Real Estate Investing Online, Part IV: The Returns

Last post of this series was a little over two years ago. I figured it's about time to update the series with what really matters: the returns.

I posted in the very first post that the returns for that first year was around 4% but that over time I expected those same investments to yield around 12-15% annually. So, now that it's been over 4 years of investing, were my expectations realistic? 

Yes, pretty close, but a bit too optimistic.

My actual annual returns now (2017) from all of my investments, including many from 2017 that are just starting up, has already returned 12% this year. And the year is not over yet. So, I was right at that lower end of my expected returns, possibly a bit higher.

Let's see what contributes to the returns and how I compute these numbers.

Breaking it down

In year one I told you that my returns were right around 4%. Turns out that's a typical low-end over the last four years. In aggregate, over the last four years, I've consistently gotten around 6-8% from all deals open for one year (the average is 7.5%). This includes deals that are simple buy-and-rent and those which require remodeling.  6-8% is typical for year 1.

The full average returns by time since first investment is as follows:

Year      Average Returns

0           1.8%

1           7.5%

2           8.9%

3           20.7% 

Some observations about these returns:

1) As alluded before, year zero has low returns because many deals take a while to start returning and many others (e.g. rehabs, fix-and-flip) do not start returning until renovations/construction is complete.

2) Year 3 is particularly robust because many equity deals target a 3-year hold, returning all investment plus appreciation at the end.

3) My investment mix is not 100% equity (more on that later), so for some deals the points above do not mean as much.

4) Note that it's implicit in the numbers above that there were four year "zeros" and only one year "three" so far as I've been investing in these online deals for four years. 

Now, let's look at returns based on cash flows per year. This is different than the analysis above because I look at how much cash was returned from an outstanding capital invested in a given calendar year as opposed to bucketing everything based on their start time. Invested amounts (the denominator) carries over from one year to the next unless the deal exits.

Calendar Returns

Year    Returns

2014    4.6%

2015    5.1%

2016    6.5%

2017    11.9%

Here again we see the same trend: low returns early on and a jump on year 3. 

You may notice that 2017 is lower than year 3 in the previous table, even though there is only one year 3, which is 2017. That's because 2017 is year 3 for deals that began in 2014, but it's also years 0, 1 and 2 for more recent deals -- hence a weighted mix of returns (also, 2017 is not over yet). In other words, the calendar returns include cash flows from any deal that year, regardless of when they began.

So, going forward, I now expect returns to be more in the 11-14% range, assuming I keep adding new dollars and re-investing old dollars into new deals. If I were to stop investing, I'd expect returns to go up for 3 or so years and then trail off, eventually dropping to zero as they all exit.

Of course, we've been on a bull market and it will not continue forever. So, going forward, results could very well be much worse.

Investment Mix

I mentioned above that I have a mix of deals, not just equity investments. The mix has changed over time too. Here's the current snapshot by deal type, weighted by currently-invested dollar amounts.

I won't discuss the rationale for this particular mix right now. For a reminder of what each deal type entails, please see part II of this series. 

The point here is that equity is still the bulk of the investments and was the sole type of investment in the first few years, hence why we see a pronounced effect at around year 3. As of late I have made several debt deals because they offer immediate returns, which helps smooth out the lumpy returns achieved by equity deals. They're also more robust to downturns, which I expect will happen at some point in the future. Preferred equity is similar to debt in which they offer immediate yields, usually higher than debt, but also with more risk.

Min/Max

Another important pair of numbers to look at are the minimum and maximum returns so far. More the min than the max, I'd say. So far, no deal has gone negative. But I've had one deal return exactly zero -- I got my investment back and a tax headache to deal with, but no loss of principal (maybe a tiny loss due to how taxes are computed).

As for the current max, it was an equity deal that returned an annualized 30%.

So, there you have it, a detailed analysis of my returns so far.

If you want to start investing online, I'd look first at Realtyshares. I'm a fan of their platform and an early investor in them (I own shares of the company). My returns above are for investments done in their platform, plus a few others. Over 50% of my currently-invested dollars are with Realtyshares as of this writing.

Happy investing.

Portfolio Returns for 2010

2010 is now history and it's time to update my portfolio returns to check on my progress so far.

In 2010, my US portfolio, which excludes real estate and foreign accounts, returned (including dividends) approximately 11.3%. Comparing with the S&P 500, which returned (including dividends) approximately 15.1%, my returns are not great.

But my results don't bother me at all, because my portfolio has less risk than the S&P and does better than the S&P in down years. Let's see why. But first, let me define risk.

Risk

I don't consider risk to be equal to beta or the Sharpe ratio. That's because I don't mind price swings (which increase beta) as long as I believe that in the long run, my buying power will be maintained or increased versus inflation.

In other words, I consider risk to be the degree with which I may lose principal, either via loss of capital (due to bankruptcy, long-term loses in the underlying companies, etc) or inflation.

With that, let's dissect my portfolio a bit to understand where I trailed the market and why I should not worry about it.

Portfolio Drag

Looking at my holdings and the weights they play on my overall allocation, I found out that the main reason for underperformance in 2010 was due to my bias towards large value companies. These are mainly blue chips that pay steadily-growing dividends such as HD, WMT and JNJ.

Let's look at a couple of those:

Johnson & Johnson (JNJ). The BandAid maker opened the year at $64.41 and closed it at $61.55, hence returning -4% in share price appreciation. When adding the 3.2% dividend, JNJ's total return was a negative 0.8%.

Walmart (WMT). The world's largest retailer opened the year at $53.45 and closed it at merely $54.09, thus returning 1.19% in share price. When adding its dividend of 2.2%, WMT's total return was 3.39%.

Home Depot (HD). The home-improvement retailer opened the year at $28.93 and closed at $30.21, thus returning 4.4% in share price. Adding its 3.3% dividend, HD's total return was 7.7%.

Therefore, my over-reliance on these big names caused my portfolio to lag behind the larger market.

However, as I've mentioned before, I believe my capital will be preserved better if I stay with these stocks for the long-run, as opposed to rotating in and out growth or "story" stocks throughout the year.

Goals, Restated

For the largest part of my portfolio, my goal is on dividend growth and capital preservation. As such, I believe these companies will continue doing the job. All three have been increasing dividends over the years (HD did pause for a while though, but I believe they will resume soon) and as long as my capital is safe with them, I will reap the benefits of the increasing dividends over time.

To recap my investing approach: When I invest, I look for companies with a history of sustainable dividend growth. Then I factor in this growth and current share price to determine a price I should pay now that will yield at least 11-12% dividend return over many years, with a margin of safety of between 10 and 15% (depending on various fundamental and historical factors).

For this reason, I'm quite happy with my returns so far. I will lag the S&P in good years, but I will do better in the down years (like I did in 2008).

Disclosures: I own every stock mentioned above at the time of writing.