

    Reply
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