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What is your why? (Compared to VTI)

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  • What is your why? (Compared to VTI)

    Anyone in here have money invested in a private real estate fund such as DLP or similar? Why did you choose to do this instead of just keeping the same money in a total market stock index fund such as VTI or VTSAX?

  • #2
    No thanks for me

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    • #3
      I've looked for a why, and I can't find one, so I just stay in good ol' boring index funds.

      Here are some things that could potentially be good about it:

      1. Outsized returns. Of course, it could also lag the index. Who knows.
      2. Diversification. Maybe it zigs when the market zags. However, I find it hard to believe that this would actually be the case. I could be wrong, but I can't imagine any sort of scenario where having 20% of my portfolio in these funds makes or breaks me.

      The downsides:
      1. Uncompensated risk. (This of course leads to the potential upside of outsized returns).
      2. Underdiversification.
      3. Complexity.

      For me, there is no clear benefit vs. the known downsides, so I'll pass for now. If I see some evidence to convince me otherwise, I'll be glad to reexamine this position.

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      • #4
        I really hate paying taxes

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        • #5
          Not for me. At some point I'll probably venture into the real estate world but it will likely be in a more active way.

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          • #6
            My whys are primarily higher returns and low correlation with the stocks in my portfolio. More info here:

            https://www.whitecoatinvestor.com/private-real-estate/
            Helping those who wear the white coat get a fair shake on Wall Street since 2011

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            • #7
              Originally posted by childay View Post
              No thanks for me
              +1, at least for now.

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              • #8
                Originally posted by familydocPA View Post
                The downsides:
                1. Uncompensated risk. (This of course leads to the potential upside of outsized returns).
                The potential upside of higher returns is pretty much the definition of compensated risk.

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                • #9
                  https://forum.whitecoatinvestor.com/...in-real-estate

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                  • #10
                    I have a substantial amount invested in passive real estate for the following reasons.
                    1) Expectation of returns that meet or exceed stock market with less volatility.
                    2) Cash flow is addicting. I know that this is somewhat of a crutch but if you can predict 5-7% yearly dividends off your investment this adds up quickly and getting monthly deposits I didn’t have to work a shift for is amazing.
                    3) Speaking of cash flow this is sheltered from taxes so unlike dividends or selling some stock to create your own cash flow where you have to pay a portion to capital gains this is all tax free.
                    4) This doesn’t get discussed as much but assuming anything close to projected returns, would real estate investment allow a higher safe withdrawal rate and therefore an earlier or more luxurious retirement? It is built for about 6% dividends plus forced appreciation which should easily keep up with inflation. 6% rule vs 4% rule gets you there 50% faster even assuming total returns are the same?
                    5) Nobody should invest all in real estate particularly syndications. However getting a portion of your cash flow in retirement via these tax protected sources allows additional sale of stocks while staying at a lower tax bracket to meet your spending needs (almost like a Roth IRA you can withdrawal 6% from tax free).
                    6) Real estate is an asset with better inflation protection. My stocks and bonds have been hit hard this year. Real estate is still up. Thank god for diversification. It helps me sleep at night.
                    7) You can make some investments that I think are lower risk and more crash resistant. These include subsidized low income housing and Medicaid focused senior housing. Fixed rate government financing and 80%+ of your monthly income is guaranteed by the federal government with inflation adjustments. Nice.
                    8) Specific to me but I’m a renter and I wanted to be neutral real estate. If prices keep climbing like they have I need a down payment that can keep track rather than being forever left behind.

                    Now for the main downsides that I see:

                    1) Diversification cuts both ways. You shouldn’t be all stocks or real estate. I always max all tax advantaged accounts ie 401k, defined benefit plan, backdoor roth, HSA and invest in stocks. Then I mix taxable and real estate for the rest of investments.
                    2) Sponsor risk: with a larger fund like DLP housing fund you own many properties so a single fire or hurricane shouldn’t wipe out your investment. However what if management gets way overextended trying to meet expected returns. What about outright fraud? This can happen in the stock market too (Enron?) but in a total market index fund your losses are more limited. I diversify across multiple sponsors but admit I’m heavy DLP. This makes me nervous but then they kill it on execution (45.57% return for 2021) while stocks AND bonds drop and I become even more concentrated with DLP. First world problem….
                    3) Asset class risk. Most funds advertised here are multi family. I think it’s a great asset class but larger market forces could force this to underperform. My second largest investment in real estate has been senior housing. Some of these made during peak COVID when those asset values were really low, and with an aging cohort of baby boomers I’m very optimistic.
                    4) Liquidity issues. DLP has annual redemption though I have other investments which aside from their monthly or quarterly distributions are locked up and may not mature for 5-7 years.
                    5) Fraud risk. I am confident that if my investments fail management will be working hard the whole time and doing their best while being honest. However this is a less regulated industry so just investing with something you see pop up on Instagram could leave you with a 100% loss.
                    Last edited by Hoopoe; 04-10-2022, 02:19 PM.

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                    • #11
                      I think the diversification advantages are largely overstated. While this asset class may perform differently than the total domestic stock market, you hardly can rebalance your opaque, long duration private real estate holding. You’re along for the ride for however long it takes your investment to go round trip.

                      Also, virtually none of these syndicators who have to advertise were along in their present form before the global financial crisis in 2008. Hardly any of them have been tested by fire in a full housing boom and bust cycle. Sure feels like we’re in one part of that cycle right now, though my crystal ball is cloudy about when or whether we’ll see another serious housing bust.

                      Comment


                      • #12
                        Originally posted by Hank View Post
                        I think the diversification advantages are largely overstated. While this asset class may perform differently than the total domestic stock market, you hardly can rebalance your opaque, long duration private real estate holding. You’re along for the ride for however long it takes your investment to go round trip.

                        Also, virtually none of these syndicators who have to advertise were along in their present form before the global financial crisis in 2008. Hardly any of them have been tested by fire in a full housing boom and bust cycle. Sure feels like we’re in one part of that cycle right now, though my crystal ball is cloudy about when or whether we’ll see another serious housing bust.
                        I do agree, though one advantage of the 2008 crisis is that it was relatively recent, so each operator has to have a ready answer (hopefully backed by appropriate action) for how they are preparing for a similar scenario as this is something even a novice investor is going to be watching and worried about. Experience and expertise is a must. Also, while some of the specific funds and financial instruments may not have been around for the 2008 cycle, many of the individuals were and their expertise is invaluable. Keep in mind that it may be impossible to not lose some money in such a decline, but the idea is that even if you NAV value/asset value drops that the organization still stays solvent and fighting the good fight to maintain as much value as possible while participating in the recovery that we hope will follow. People who bought property in 2006 may have had a bumpy road but it is still possible to have made a good investment during that time that has made money to date. Particularly if they were in the accumulation phase and had continued acquisitions in the years that followed.

                        I also see a lot of people concerned about total loss with these investments. I am personally betting on outperformance, but my personal downside that I accept is that I could be wrong and it ends up being underperformance relative to an alternative investment like total stock market VTI.

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                        • #13
                          Return, diversification, taxes, cash flow.

                          In that order.

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                          • #14
                            Originally posted by bovie View Post
                            Return, diversification, taxes, cash flow.

                            In that order.
                            No place for "risk"? That seems to be the starting point. Both personal and on any investment.

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                            • #15
                              Originally posted by bovie View Post
                              Return, diversification, taxes, cash flow.

                              In that order.
                              Risk-adjusted return, but otherwise I agree with you.

                              There’s a reason you don’t chase yield in the bond markets. If this private placement is such an awesome opportunity, why doesn’t the sponsor get cheap financing from a bank and keep more of the profit for himself or herself?
                              Last edited by Hank; 04-10-2022, 01:39 PM.

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