By Datta Khalsa, Broker
In a climate where local inventory has dwindled, cap rates have declined, and property values are believed to be near the end of their growth curve, many investors are tempted to look in other markets but are discouraged by the logistics of having to manage their investments from afar. Fortunately, there is a good alternative called the “Small Pool LLC” investment fund that puts the management responsibilities in the hands of a team who oversees the daily decisions that can be otherwise difficult for an investor to handle on their own.
The local real estate fund that I have helped to set up and manage posted a 9% annualized return in 2019, continuing an unbroken record of growth and positive returns for our investors year-over-year since our inception in late 2013. We have done this by combining the best of both local and out-of-state investments to provide a diversified model with the flexibility to take advantage of differing markets in various parts of the country, and the flexibility to deploy dynamic investment strategies to respond to fluctuating market conditions.
For example, as the market for Single-Family Residential flips has started to dry up we have shifted our focus increasingly towards other types of investments, such as private equity loans and multi-unit residential developments. We are also participating in the burgeoning hotel market in partnership with several experienced developers, including a local entitlement project and a pair of rehab and stabilization projects for hotels out of state.
The local entitlement project is for development of a 135-room “upper select service” hotel offering a restaurant and rooftop lounge in Silicon Valley. Our partner in that development has engaged with a major chain for a contract that is expected to pay returns well in the double digits with a projected sale date at the end of the third quarter of this year.
Our investment models for the two redevelopment deals out of state are structured with the fund receiving monthly fixed dividend payments over the first 18 months, before converting to an equity share once each project is stabilized and refinanced. At that point, our full initial capital investment is repaid, with us continuing to receive pro rata distributions on all profits and/or proceeds thereafter.
On the residential development front, our largest asset is a 20-townhome development that is underway in Phoenix, on track to be completed by the end of the year. And locally, our 15-townhome project we are partnered on in Aptos just received full entitlement and is moving towards breaking ground on that one this Summer.
Over the course of its first six full years of operation, the fund has averaged returns of over 13%, compounding to over 18 % for our investors who rolled these returns back into their shares. In other words, $100,000 invested in 2014 has $212,684 value today by being reinvested every year, backed by the stability of a portfolio that is diversified between 25 assets across 11 states.
Moving into 2020 we are excited to see our multiple ventures and development projects continue to grow, as we build on our already solid foundation of investments made.