P2P Real Estate Investing

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ClevrChico
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P2P Real Estate Investing

Post by ClevrChico » Mon May 02, 2016 8:10 pm

The latest blogpost on MMM is on something that may be new to us, P2P Real Estate Investing:

http://www.mrmoneymustache.com/2016/05/02/peerstreet/

Does anyone have any experience or thoughts on this? It's reported returns are in the 6-12% range and PeetStreet's fee is up to 1%.

It seems like Vanguard's REIT (VGSLX) would be the better choice, right?

jjface
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Re: P2P Real Estate Investing

Post by jjface » Mon May 02, 2016 8:25 pm

Well for one you need $1m assets or $200k income to be accredited and so be allowed to invest in these things.

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unclescrooge
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Re: P2P Real Estate Investing

Post by unclescrooge » Mon May 02, 2016 9:10 pm

Very interesting.

I'm curious to see how they fare during a down turn in the real estate cycle.

Personally, I wouldn't invest. The after tax yield drops from 10% to 5.6%...I's rather stick to my Muni CEFs that yield 4.5%.

Valuethinker
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Re: P2P Real Estate Investing

Post by Valuethinker » Tue May 03, 2016 3:05 am

ClevrChico wrote:The latest blogpost on MMM is on something that may be new to us, P2P Real Estate Investing:

http://www.mrmoneymustache.com/2016/05/02/peerstreet/

Does anyone have any experience or thoughts on this? It's reported returns are in the 6-12% range and PeetStreet's fee is up to 1%.

It seems like Vanguard's REIT (VGSLX) would be the better choice, right?
You are taking on a lot of risk to do peer to peer. Risk of individual properties. Illiquidity etc.

VG REIT fund is a totally different sort of animal. Diversified. Liquid. You get day to day volatility in the share price but that's simply a function of the liquidity- -for a long term holder it should not make a huge difference (but you will have days when the thing moves 10%, which is quite a change).

Also VG REIT you are investing in equity, whereas in this one you are investing in private, illiquid debt which by its nature (bridge loans) is high risk. Travel carefully. There are a lot of places in the chain where an unscrupulous intermediary or adviser could rip off the individual investor.

Cannot comment on the tax advantages/ disadvantages, but I would P2P RE investing in the "specialized investors only" category, and they are quite likely to get the short end of the stick vs. the advisers.
Last edited by Valuethinker on Tue May 03, 2016 3:09 am, edited 1 time in total.

Valuethinker
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Re: P2P Real Estate Investing

Post by Valuethinker » Tue May 03, 2016 3:08 am

unclescrooge wrote:Very interesting.

I'm curious to see how they fare during a down turn in the real estate cycle.

Personally, I wouldn't invest. The after tax yield drops from 10% to 5.6%...I's rather stick to my Muni CEFs that yield 4.5%.
They are bridge loans. In a down cycle, I would imagine one would get hammered. Borrower buys the property, cannot refinance (value fallen and/or tightened lending criteria), goes bankrupt. You get left with a property which might be half the value you lent to it against. On an 80 or 90% Loan to Value you will lose at least 40% of your loan. How much equity is the borrower putting in? If I was a bank, I wouldn't do this on more than about 65-75% LTV I suspect.

Just skimming the intro it appears you get neither the benefits of US mortgage backed securities (ie prime home loans) nor of commercial mortgages. It's also worth knowing that whilst REITs (ie equity) have been a high performing asset class Mortgage REITs (which this seems closest to) have not, have in fact deeply underperformed for a very long time. In fact Mortgage REITs are not included in the REIT indices nor in the VG fund.
Last edited by Valuethinker on Tue May 03, 2016 4:19 am, edited 1 time in total.

Valuethinker
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Re: P2P Real Estate Investing

Post by Valuethinker » Tue May 03, 2016 4:09 am

Valuethinker wrote:
ClevrChico wrote:The latest blogpost on MMM is on something that may be new to us, P2P Real Estate Investing:

http://www.mrmoneymustache.com/2016/05/02/peerstreet/

Does anyone have any experience or thoughts on this? It's reported returns are in the 6-12% range and PeetStreet's fee is up to 1%.

It seems like Vanguard's REIT (VGSLX) would be the better choice, right?
You are taking on a lot of risk to do peer to peer. Risk of individual properties. Illiquidity etc.

VG REIT fund is a totally different sort of animal. Diversified. Liquid. You get day to day volatility in the share price but that's simply a function of the liquidity- -for a long term holder it should not make a huge difference (but you will have days when the thing moves 10%, which is quite a change).

Also VG REIT you are investing in equity, whereas in this one you are investing in private, illiquid debt which by its nature (bridge loans) is high risk. Travel carefully. There are a lot of places in the chain where an unscrupulous intermediary or adviser could rip off the individual investor.

Cannot comment on the tax advantages/ disadvantages, but I would P2P RE investing in the "specialized investors only" category, and they are quite likely to get the short end of the stick vs. the advisers.
Further

- re returns are the reported returns audited in any way? Taken gross or net of fees?

- past returns do not predict future ones. If this was a market opportunity, there are not presumably high barriers to entry. Other investors and platforms will seek to enter, competition will drive down returns.

By contrast with REIT index fund you pretty much know that competition has entered. Your returns will be what they will be and will be

= current dividend yield + dividend growth +/- changes in valuation*


* a fall in dividend yield will *increase* the value of a REIT index or REIT. For the same cash dividend, a higher share price. Similarly a rise in average yield of REITs (say because interest rates generally rise) will be a one-off reduction in performance.

garlandwhizzer
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Re: P2P Real Estate Investing

Post by garlandwhizzer » Tue May 03, 2016 1:47 pm

Direct quote from the article referred to above:

But because you’re not competing in the well-developed 30-year residential mortgage market, you can expect to collect annual interest in the 7-10% range, rather than the 3-4% that mortgage securities pay their owners.
In current market conditions anytime anyone tells you that you can sit back and collect 7% - 10% annually on your investment with them there is an important concept to consider: RISK. Anything that yields 7% - 10% now has to have a very high level of risk, higher according to the market's perception than either junk bonds or EM bonds, both of which yield less. If there were not substantial risk in such numbers, they simply wouldn't exist because they would be arbitraged away by investors seeking both yield and some safety. Like equities, real estate now is richly valued. Total mortgage debt is currently about 60% of GDP, a very high level of debt in a very sluggish and potentially vulnerable economy. Real estate values especially in places that have skyrocketed like NYC, SF, LA and coastal California are very stretched relative to household income. In my view this makes P2P mortgages potentially vulnerable to very substantial losses of capital. Personally I wouldn't touch this investment with a 10 foot pole.

Garland Whizzer

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unclescrooge
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Re: P2P Real Estate Investing

Post by unclescrooge » Tue May 03, 2016 6:29 pm

Valuethinker wrote:
unclescrooge wrote:Very interesting.

I'm curious to see how they fare during a down turn in the real estate cycle.

Personally, I wouldn't invest. The after tax yield drops from 10% to 5.6%...I's rather stick to my Muni CEFs that yield 4.5%.
They are bridge loans. In a down cycle, I would imagine one would get hammered. Borrower buys the property, cannot refinance (value fallen and/or tightened lending criteria), goes bankrupt. You get left with a property which might be half the value you lent to it against. On an 80 or 90% Loan to Value you will lose at least 40% of your loan. How much equity is the borrower putting in? If I was a bank, I wouldn't do this on more than about 65-75% LTV I suspect.

Just skimming the intro it appears you get neither the benefits of US mortgage backed securities (ie prime home loans) nor of commercial mortgages. It's also worth knowing that whilst REITs (ie equity) have been a high performing asset class Mortgage REITs (which this seems closest to) have not, have in fact deeply underperformed for a very long time. In fact Mortgage REITs are not included in the REIT indices nor in the VG fund.
If the borrower went BK, I'm pretty sure there would be mechanics liens on they property too. This would like bring down the recoverable amount to 15-20 cents on the dollar.

Good point about the benchmark!

Valuethinker
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Re: P2P Real Estate Investing

Post by Valuethinker » Wed May 04, 2016 3:57 am

unclescrooge wrote:
Valuethinker wrote:
unclescrooge wrote:Very interesting.

I'm curious to see how they fare during a down turn in the real estate cycle.

Personally, I wouldn't invest. The after tax yield drops from 10% to 5.6%...I's rather stick to my Muni CEFs that yield 4.5%.
They are bridge loans. In a down cycle, I would imagine one would get hammered. Borrower buys the property, cannot refinance (value fallen and/or tightened lending criteria), goes bankrupt. You get left with a property which might be half the value you lent to it against. On an 80 or 90% Loan to Value you will lose at least 40% of your loan. How much equity is the borrower putting in? If I was a bank, I wouldn't do this on more than about 65-75% LTV I suspect.

Just skimming the intro it appears you get neither the benefits of US mortgage backed securities (ie prime home loans) nor of commercial mortgages. It's also worth knowing that whilst REITs (ie equity) have been a high performing asset class Mortgage REITs (which this seems closest to) have not, have in fact deeply underperformed for a very long time. In fact Mortgage REITs are not included in the REIT indices nor in the VG fund.
If the borrower went BK, I'm pretty sure there would be mechanics liens on they property too. This would like bring down the recoverable amount to 15-20 cents on the dollar.

Good point about the benchmark!
Thank you for the term "mechanics lien" of which I was unaware.

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