In October 2017, we invested roughly $10.5 million in the construction of 13 new homes in Angelino Heights, Los Angeles, with impressive views of downtown and Dodger Stadium. After some initial delays due to a longer than expected permitting process, work has moved along steadily, with structural work nearing completion.
As is typical of our investments in construction, this investment was structured as a loan (debt), where the borrower must pay us a fixed rate of return before they can earn a return for themselves, and their equity provides us with a cushion against losses.
One of the main reasons that we are able to obtain attractive returns on our investments in construction is that there is inherently a higher level of uncertainty (i.e. risk) involved in creating something new as opposed to investing in a finished product. We believe that these risks can largely be mitigated by investing with experienced developers into projects with sound fundamentals, so the risks are well worth taking for a higher expected return.
Once a project is close to completion, however, much of that uncertainty is gone, so its risk-return profile decreases. In this particular case, the developer took advantage of this dynamic to refinance with another lender who was (presumably) willing to accept a lower rate of return.
While we’d have been happy to hold this investment through the completion of construction and sale of the homes, we’d prefer an earlier than expected payback due to good progress over a project that struggles to deliver.
Our investment in these homes earned an annualized return of roughly 8.9%¹ over the 25-month duration, which is consistent with initial projections.
Investor FAQ: How did this project impact your portfolio?
Throughout the term of this investment, the regular income it generated supported quarterly dividends for the West Coast eREIT.
As always, please don’t hesitate to reach out to investments@fundrise.com with any questions or feedback.
