Editor: We don’t discuss Real Estate much on The Physician Philosopher. This is for two reasons. The first is that I don’t write about anything that I haven’t done personally and found successful. My only real estate exposure in The Physician Philosopher portfolio is through REITs.
The second reason is that Passive Income MD does a fantastic job of covering real estate. So, I just go on over to his blog, which is where this Saturday Selection was originally published, when I have a question about the topic.
Almost exactly one year ago, I wrote a post detailing a $50,000 investment I made in a real estate fund. I gave my reasons why I was interested in investing in a real estate fund, my expectations for that type of investment, and why I ultimately decided to go with MLG Capital Fund III. (MLG is currently a sponsor of this site.)
There are countless real estate funds out there but I decided to go with them in large part because of their 30-year stellar history of consistently getting returns for their investors. It was comforting knowing that they had experienced multiple boom and bust real estate cycles.
I was concerned and still am of changing market conditions as well as a potential looming recession, and so I felt the need to stick with a company that had been tested in the past and had succeeded.
Well, since it’s been a year and many of you have asked for an update on how the investment is doing, I decided to share it with everyone.
Recap of the Investment
When it comes to real estate, I invest through direct ownership (own my own properties) as well as invest passively (through syndications and funds).
A syndication is the pooling of funds to invest in a real estate opportunity. For example, a syndicator (group that runs a syndication) might find a great opportunity to invest in a large apartment building, then they’ll arrange financing to purchase it, come up with a plan on how to improve the financials of the building through better management, raise money from investors to help fund the purchase, manage rehab, then ultimately give distributions to the investors. That all takes place for one building.
Real estate funds can be thought of as mutual funds of syndications. A fund operator will raise capital from investors based on their track record of success. They use those funds to buy multiple properties, giving the investors diversification over a larger pool of properties.
Like many of you, I absolutely love diversification. It’s a huge part of my strategy and it gives me some peace of mind at the end of the day. It was the main driver in this case for why I decided to invest in a fund for this investment instead of a syndication.
One of the major downsides, however, is that real estate funds are typically a little longer in duration than your typical syndication. So your funds are locked up for closer to 7-10 years. As an investor, you just have to be aware of that illiquidity and be comfortable with the returns that you get for that lack of liquidity.
So, on 8/17/18, I made the commitment to invest $50,000 in MLG Fund II and submitted a 10% deposit ($5,000) to hold my place. I then waited for the capital call.
For those who aren’t familiar with the way some of these funds work, oftentimes you make a commitment, but the fund may not have use for your capital right away while they look for a building to purchase.
So instead of just having it sit in their account, they have you hold on to the funds and then let you know when they need it – this is what’s known as a “capital call.”
Once this capital call takes place, they typically give you a few days to a week to send them the funds.
After making my commitment, I knew the call could happen anytime in the next few months, so I kept that money liquid in a high-yield savings account.
Well, I eventually got the capital call, a little less than 90 days later and on 11/5/18, I deposited the remaining $45,000.
Then I sat back and waited for updates and for distributions/returns.
How I Was Going To Get Paid
Whenever I look at a passive real estate investment, whether it’s a syndication or fund, I look for two major things regarding my returns: 1) The timing of returns – when they expect to pay distributions (monthly, quarterly, immediately, after some set amount of time), and 2) The “waterfall structure” which is the way you know how cash in the deal gets distributed.
In terms of timing, MLG stated they would be paying out quarterly immediately after your investment.
For this fund, the waterfall structure was pretty simple. With whatever cash flow the fund produced, the investors first would be paid a preferred return of 8% averaged yearly on their investment.
After that amount was satisfied, then the remaining cash would go back to returning the investors’ capital. Only after those two conditions would be met, then the remaining cash was split between the investors and the fund.
So after making my full investment on 11/5/18, I received my first quarterly distribution on 1/16/19 in the amount of $754.16. That amounts to a 1.5% immediate return.
If I expected an 8% preferred annual return, that means that I should expect a return of ~2% every quarter.
I entered the part of the way through November so didn’t expect a full quarter distribution. It felt great getting a return along with a detailed update explaining what they had used my funds for and how things were performing with the fund overall.
I was and still am able to track everything through my own investor portal where all of my investments and distributions are tracked.
Communication and transparency have been great as updates every quarter give me an idea of how the fund is doing, as well as, how every single property in the fund is performing. I’m able to view updated financials easily.
Two more quarters have passed and I’ve received distributions of $957.89 on 4/15/19 and $968.64 on 7/15/19. Totaling all of my returns thus far, I’m on track to receive my full 8% preferred return as expected on this investment.
The fund did state that the average preferred return is 8%, so if it’s lower one year, the next year they will catch up. But again, looks like I’ll be current on the 8%.
So far, I’ve been happy with my investment with MLG Capital. I really don’t have anything to complain about. I’ve received timely updates and distributions as promised. Based on the financials I’ve seen, the fund is performing quite well and there’s every expectation that it will continue to do so.
Again, who knows what will happen if there’s an economic downturn. However, I feel comfortable knowing that this investment is well-diversified across multiple properties in multiple markets/states and I’m investing with an experienced company.
I’ll keep the updates coming.
Interested in talking more about real estate funds or investing? Join our Facebook Group, Passive Income Docs. See you there?