Anatomy of a $50,000 Real Estate Fund Investment

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My financial mindset, as it has been for the last 4-5 years, is to take active income and create as much passive income as possible.

What that has meant, for the most part, is that I’ve been focused on converting my daily income as an anesthesiologist into more passive-type investments that will provide cash flow for years to come or hopefully indefinitely. I had hoped that this passive income would eventually exceed my expenses in 15 years, but gratefully it has happened much quicker than I imagined.

The pursuit has mainly been for money that doesn’t require additional time in the hospital and that is essentially made in my sleep. What kind of investments have I poured my time, energy, and money into? Well, they’ve been many of the ones listed in the 10 Perfect Passive Income Ideas for Physicians.

The Blog and What To Do With the Income?

If you’ve been following my blog at all and if you’re a newsletter subscriber, then you’ll have seen that this site itself has surprisingly become a significant income source. (Thank you supporters!) On the other hand though, a blog is not the most passive of ventures as my fellow bloggers and I tend to joke about quite a bit.

However, I do really enjoy running this site. I enjoy pursuing the mission which is to help people achieve financial freedom through multiple sources of passive income, in order to allow them to live the life they want in and out of medicine. I also love the network of people I’ve come into contact with and the community that has been building around this concept of financial freedom, especially the physician community of Passive Income Docs.

So lately I’ve been thinking about how to take the actual income from the blog and convert it into something even more passive as well. Sure, I could go and stick it all in a taxable stock account and let it ride in a highly diversified index fund.

However, I’m just not particularly interested in that type of investing. I’d like to invest in an asset class that gets me excited and up in the morning while providing immediate cash flow – real estate.

Now there are so many ways to invest in real estate and I’ve tried most of them. I’ve purchased my own rental properties, invested heavily in crowdfunding, but lately, I had been interested in investing in a real estate fund. Why? Because it is as pretty close to passive as you can get in this asset class. Once you do the initial due diligence, you make the investment and wait for the returns to hit your bank account.

Personally, I have some concerns about an upcoming downturn in the real estate market just like everyone else. The experts have been predicting one for years but the truth is no one actually knows when it will come.

However, despite this concern, I’ve continued to invest. That’s because I consider money on the sidelines as dying money and trying to wait and time investments, whether it’s in the stock market or real estate, usually doesn’t end well. I’ve just tried to be a little more cautious about what I invest in, usually opting for some longer-term investments that will provide cash flow for years.

Investing in a Real Estate Fund

So I started doing some research on real estate funds and shared that in Is This the Holy Grail of Real Estate Investing? Here’s a quick summary on some of the strengths and weaknesses:

MLG real estate investing

Strengths

  • Diversification
  • Professional Management
  • Collateralized Asset
  • Very passive after initial vetting

Weaknesses

  • Illiquidity (hold 7-10 years)
  • No control over assets

Vetting a Real Estate Fund

I had been investigating several real estate funds over the last few months so it was fortuitous timing when MLG Capital came on board as a sponsor.

There was absolutely no obligation to invest but this gave me the opportunity to get to know a fund operator and the mechanics of their fund on a much deeper level. I had already heard quite a bit about them from real estate investing circles, but I wanted to vet them on my own, and I grilled them.

In my case study posts on how to vet a real estate fund, Parts 1 and 2, I took a deeper dive into what questions you need to ask a fund operator you’re considering investing with.

Some of the key points I focused on:

  • What is the history and past performance of the fund?
  • What are their core values?
  • What are the fees in their funds?
  • What kind of returns can I expect?
  • What are the major risks and how do they mitigate them?
  • How and when are returns distributed?

I literally took you on a journey with me as I vetted this company. I wanted to show you that there is no such thing as a completely passive investment. At the very least, you have to put in some time and effort up front to vet an opportunity. Then after you invest, that’s where the passive part comes into play.

I honestly wasn’t sure whether I was going to invest but I thought they answered my questions with complete transparency and they took the time with me to walk me through some of the numbers. I felt comfortable with it, so I’m giving away the punchline – I decided to make a $50,000 investment with MLG Capital.

Anatomy of the Investment, the Details

What exactly am I investing in? Let’s take a quick scalpel to it.

Amount and Fund Details

  • I am investing $50,000 in MLG Fund III.
  • The fund opened in September 2016 and will close to new investors on 9/30/18.
  • The fund’s assets are a mix of multifamily, industrial, and retail.
  • The expected life cycle of the fund is 7-10 years.

Who

The group MLG Capital has a 30-year history of running syndications and funds. They’ve been through multiple up and down real estate cycles and that gives me comfort considering the market we’re in.

Expected Returns

  • Targeted returns are 13-15%.
  • There is an 8% annual preferred return paid quarterly. They begin returning capital throughout the life of the fund, so I will receive 8% on whatever capital they haven’t yet returned.
  • Of note, MLG does not participate in profits until 100% of your capital is returned (great structure for the investor)
  • Profit on properties sold by the fund are split 70%/30% (Investors/MLG)

Investment Steps

  • I reached out to MLG to let them know I was interested.
  • Spent some time on the phone to vet them.
  • They sent me documents on the fund for review.
  • I returned signed investment documents along with the Accredited Investor Verification form filled out by my CPA.
  • They reviewed the documents and approved entry into the fund.
  • I wired 10% of my investment amount ($5,000).
  • I will expect a capital call within the next few weeks where they will ask for funding of the remaining balance ($45,000).
  • I will receive quarterly updates and distributions.

MLG real estate investingWhat’s Next?

So now I wait for the capital call and for quarterly updates. That’s it. The active component of the investment is done and now I wait for the passive income to come.

This is one of the major ways that I am creating additional passive income from this site. You should start seeing it creep into my income reports. If you want to follow along, feel free to sign up for my newsletter (no spam) here:

As usual, I’m willing to try out an investment and report back on how it’s going. Stay tuned for the results.

Want to continue the discussion? Talk about this and other passive income topics with other like-minded physicians in our facebook group, Passive Income Docs.


11 COMMENTS

  1. I loved your series on MLG Peter.

    I have a question, given that they had mentioned this fund was closing and a new one was opening, what made you want to go into this one rather than be on the ground floor of the next one?

    If I recall the preferred payment structure goes away when the investors capital is returned so if you are in the end of a fund offering would the majority of that benefit have been used already?

    • There are pros/cons to investing at the end of an open fund cycle and that decision really is a personal preference. I didn’t intentionally wait until the very end of this cycle. It just happened with the timing of when I heard about MLG and the time it took me to vet them properly. I guess I could wait until the next fund, but I’d like to get my funds working as soon as possible and for my first investment with them, it is nice to actually invest in the portfolio they’ve been building. It also means that we’re only 3 years away from the point where they no longer will be buying up assets but will return distributions to investors with sales.

      Just because I’m investing in Fund III, doesn’t mean that I won’t be back for Fund IV 😉

      Also to clarify, investors will always get an 8% preferred return, however, MLG will not participate in any profits until all investor capital is returned.

  2. Totally in sync with you on this! I’m committing to fund III. I first heard of them from you, but since that time they have popped up on my radar over and over again. Long-term investor references are very good. One from a dentist and one from another anesthesiologist I talked to. Honestly, I’m no longer comfortable with single family homes. I feel like funds and syndications are 80% of profits with 1% of the work and no/low closing costs.

  3. I’m currently considering MLG as well. In your opinion, what’s the difference between investing with sponsors directly vs. investing with them through one of the myriad crowdfunding platforms? Is there an inherent benefit with the platform (user reviews, a 3rd party oversight etc)?

  4. Thank you PIMD for this excellent post. Are you investing in MLG, other syndications, RE crowdfunding in outside retirement accounts or in a self-directed IRA? I’m just wondering what the tax implications are and if we have to be waiting around for K1’s and other tax documents come tax time.

  5. Probably missing something here — apologize if this sounds dumb.

    Once your capital is eventually returned to you, does your share of the fund equity go down to 0%? If so, how are you able to participate in the profit sharing when properties are eventually sold?

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