The Value Proposition of a Real Estate Access Fund – The White Coat Investor

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The Value Proposition of a Real Estate Access Fund - The White Coat Investor


[Editor’s Note: Facebook Live tonight at 7 pm Mountain in the WCI Facebook Group all about contracts, contract evaluation, and negotiation. See you there!]

Many investors are not familiar with the concept of a real estate access fund. But before I can get into what an access fund is, I need to describe to you what an access fund accesses, which is generally a private real estate fund. If you have taken my Fire Your Financial Advisor online course, taken Peter Kim’s Passive Real Estate Academy, or heard me speak at PIMDCON19, you have seen my slide showing the spectrum of real estate investing.

Today we’re way out nearly to the right side of this continuum. We’re talking about individual real estate funds. This is actually my favorite spot on the spectrum. You don’t have the liquidity of a publicly-traded REIT (or better the Vanguard REIT Index Fund), but you do have much lower correlation with the overall stock market, depreciation actually gets passed through to you, and most proponents would argue your expected returns are higher.  That’s really the attraction to me.

The ideal portfolio component has high returns and low correlation with everything else in the portfolio. I’m more than willing to give up some liquidity on at least part of my portfolio in order to earn higher returns. I get professional management, economies of scale, and broader diversification than I would be able to achieve buying individual syndications. Most importantly for someone like me who already has two jobs, I get passivity. At least once the fund is selected, it’s just mailbox money until the fund liquidates in 3-10 years. While I don’t retain the control over management and taxes that I would have buying individual four-plexes, I don’t have to actually do anything more than write a check and cash checks, at least after the initial due diligence.

Sounds great, right? Well, it has its downsides too. It’s tough to do 1031 exchanges when you’re investing in funds. The most tax-efficient way to invest in real estate is to depreciate, exchange, depreciate, exchange, depreciate, and die. While easily done while investing directly, it’s more difficult with syndications and nearly impossible with funds. We already mentioned another downside–illiquidity. But as long as I’m being paid for that, I can deal with it and so can most other doctors with some portion of their portfolios. The final downside is much more difficult for doctors, even me with my income from WCI–high minimum investments. These are institutional class funds and they expect you to have institutional money. If you’re lucky, you might find $100K minimums. If you’re unlucky, those minimums might be $1M or more.

Enter the “Access Fund”

The whole point of an access fund is to lower that minimum investment. Perhaps the typical scenario is lowering the minimum from $200-500K to $25-50K. You still have to be an “accredited investor” (income of $200K+ or investable assets of $1M+), but the majority of doctors meet that requirement even while they still have a negative net worth. But coming up with a quarter-million dollars for one investment in one asset class? That takes some real money. In exchange for that service, the access fund usually charges an additional layer of fees. Maybe it negotiates a little bit better deal than a $250K investor would get (since it is coming in with several million) but its fee usually eats up more than it can negotiate. So the basic exchange is higher fees (and thus lower returns) in exchange for access. Is that exchange worth it? Only the investor can decide.

Two Debt Funds From CityVest

There are all kinds of private real estate funds, just like there are all kinds of mutual funds and even REITs. Some invest on the equity side, in multi-family, retail, industrial, storage, or even mobile homes. Some invest in preferred shares, kind of a hybrid between equity and debt. While others invest purely in debt. Most of these funds loan money to home flippers who are looking for quick money they can borrow for 6-12 months.

Their biggest cost is opportunity cost, so they are more than willing to pay double-digit interest rates (and points) in order to get ready access to capital. The fund provides that capital, takes its cut, and the investors who provided the capital get the rest. (Although to be totally accurate, it is usually set up so the fund gets its fees first [1% is pretty typical], then the investors get their capital, then the investors get a “preferred return”, and finally the investors and the fund split the rest of the profits 80/20 or 70/30.) I have invested in these funds both directly and via an access fund.

CityVest is a company that has been sponsoring this website for the last year or so. They do nothing but access funds. They go out and find the best funds they can and cut a deal with them to bring them $5 Million or so all at once, often acquiring better terms than an investor with the fund minimum might be able to get. Then they turn around and form a 99 member LLC and offer a lower minimum to that LLC than the fund offers, usually $25-50K. In exchange for that, they charge a 0.75% annual management fee, a $500 per investor per year tax prep fee, and a one-time $50K fee to the fund. This usually works out to something like 2% in total fees to the investor. Right now they’re offering two access funds that invest in debt funds.

A Word About Fees

Before we get into the two funds, let’s talk for just a minute about fees. For those who have been hanging around in the mutual fund and the financial advisor space, a 1% fee is egregious, much less a 2% fee. We’re used to paying 0-0.1% for our mutual fund expense ratios and by golly, if we’re going to pay an advisor it sure as heck is going to be less than 1%. But you can’t compare those fees directly to what you are paying to a private real estate fund. It’s a little bit of apples and oranges. Let me explain.

First, the EFFECT of fees is exactly the same, no matter why, how, or when they are charged. Every dollar you pay in fees is a dollar you do not get in return. A key principle of investing has always been to minimize fees as much as you can.

Second, a real estate fund is a partnership. A type of company. Like any company, it has expenses. When you invest in a publicly traded REIT, you are investing in a company. That company has expenses too. But those expenses don’t show up in the expense ratio of a mutual fund that invests in that REIT. But they still reduce the return of the investor just the same. With the private real estate fund, they actually tell you what those expenses are. So it SEEMS that you are paying dramatically more, but in reality, you may be paying dramatically less. A publicly traded REIT has a lot of regulatory and accounting costs that a private fund doesn’t have. So in many ways, it is cheaper to run a fund than a public REIT. That may account for some of the higher returns that most investors in these funds expect. although it’s possible that it is simply a result of REITs having been bid up in price. For example, the yield of the Vanguard REIT index fund is under 3%. That’s pretty low considering that a REIT by law must return 90% of its taxable income to its investors each year.

The first of the two funds I’ll highlight today is the Arixa Access Fund I. I have personally previously invested both with Arixa and with CityVest in the past, so it is kind of fun to see them teaming up. Arixa has two funds. The first one, which I have invested directly in, is the Arixa Secured Income Fund, has a target return of 7-8%, and has a $100K minimum. My personal XIRR return there over the last 18 months or so is 6.54%, but that’s probably slightly lower than my actual return because there is a slight delay in reporting. That fund simply loans money to fix and flippers in California. The loans are secured in first lien position by the properties being renovated.

However, the CityVest Arixa Access Fund I is not investing in that fund. It is investing in the other Arixa Fund, The Arixa Enhanced Income Fund. The main difference between the two is that the Enhanced Income Fund uses up to 50-65% leverage and the Secured Income Fund is non-levered. However, the Enhanced Income Fund has a $200K minimum and a target return of 9-10%. It also has a $200K minimum if you invest directly.

Enter the Access Fund.

Now, instead of needing $200K to invest, you can invest with just $50K. Actually, if you go through the links on this page (or simply tell CityVest you came from WCI), you can get in with a $25K minimum. In addition, you get part of your first year’s CityVest management fee waived if you come from WCI.

But that only offsets part of the fee. The CityVest fees on this fund are:

  1. 0.75% per year (0.375% in year one) plus
  2. $500 per year per investor plus
  3. $50K up-front for the fund (1% if the fund hits its target $5M investment, otherwise higher.)

That ads up to a little under 2% a year for a $50K investor if the funds hits its target, or a little over 2% a year for a $25K investor especially if the fund doesn’t hit its target.

What should you expect from this access fund return wise? Well, if the underlying fund thinks it can hit 9-10% after-fees (seems reasonable given the 10.31% return the last 5 years), and the access fund is going to cost you 2%, then Alan and I both think it is reasonable for a CityVest Arixa Access Fund I investor to expect 7.5% returns. Maybe a little better, maybe a little worse. Not too bad for an investment that is primarily backed by first position real estate liens. The only similarly diversified investment in this asset class with a lower minimum investment that I know of is the iShares Mortgage REIT ETF REM, but that is subject to stock market volatility. It lost more than 3/4 of its value in 2007-2008.

The Access Fund has less liquidity than the underlying fund (4 years instead of 2) and less frequent distributions (quarterly instead of monthly).

Check out the CityVest Arixa Access Fund I Today!

Cityvest real estate fund

The second access fund I wanted to introduce you to today comes from DLP. You may recall the DLP Access Fund I investment from almost a year ago. I invested $100K in it and the majority of the fund was actually made up of white coat investors. My XIRR return in that fund as of the time of writing was 7.37%, but the most recent distribution annualizes out at 11% (and I expect my overall return to be in the 9%ish range after the CityVest fees as time goes on since the underlying fund is targeting 11%.)

However, these two access funds are investing in two different DLP funds. Access Fund I invested in the DLP Lending Fund, an older fund with a $500K minimum. Access Fund II will invest in the DLP Income and Growth Fund, a newer fund with a $250K minimum. Both of those minimums are out of reach for most physician investors, so there isn’t much difference between $250K and $500K. Both funds are primarily invested in first-lien loans to home flippers and apartment developers, but can invest in other investments. According to CityVest, The Income and Growth Fund can invest in opportunities that may include, but are not limited to:

  1. Rehabilitation and private loans to real estate investors
  2. Loans to Affiliates of the manager
  3. Investments in Affiliates’ other LLCs, such as the DLP Lending Fund
  4. Preferred equity investments and partnerships
  5. Acquisition and disposition of non-performing notes as well as other real estate backed investment LLCs

So there will be a broader range of investments in this fund than in the Lending Fund (and it may even invest in the Lending Fund) although according to the DLP site, the Lending Fund itself can also take equity positions. The fund is targeting a return of 11%.

Once more, the point of the Access Fund is to lower that minimum investment from $250K to $50K ($25K for white coat investors, who also get half their first year’s CityVest 0.75% management fee waived.)

This access fund is also going to be a four-year fund with quarterly distributions. It is aiming for $7M, although it certainly won’t get there if every investor only puts in $25K. CityVest fees will be the same as for the prior fund:

  1. 0.75% per year (0.375% in year one) plus
  2. $500 per year per investor plus
  3. $50K up-front for the fund (1% if the fund hits its target $5M investment, otherwise higher.)

real estate acces fund

So if these fees work out to be around 2% total, a reasonable expected return from the access fund would be 11 – 2% = $9%.

Now that is higher than the Arixa Access Fund I (7.5%), but the underlying investment may also be riskier. Only you can decide if that risk is worth taking for the potentially higher return.

Check out the CityVest DLP Access Fund II Today!

What do you think? Do you like investing in real estate on the debt side? What do you think of private debt funds like these? What do you think of access funds? Have you invested in one? What was your experience like? Comment below!





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