For an audio version of this post, please click on the speaker icon (top left).
When I first began my Financial Independence journey I quickly came across and embraced the concept of passive income and its many benefits:
- Preferable tax treatment.
- The ability to sever the work-money relationship that everyone in the rat race has participated in.
- The ability to earn money while you sleep.
A properly constructed passive income machine truly does provide “mailbox money,” which is vital if your plan is to retire, early or otherwise.
There are many avenues to creating this perpetual money printing machine that is passive income.
Those who prefer to invest in equities can certainly accomplish a substantial passive income stream via dividends.
About 1/3 of my “Investment Portfolio” is indeed in the stock market but I would not be able to live on just these dividends because of the relatively low yield this type of investment provides.
Sure I could specifically target stocks that have higher yields to boost the return by a few percentage points, but it still requires a much larger stack of capital in play to achieve the annual passive income I was trying for.
I therefore set my sights on real estate to help bridge the gap between what my market portfolio provided and my estimated burn rate.
As a physician I did not really have the time or expertise to be an active real estate investor so I chose the more passive avenues of real estate investing, namely that of syndication deals.
I was willing to trade off some of the potential return of an investment in order to have a more “hands off” approach.
My first syndication deal, with 37th parallel, a sponsor of this blog, was in May 2017.
Typically syndications have a longer holding time with your capital tied up for 7 or more years.
It is therefore hard to truly see how your investment performed until it exits after a full cycle.
Sometimes, however, a syndication exits at a much earlier time frame than originally proposed (ideally because there was an impressive offer made on the property that made sense for the syndicator to sell and cash out the profits ahead of time).
I finally have one such deal that just completed an early exit and thought I would share the process I experienced.
Alpha Investing (A blog benefactor).
A Class B, 488-unit garden-style multifamily community built in 1979 located in Phoenix Arizona.
This complex contained studio, one bedroom, and two bedroom apartments.
Acquisition price was $39.75M.
The Proposed Business Plan:
This was basically a value-add investment type business offering.
Essentially investors would provide capital to purchase the property and do targeted improvements in the property that would create higher revenue from the increased rental premium.
The minimum investment (had to be an accredited investor) was $10k.
The projected hold period of this investment was 5 years.
Investor Projected Return Structure:
- 17.4% IRR
- 10% Preferred Return
- 2.13x Equity Multiple
- 113% Return on Investment
My investment experience.
This was my first experience with Alpha Investing.
Alpha Investing first landed on my radar courtesy of fellow physician blogger, Peter Kim, of Passive Income MD.
I was in the final stages of closing on my “Grand Slam Investment“and knew that I would soon be receiving a large amount of capital that I was hoping to redeploy back into the perpetual money making machine I was creating.
I reached out to Alpha Investing and not only was I able to talk to the CEO, Fark Tari, but I was able to meet him in person shortly thereafter.
Fark was also kind enough to place himself under the X-ray Beam and gave some great insights about his company and real estate investing.
After answering all my questions satisfactorily, I decided that I would indeed park some money in the above mentioned investment.
How the Numbers Played Out:
Investors typically got paid every quarter from positive cashflow from rent.
I made a commitment for a $20k investment which I completed May 3, 2019.
As I am certainly no financial/math whiz, and consider myself average on Excel, I tried researching online to come up with a workable formula to calculate returns as best I could (if someone sees an error in this formula or has a better option, please let me know):
=((Initial Commitment Amount+Running Total Distribution)/Initial Commitment)^(365/(Date of Last Distribution-Initial Commitment Date))-1
In this Excel spreadsheet I therefore used this $20k as my initial capital value and 5/3/2019 as the initial date to calculate returns.
The following is exactly how my investment behaved:
|Date||Distribution||Running Distribution Total||Calculated Return|
My thoughts at this stage:
Out of all my other syndication deals, it was producing the lowest calculated return numbers across the board, but this particular investment was not designed to be a cash flow play but more along the lines of an appreciation play.
Add to that the fact that some of my other investments were chugging along since 2017 and had a distinct advantage as typically in mid/later stages of the investment cycle the distributions tend to get higher (as capital improvement costs start to decline and premiums from increased rents start showing up).
To make matters worse there were only 2 distributions made in this particular investment prior to the world being put on its knees by the microbe known as COVID-19.
Every Dog Has Its Day.
This deal was still doing better than if I had parked my money in a savings account, where the “high interest rate savings accounts” started to dramatically reduce the interest rate given (went from around 2.3% interest to currently 0.45%).
Add in depreciation deductions and the advantage of this investment over leaving my money in a savings account grew even more.
Another benefit of these types of deals is that you are essentially locked into the investment and have to see it through its entire course.
If this was a stock that had poor returns a lot of investors may have cut bait and gotten out of the investment in the early stages.
In this particular instance that would have been a disastrous move.
An email that made the runt of the litter move to the front.
On Dec 17, 2020, I received a simple email from Fark addressed to all the investors, and boy did it really shake things up.
In the email Fark stated that the project ended up being sold and touched up on some of the financial details:
- Initial purchase price was $39.75M
- Total Cost after Capital Improvements: $47M
- Sale Price: $60M
Shortly thereafter I received not only a check back for my initial capital, but a final distribution check from the proceeds of the sale.
That made the above table far more palatable
|Date||Distribution||Running Distribution Total||Calculated Return|
According to Alpha Investing, the return for investors was:
- 37.9% IRR
- 68% ROI (1.68x equity multiple) over 1.63 years (41.8% average annual return).
I was pleased that the IRR I calculated (37.18%) was within acceptable range, especially since my calculations used the exact date the money left my bank as the starting point.
It is hard to truly judge how a real estate syndication deal is doing until it goes full cycle.
When reviewing a Private Placement Memorandum that syndicators provide, you can get lost in all the numbers.
It is also easy to manipulate numbers by changing various metrics to draw in more investors.
I prefer to invest with syndicators who take a more conservative approach rather than those who rather showcase an overidealized scenario of returns.
I rather be pleasantly surprised that the numbers I achieved exceeded their projections rather than the opposite scenario playing out.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
NOTE: The website XRAYVSN contains affiliate links and thus receives compensation whenever a purchase through these links is made (at no further cost to you). As an Amazon Associate I earn from qualifying purchases. Although these proceeds help keep this site going they do not have any bearing on the reviews of any products I endorse which are from my own honest experiences. Thank you- XRAYVSN
Thanks for the update.
I’m not sure I followed your Excel formula, but I’m sure its fine.
I usually just throw the numbers into the =XIRR ( ) function. Have you used that or considered that?
I came across that formula I think awhile after I created my formulas for syndication returns. It probably is a way more elegant solution. May tinker with it in future. Thanks!
WCI had a good post on it (of course!) back in his early blogging days of 2011.
I would love to get into the real estate game one day. I’m just so afraid that the capital is tied up in one asset and that I basically only have one shot to make it good, otherwise the subsequent deals are going to tumble like a house of cards.
Good luck on the deal. I’m sure it’ll turn out great!
Thanks David. Yeah the dollar amount and time frame of hold can put a lot of people off.
My tactic is that I have invested with several syndicates and multiple properties to help lessen concentration risk.
There are some syndicated deals that act like funds (your commitment buys you a fractional share in multiple properties) that may be more to your liking.
Yeah this particular deal has already been fully exited and I received my capital back as well as my share of profits.
Best of luck!
Agreed with Wealthy Doc: you should definitely just use the =xirr function. Much more elegant and relevant since the actual distributions in the early stages of a syndication are *relatively* meaningless to the overall investment return. It’s really the final disposition (sale/refinance) of the property (and how early/late it occurs) that accounts for the bulk of the investment returns.
Appreciate the feedback, will definitely have to look at changing my spreadsheet. I’m not sure how I arrived at my formula, but remember trying to google what I was trying to accomplish and came across a formula that I sort of copied.
Appreciate the transparency and putting your real world numbers out there, Xray. This is the space that is most interesting to me lately, although I’m leaning more toward direct real estate ownership to give me the option of hands-on management once the kids leave home.
Grateful to learn from you,
No problem at all CD. It was my first full cycle event so figured it might help people understand how returns might play out.
Direct ownership is great for those who are into it. Far more control and ability for profit.