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In real estate, high minimum investments aren’t just a barrier to entry—they’re also a barrier to diversification. Whether you buy investment properties directly or invest passively in syndications, funds, or JV partnerships, you likely need to cough up $50,000 to $100,000 or more. That includes the down payment, closing costs, and initial repairs, or the required minimum set by the operator.
Those kinds of minimums make it really hard to diversify. This is why I invest $2,500 to $5,000 at a time instead, as a member of a co-investing club. By doing so, my returns form a healthy bell curve, reducing my risk and letting me approach real estate investing more like stock investing.
The Returns Bell Curve
All investments come with risk. Some inevitably underperform, others overperform, and most land somewhere in the middle of the returns bell curve.
As real estate investors, we do our best to analyze and understand the risk of any given investment. But we can’t eliminate it entirely.
Of the 54 passive real estate investments I’ve made, four have underperformed badly. Others have surpassed expectations. That’s investing.
But when I invest $5,000 at a time, I don’t lie awake at night chewing my fingernails when one of them goes sideways. That wasn’t true when I was investing $50,000 to $100,000 in properties as an active investor. Back then, I had plenty of sleepless nights.
Nowadays I just average out the returns at the end of the year, knowing that occasionally a deal will stumble, even as another overperforms.
Averaging Leads to Above-Average Returns
In my co-investing club, the combined average return of all deals is 16.39%. That includes both realized returns on the deals that have gone full cycle and the projected returns on the deals that are still running.
Stock indexes like the S&P 500 work the same way. Even in good years for the market, typically 25% to 30% of the stocks in the index lose money. In bad years, that number can look more like 75%. Over time, however, the S&P 500 has generated an average annual return of around 10%.
That’s pretty good, and I do put around half my money in the stock market. But I still do better with my private real estate investments.
Diversifying Across Every Axis
Because I invest $2,500+ at a time in real estate investments, I can create an incredibly diverse portfolio.
That starts with property type. I own an interest in over 5,000 multifamily units, but I also have exposure to industrial properties, retail, raw land, mobile home parks, single-family homes, and hotels.
We also diversify geographically. All these properties are spread across the entire U.S. We even invested in a project in Canada.
I also invest in both equity and debt. While many of my investments are private equity real estate syndications or private partnerships, sometimes the co-investing club invests in secured notes at a fixed interest rate. Most recently, we invested with a land operator on a note paying 15% interest, secured by real property at a 55% LTV.
Then there’s the time commitment. Most real estate investments are long-term, often five years or longer. But our co-investing club goes out of its way to find some shorter-term investments as well. That 15% note has a term just over one year.
By mixing this up, we ensure our money comes back in staggered amounts, rather than all at once in a tax-heavy wave.
Staggering Tax Benefits
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Most investments we make come with huge depreciation write-offs in the first year, typically 65%-80%. These help offset other taxes on investments.
This helps us practice the “lazy 1031 exchange” strategy. As one investment goes full-cycle and pays us out, we’ll owe taxes on the profits. But by making a new investment in the same calendar year, the depreciation write-off helps offset those taxes.
And because we vet one or two new investments every month, we always have new investments on the table to put our money back to work.
The Advantages of Dollar-Cost Averaging
Because I invest $2,500+ in each new deal, I can practice dollar-cost averaging, investing in at least one new real estate deal every month.
You would have to be fabulously wealthy to invest $50,000 every month in a new deal. But dollar-cost averaging helps protect me from timing risk. Just as with stocks, no one knows where the market will go next (even though too many investors think they do).
I invest in stock index funds every month, specifically to avoid timing the market. I do the same thing with my real estate investments, as a slow-and-steady drip of new investments.
Sometimes market timing turns against me (like in 2022). More often, it moves in my favor. But by investing steadily every month, I take my emotions out of the equation and focus on “time in the market” rather than “timing the market.”
Real Estate Replaces Bonds in My Portfolio
Bonds serve several purposes in the average investor’s portfolio:
- High income yield
- Diversification from the stock market
- Some are recession-resilient.
But people have a misconception that bonds are low risk. Sure, bonds have low default risk, but they have high inflation and interest rate risk.
The real estate investments I make through the co-investing club often achieve all three of those purposes of bonds. Many syndication investments pay distributions in the 6%-10% range as part of the 14%-18% total annualized returns, including profits at the sale. And the notes we invest in pay 14%-16% in interest income every quarter.
They all share a low correlation to the stock market, for real diversification (unlike REITs). And many are recession-resilient.
Plus, real estate protects against inflation, unlike bonds, whose returns get directly eroded by it.
Investing in real estate instead of bonds helped me go from broke to millionaire in less than seven years. And investing small amounts, month in and month out, helps my returns form a bell curve that protects me from outlier underperformers.
No matter how good you get at evaluating risk, you’ll never completely eliminate it from your investments. Instead, invest in many different types of real estate in many markets across the country, along many different timelines. Occasionally one will miss—but the law of averages will not only protect you but also sweep you forward with excellent returns over time.
