Three years and 6k in pooled funds. The only near miss was paperwork.

I wanted income without becoming a landlord and I wanted to start small enough that a mistake wouldn't matter. So I put 2k each into three pooled offerings on two platforms, roughly three years ago, and left them alone.

What happened. Distributions came quarterly, mostly on time, once about three weeks late with an email explaining why. Blended across the three, I've received about 1,280 in distributions on 6k over three years, so call it 7.1% a year. One of the three cut its distribution rate partway through, from an annualized 8% to 6%, and told me in advance in a letter I actually read. The other two held steady. Two of the three also report a share value that has moved a little in both directions, so my paper total isn't exactly 6k plus distributions, it's a bit under.

The part that nearly broke it was tax paperwork. One fund sent a 1099 in February. Another sent a K-1 in late March, which meant my return got filed later than I've ever filed anything, and I hadn't budgeted for a preparer who charges more for a K-1. That's a small thing but it was the only genuine surprise in three years, and it would have been worse if I'd owned nine of these instead of three. Everyone's tax situation is different so ask your own preparer what a K-1 does to your filing.

What I'd keep. Small first amounts. A one-page spreadsheet with the date and amount of every distribution, because the platform dashboards each calculate returns differently and I wanted one number I trusted. And reading the letters. The distribution cut was announced and I understood why before it happened, which is most of the reason it didn't bother me.

Answer

0tonyv88SO4CPRO6

The thing I'd watch next is the redemption side, since you haven't tested it yet. Pooled funds like these usually have a redemption plan, and it's a plan rather than a right. Typical shape is quarterly windows, a cap on how much of the fund can be redeemed per quarter, sometimes a small penalty if you're out before a holding period, and language letting the manager limit or suspend redemptions if too many people ask at once.

That suspension clause is the one to find and read now while nothing is happening, because it's the part that decides whether your 6k is available when you want it. Search the offering circular for redemption and read every hit. It'll tell you the window dates, the cap, and the conditions for suspension.

The rest of what you did I'd copy. Especially your own spreadsheet. The platform will show you a return number computed on some convention it doesn't fully explain, and when you compare across two platforms those numbers aren't comparable. Cash in, cash out, dates, is the only version that survives contact with a second platform.

On the distribution cut, a fund telling you in advance and explaining the reason is worth more than the two points. The funds that don't tell you are the ones where you find out from your bank statement.

10 replies

2kevin_lombardPG1BPRO5

This is the first post in this room I've understood completely on one read. Thank you. What's the difference between a 1099 and a K-1 in practice, other than one arriving later?

2nicole_adeyemiPassivePRO5

@juniper roughly, a 1099 reports payments to you and a K-1 reports your share of a partnership's income and expenses, which can include depreciation that shows up as a loss on paper even when you got cash. What that means for your own return is a question for a preparer, and it can also raise state filing questions depending on where the properties are.

1brandonlee36Passive

7.1% with no phone calls at 11pm. I have four doors and I'd be lying if I said my cash on cash beat that after the water heater year.

2gregpowell66AG4BPRO8

What would have happened if all three funds had cut distributions in the same quarter instead of one? I ask because the three-year window you're describing was a period where a lot of these vehicles were under pressure and some paused redemptions entirely. Your result reads well and I'm trying to work out how much of it is the selection and how much is that you happened to hold three that held up.

0monica_tran3SF4CPRO6

@girder fair, though verity's stated goal was income without a second job, and a cut from 8 to 6 is still income. If all three had cut she'd have 5% and no work. The failure mode that would actually hurt is a suspension plus a cut, which is what @trellis is pointing at.

1aliyah_bAU2APRO6

The preparer cost surprise is the number I want. How much more did the K-1 add?

2bmoreno23AB1B

Reading this after two weeks of watching deal-level offerings and feeling like I need a finance degree. Starting with pooled funds and 2k slices sounds like something I could actually do this month.

2ryanmck27SC2C

@ember the tradeoff is that in a pooled fund you don't choose the properties, the manager does, so your diligence is on the manager and the fee structure rather than the buildings. Different work, still work.

-1luis_carrera Get yours

The line about the platform dashboards each computing returns differently is why I've been stuck for four months comparing things that aren't comparable. Building the cash in, cash out sheet tonight.