Financial Samurai 3Q2018 Investment Review And 4Q2018 Outlook

Out of the 25+ financial accounts I track online, there are only two accounts that I really care about at the moment:

1) My after-tax investment account I created in 3Q2017 after I sold my SF rental house.

2) My real estate crowdfunding portfolio that has mostly investments outside of expensive coastal cities.

I care about these two accounts the most because before I sold my house, I had a different investment strategy for this portion of my net worth. I had originally wanted to hold the SF property I bought in 2005 forever. But after a good run up since 2012 and with a new set of responsibilities as a stay at home father, it felt like it was time to simplify life.

How I reinvest the ~$1.8M in proceeds will largely determine whether I made the right move to sell the house or not. If I lose money while the house continues to appreciate in value, then I will feel like a stupid idiot. If I lose money while the house starts declining in value, I’ll feel fine. If the house appreciates more than my reinvestments, I’ll at least take solace in all the time and stress saved from not owning.

I’ve already conceded it is unlikely I’ll make more money from my reinvestments than if I continued to own the house given they lack the leverage my house had. The house had a market value of $2,740,000 with an $815,000 mortgage. Further, the SF Bay Area economy is bananas.

Let’s see how the re-invested proceeds have been doing since San Francisco housing prices are up 7-8% year over year. 

3Q2018 Investment Review

Financial Samurai 3Q2018 Investment Review

It wasn’t until February 2018 that I invested my full desired allocation of ~$1,200,000 in house sale proceeds into an after-tax investment stock and bond account I call the House Sale Fund. The remaining $550,000 in house sale proceeds went to real estate crowdfunding by 4Q2017, where I had already invested $260,000.

The overall allocation of my House Sale Fund was roughly 45% into individual municipal bonds and bond funds and 55% into index funds and specific tech investments such as Amazon, Netflix, Facebook, Apple, and most recently Tesla once Elon got sued by the SEC.

The reason why the House Sale Fund is tech heavy is because my San Francisco rental house was a derivative play on big tech. So I figured, in order to for my performance to keep up, I needed some tech-heavy exposure. At the same time, I wanted real estate exposure to not lose too much of an allocation in my overall net worth.

After the first quarter 2018 correction, I started investing more in equities to get my overall allocation up to 60% equities, 40% fixed income.

The House Sale Fund was doing great up through August when it started sputtering hard due to blowups in big tech names. Netflix, my largest individual holding, went from a high of $408 to a low of $317 on August 13.

Meanwhile, fixed income securities came under pressure as interest rates kept going up. What went from a ~3% fund outperformance of the S&P 500 ended up resulting in a ~0.5% underperformance by the end of 3Q.

Bonds and stocks taking it on the chin in late September, early October

My overall objective with the House Sale Fund is to generate a 4% – 5% rate of return with little stress. So far, the fund is up about 8% through 3Q2018. I should consider rebalancing, but I can’t stand the tax consequences and would rather just hold.

Here is my last weekly holdings recap I received for the quarter from Personal Capital, which highlights my overall equity holdings across all accounts was up 8.59% YTD according to the You Index. The weekly recap reminds me that I did finally buy some foreign equities, FXI, a China ETF that has gotten beaten up with all the trade wars.

3Q2018 Performance Personal Capital

3Q2018 Real Estate Crowdfunding Performance Review

I’ve now got 17 different real estate crowdfunding investments via the RealtyShares Domestic Equity Fund. I invested in the Fund because I found I was often too late to get into the deals that I wanted. Further, I wanted to earn a completely passive income where a management committee would stress about which deals to invest in. They would also work with the sponsors to fix underperforming properties.

Demand continues to outstrip the supply of deals on the RealtyShares platform. I’m told another equity fund will be launched before the end of the year. I’ll be sure to let you know when it does in my newsletter.

Financial Samurai 3Q2018 RealtyShares Performance Review

Below are the detailed cash earnings from my real estate crowdfunding investments YTD 3Q2018. I’m surprised I’m getting this level of earnings because all my investments are equity investments with multi-year time horizons and not debt investments. But with 17 different projects, there seems to always be at least one project that is returning money to shareholders.

RealtyShares Cash Earnings 3Q2018 YTD

It won’t be until sometime in 2019 when I benefit from the full force of my $800,000 investment in the Fund. The reason is because I built my $800,000 position over a two-year period. I have a $10,000 individual investment in a suburban Philadelphia class-A office building, which was my first foray into the space.

My passive income earnings from RealtyShares YTD 3Q2018 is $21,322.74, which far surpasses my $9,600 estimate for the year. Therefore, I’ll be revising my 2019 passive income estimates upwards.

So far, I’m pleased with my real estate crowdfunding investments mainly because I don’t think about them until I notice a credit in my checking account, like the one I got for $9,690.42 in September.

If I had kept my SF rental house, I’m sure I would have received another three late rental payments and at least a couple requests to fix something this year. Further, I would have already written a $12,000 1H2018 property tax check plus another $12,000 property tax check by December 10.

Not having to manage a physical property feels amazing.

Related: Reinvestment Ideas After Selling A House

4Q2018 Investment Outlook

With the 10-year bond yield surging to 3.22%, stocks and real estate will have a difficult time marching higher in 4Q. My original 2018 predictions called for a 10% rise in the S&P 500, a 3% cap on the 10-year bond yield, and a slowing of coastal city real estate.

10-year bond yield 2016-2018

Anything can obviously happen between now and the new year. But it’s clear to me coastal city real estate is slowing. We should all be starting to worry about the housing market again. In retrospect, it looks like 1Q2018 was the most recent peak in housing prices, and the most expensive markets have been softening since. Take a look at the surge in inventory, the increased days on market, the weakness in homebuilding stocks, and the decline in prices if you don’t believe me.

With regards to my real estate crowdfunding investments, the vast majority of the investments are rehab projects that were supposedly purchased at favorable prices. Mid-market commercial real estate generally has more opportunity for buyers given prices are much higher.

If you’re a competent operator, the best way to make money in real estate is to improve occupancy rates, increase rents, remodel, and expand rather than simply buy a condo or single family home and hope the market takes it up.

I’ve done my fair share of rehabs and I’m thankful to be done. I’m hopeful the operators of my real estate crowdfunding investments in lower cost areas of the country will add value. It feels great to have them put in the sweat equity instead of me. But I’m under no illusion that if the housing market continues to weaken across the country, my investments will suffer as well.

It’s hard for me to put new money to work in the stock market or real estate market at the moment. But I’ve held my nose and accumulated more municipal bonds, treasury bond ETFs, and volatile tech names during sell-offs. I’m also waiting for information on the next RealtyShares fund.

I no longer mind accumulating cash given I can now get ~1.85% or higher with a money market fund or 2.5% or higher with a 12-month CD. I’m staying patient with my capital.

If the stock market does melt down, I’m hopeful my ~40% bond position will help my Housing Market Fund outperform the S&P 500. It’s always disappointing when stocks sell off because bonds are selling off. I won’t know the market value of my real estate crowdfunding investments no matter what the stock market does, which is one of the reasons why I like real estate.

My year-end targets of 3,000 for the S&P 500 and 3% for the 10-year bond yield are currently looking tenuous. If the 10-year bond yield stays at 3.22% or higher, I think the best we do is an 8% return on the S&P 500, instead of my predicted 10%.

But perhaps a massive trade agreement with China and a year-end Santa Claus rally will at least prove my S&P 500 prediction correct.

Readers, how have you done so far and what do you see in your crystal ball for 4Q2018?


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