Why I Invest in Real Estate/Alternatives

[The White Coat Investor]

I get flack from both sides of the spectrum. The real estate investors can't believe I invest in those terrible paper assets and the Boglehead index fund types can't believe I invest in any real estate besides the Vanguard REIT Index Fund. When I talk about how much I lost in a bear market, the real estate investors have a laugh. When I mention the times risk shows up in my real estate holdings, the Boglehead types scream "I told you so!"

My portfolio is 60% stocks, 20% bonds, and 20% real estate/alternatives.

I invest in real estate for:

1. High returns


2. Low correlation with stocks/bonds


3. To get paid for illiquidity

Is it working? I'll let you be the judge. Here are my actual dollar weighted 2018 returns for stocks and bonds:

• US Stocks (TSM) : -9.18%


• International Stocks (TISM): -17.7%


• Small Value Stocks: -15.04%


• International Small Stocks: -20.03%


• TIPS:-2.76% (this one is actually a little better than this, perhaps -1.7% as I had two different holdings during the year and didn't combine them)


• G Fund: 2.91%


• Muni Bonds: 2.08%

Now let's look at the other 20%.

• VG REIT Index: -7.63%


• My Equity Holdings (currently about half websites, half real estate): 84.84%


• My Debt Holdings: 9.13%

Overall I had a slightly positive return, which is pretty good considering that 60% of the portfolio was in stocks with returns of -9 to -20%. It's pretty easy to see where that return came from this year.

Not every year will be like this, of course. And I was very happy with how my stocks and bonds performed in January, but when people say "Why are you screwing around with all that risky, expensive real estate stuff?" I just point to the scoreboard. I might only be scoring ugly goals, but the ugly ones count just as much as the pretty ones. Certainly my experience so far is enough to justify my continuing interest/involvement in these types of investments.

[Larry Ragman]

Well, the snapshot benefits of diversification are obvious enough in terms of balancing volatility in one year. Have you ever tried to calculate if the broader diversification out of index funds improved your performance over a longer period? For example, over a decade the total stock market index (VTSAX) returned what, 13%? Was you overall performance better over the same period, or whatever comparison period makes sense? Not asking for the numbers,just curious if the anecdotal evidence holds up over time.

Also, since you posted, two questions about the alternates class. 1) do you count the WCI website and associated revenue streams under “websites?” 2) why do you group websites with real estate equity?

[Peds]

You have plenty of money. Continue doing what you want.

[The White Coat Investor]

Larry Ragman wrote:

Well, the snapshot benefits of diversification are obvious enough in terms of balancing volatility in one year. Have you ever tried to calculate if the broader diversification out of index funds improved your performance over a longer period? For example, over a decade the total stock market index (VTSAX) returned what, 13%? Was you overall performance better over the same period, or whatever comparison period makes sense? Not asking for the numbers,just curious if the anecdotal evidence holds up over time.

Also, since you posted, two questions about the alternates class. 1) do you count the WCI website and associated revenue streams under “websites?” 2) why do you group websites with real estate equity?

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1. Not WCI. Yes PIMD/POF

2. That's a great question. May remove them this year. Seemed the logical place to put them when I bought them, but they're now half of my real estate equity category.

[The White Coat Investor]

Peds wrote:

You have plenty of money. Continue doing what you want.

Click to expand...

An excellent point. The 85% of my portfolio in index funds is more than 100% of the portfolio of most docs. So even if I simply lit the other 15% on fire I'd still be ahead.

Part of the reason the portfolio is so large though is that I haven't been afraid to branch out a bit.

[Complete_newbie]

How are you valuing the "equity" in the website leading to 84% growth? 3x the revenue?

 

 

[Tim]

“My Equity Holdings (currently about half websites, half real estate): 84.84%
My Debt Holdings: 9.13%”

Counting WCI, it would seem the time spent on side gig investments would dwarf that for your equity investments. Over the same year, just roughly how much time devoted to education, exploring, vetting and maintaining? Obviously some is personal interest, but at what point would you plan to exit the 20% alternatives?

My guess is you spend 80% or more on the alternatives.
My guess is you spend substantial time as well.

[LIFO]

"My Equity Holdings (currently about half websites, half real estate): 84.84%"

How much of this is WCI website?  Amazing work on your part but also not something available to every investor.

For me, I like the generalist approach.  Find and invest in value where you see it.  All assets can be mispriced.

Would you ever look at stock picking like you look at your private equity holdings?  ie, stepping away from the indexing mentality and make a focused outsized bet on a single or group of equities that you feel have been mispriced?  Obviously, not something to do with your whole portfolio.  But to give yourself an even shot at beating your own returns, you need to give yourself an even playing field.

[The White Coat Investor]

Complete_newbie wrote:

How are you valuing the “equity” in the website leading to 84% growth? 3x the revenue?

 

 

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According to the buy out section of the partnership agreement.

[The White Coat Investor]

Tim wrote:

“My Equity Holdings (currently about half websites, half real estate): 84.84%
My Debt Holdings: 9.13%”

Counting WCI, it would seem the time spent on side gig investments would dwarf that for your equity investments. Over the same year, just roughly how much time devoted to education, exploring, vetting and maintaining? Obviously some is personal interest, but at what point would you plan to exit the 20% alternatives?

My guess is you spend 80% or more on the alternatives.
My guess is you spend substantial time as well.

Click to expand...

I don't count WCI in that portfolio but it is hard to separate how much work is put into the website investments from WCI. I don't have plans to exit from alternatives unless forced to do so. They're my best investments.

[The White Coat Investor]

LIFO wrote:

“My Equity Holdings (currently about half websites, half real estate): 84.84%”

How much of this is WCI website?  Amazing work on your part but also not something available to every investor.

For me, I like the generalist approach.  Find and invest in value where you see it.  All assets can be mispriced.

Would you ever look at stock picking like you look at your private equity holdings?  ie, stepping away from the indexing mentality and make a focused outsized bet on a single or group of equities that you feel have been mispriced?  Obviously, not something to do with your whole portfolio.  But to give yourself an even shot at beating your own returns, you need to give yourself an even playing field.

Click to expand...

None. Agreed, not generalizable. But neither are most of the other private investments since you can't go back in time and buy them.

I find the stock market FAR more efficiently priced than the real estate market, and there is zero efficiency in the website market. It turns out I can add a lot of alpha there.

[Complete_newbie]

Still vague though , buyout agreement value changes based on...? It has to be revenue and what the website is valued at

I was assuming 3x multiple.

[ScopeMonkey]

I'm in complete agreement with Jim's approach; why not balance the index fund investment philosophy and the RE philosophy and do both?  I've begun listening to various RE podcasts like BiggerPockets, as well as reading Bogleheads, and hearing many traditional advisory approaches as well (some from financial advisors on this forum).  It's quite amazing how strident the voices of each approach, and that they attack any other approach as folly and stupidity.  Why not do both?

I'm now in about 60% stocks/bonds (mostly indexed, but some individual munis) and about 40% RE, including my office building equity, hard money lending, private REITs, and asset funds like MLG etc.  These all produce steady income, and some appreciation.  I think both approaches are valid; just do your homework in whatever you invest in, be conservative, and it will all usually pay off over time.

[wonka31]

Scopemonkey wrote:

I’m in complete agreement with Jim’s approach; why not balance the index fund investment philosophy and the RE philosophy and do both?  I’ve begun listening to various RE podcasts like BiggerPockets, as well as reading Bogleheads, and hearing many traditional advisory approaches as well (some from financial advisors on this forum).  It’s quite amazing how strident the voices of each approach, and that they attack any other approach as folly and stupidity.  Why not do both?

I’m now in about 60% stocks/bonds (mostly indexed, but some individual munis) and about 40% RE, including my office building equity, hard money lending, private REITs, and asset funds like MLG etc.  These all produce steady income, and some appreciation.  I think both approaches are valid; just do your homework in whatever you invest in, be conservative, and it will all usually pay off over time.

Click to expand...

Agreed, there's value to both strategies. Most of the people who are dogmatic about one approach or the other are 'talking heads', no different than the financial screamers of CNBC, Fox, CNN, etc. I will say, Bigger Pockets started a second podcast which I like a lot. The two co-hosts are more moderate and claim to do real estate and index funds. I was a little surprised as it deviated from their real estate platform, but it is well-done and I think they have nailed it thusfar.

[PTM]

I heard the recent podcast about private real estate funds.  The returns north of 10% sound good, but if its essentially a debt deal I don't see the allure to a high income professional such as WCI.  After all, aren't the proceeds taxed as ordinary income?  I don't need more income, I make plenty in my day job (and get taxed plenty too).  I need more tax-efficient assets, but don't have the time or expertise for single family homes.