I put 2 million into 20 crowd fund deals. Posting performance:

166 Replies

@Matthew R.   In a down turn and a very poor market.. its not scalable. many of us Hard money lenders ( which is what these folks are) went bankrupt in 08 to 09 through 2010.. 

It will be up to the investors to put the capital In to prosecute your foreclosures if there is a run of them.. they won't have the ability to do that. its very costly.

Its just lending these are the risk you take..Especially if your in mortgage states with long foreclosure process's like NY.. PA  NY those can be nightmares on a collection side

@Jay Hinrichs

Well shoot! As soon as I posted the update on the first default loan, I received notice that another is in default! Seems a bit to frequent given the overall economy is in pretty good shape

It would be interesting to look at all the Loans that have gone into default (across multiple P2P platforms) and identify what they have in common.

Might be able to learn a few key things to avoid. 

Obviously some things like regional market cycles, etc will change all the time, but buyer profiles and property profiles could be revealing.

@Jay Hinrichs

By the way Jay. You are in a very hot market right now. I love the Portland area and was trying to find some rental property there like townhouse, small 3/2 or a multi.  (I was looking around Happy Valley) but the market has been running up so much I have help off. I think I am a little late to the party... but let me know you if you come across anything particularly interesting. 

@Matthew R.   we are not allowed to market on the public side of BP.

if you shoot me a PM we can begin the discussion I am quite active here in PDX and can probably help you.

As to the defaults in Crowdfunding.. I think its a few things.. one there was a rush to market and trying to garner market share... when I first talked with the owners of POL they were looking for pretty high returns.. on the HIGH end of HML rates and terms.. So being a HML myself in the day ( 35 million out) I knew they would be trolling in the higher risk borrowers.. But then again that's there choice to do.. And I agree with you if you have defaults in this current market cycle then you need to take a step back.. something has not worked in your underwriting.

but I do a lot of deals  easy as much as these folks.. and I have a few bummers over the course of the year as well.. I have always stated NO ONE can be perfect when your trusting others to repay you.. and its the risk you take to get the higher returns...Some of what I saw go out the door at CF portals was what I personally based on my years in the industry would have considered SUPER high risk

@Jay Hinrichs

FYI - Some time ago I asked PoL the following:

"Given the increasing competition and maturing market, are you seeing downward pressure on interest rates that you can charge and upward pressure on LTVs"

My impression of their answer was this:

"Not really. We are just expanding more into the lower risk (stabilized) / lower interest market, so you are seeing more of those"

@Matthew R.  

What does default mean in this case? I think there is a big difference in someone who is late and someone who if bankrupt or where the property is being taken back. I think @Jay Hinrichs would agree that most HMLs, while being concerned about lateness because of what it can mean (disorganization, etc.) it isn't that big a deal especially if you have penalty interests or points. Lateness can occur for many reasons. For instance, I know a strong operator that was targeted by a corrupt inspector who held up each and every property. In other cases, you opened up the property and something happened. This is easy to deal with when you have an HML you can talk to but almost impossible to deal with when you have a group without having a optics issues. This also has nothing to do with a rising market because the sale price means nothing if you can't get it sold.

Obviously, platforms should communicate this to you but as they get more and more properties this is going to be tough.

I do however share the opinion that we will see things get worse for platforms. They have no choice but to write more loans since they all raised a bunch of money and they have to be competitive to attract borrowers.  Worse, since by definition they market mostly to people who aren't doing the work they are going to have trouble offering the best terms in the market since the investors, from what I can tell, look first and foremost at yield and don't understand the risk. 

In addition, I think debt platforms in particular targeted a part of the market that is smaller to mid market operators with decent track records but not significant scale. I think they really missed an opportunity to redo the debt structure by sticking to basically how HMLs operate, a methodology targeted at retail flippers rather than significant operations that are large scale businesses. I could be wrong but my sense is the latter have a better risk/reward and I know for a fact they are willing to pay up for more optimal capital (with optimal being measured not just by rate but by ease of use). Most of these have raised captial with other platforms at higher rates and it will be interesting to see how that plays out. 

OK. 

1) September data entered.

2) Made the sheet nicer to view & understand

3) @Charles Worth - All very good points. Default is not the same as late. I think the evidence shows that most "late" loans less than 90 days get caught up and paid, so my Binary default/not default (although technically accurate) was not great from a practical standpoint. I made it more graduated from late to default... but after 90+ days I think its fair to call loans "in default'. 

Matt,

   I find it interesting that none of the platforms show defaults.  I realize it's bad press but that is what scares me away since they are not totally open and honest.  Anyway, I have a few loans now on RS, POL, and PeerStreet.  I also am in the alphaflow fund 2 which is a collection of loans.  I think I am going to hold off becuase I am concerned about defaults now reading your feedback.  Let us know how you continue to make out. 

Another thing I am looking at is overfunding life insurance.  I know that is off topic here, but anyone look at that?

Matt,

Very interesting thread and a good summary of your investments. Goes a long way to help every BP member here. 

I am looking at these CF platforms to generate money and with most of the threads, POL sounds like a better platform. For a new investor, what would you suggest to look for while vetting the investments on these platforms? 

Hi @Gaurav G.

My method is embarrassingly simple. I prefer deals where:

1) I like the specific property, the market it is in, and location. (markets have good value trends, market feels familiar to me, locations seems good (proximity to transportation, parks, lakes, business districts, etc, property looks attractive, plan looks solid, etc) With me this all takes a few minutes as I am winging it...  In simple terms: Would I mind owning it if platform had to repossess and I wanted to buy it out...

2) The LTV is at or under 65%. (I ignore deals that highlight ARV instead of LTV)

3) They are first position debt deals 

4) The interest rate is between 10% and 12% (lower not exciting... higher gets too risky)

5) The sponsor has FICO score above 650 and some experience

6) I am comfortable with the platform. 

@Matthew R. 

Simple is good. I will remember these while I look for deals on the CF sites. I am new to this but very keen on investing in RE and making money using the money have saved over time. I am not a big risk taker and my goal is always to save capital. At the same time invest in good deals and build wealth. Looking to network with good & honest real estate investors who share the same mindset. 

So a couple people commented that the debt investments yield interest income which is taxable at full rate... This is correct... so yes, I pay 39.x% fed + 8% state, etc...

I am learning to appreciate this more and more. I re-structured my company sale so more proceeds were cap gains (closer to 29.x% with state and fed)

I talked to PoL about structuring a vehicle whereby these these can yield cap gains. They sound interested. I know a lot of the sites have REIT funds... I need to understand if those throw off cap gains vs income.

The reality is, unless I get a lot more sophisticated, taxes are a part of life that feels hard to avoid. Cap gains takes equity. Equity deals seem to have less certainty to me... .but I'd appreciate feedback on that. 

Regardless, I am going to start looking a lot harder at the equity deals I guess... So far I just haven't had great luck with them in the past. 

I saw a thread on Quora about savvy ways to cut taxes and they had a few responders explaining some pretty sophisticated techniques... but all look like they take the right CPA/attorney to setup... and you need to be willing to spend some real time and money structuring them. Might have to start getting more serious about learning all that... not my favorite thing to do. 

Matt

@Matthew R. this is great, thanks for putting it together. One of the challenges with evaluating real estate performance, especially on the equity side, is that the feedback cycle is too long. Deals can look like thy're going as planned (for years), yet they can quickly be derailed (key tenant vacates, unexpected capex, cost overruns, mis-management etc. etc.). A million things can go wrong.  This tracking sheet will look much more interesting 12-36 months down the road. 

When evaluating equity deals, it all comes down to the quality of the sponsor. I've written about this before 

You're latest comment alludes to the preferential tax treatment of equity investments (which is real, most cash flow is deferred/offset), but the bigger advantage is the possible outsized return you can achieve through asset appreciation. That doesn't exist with debt investments. 

I'd be happy to discuss the space further. My firm raises capital from HNW investors (we've raised $200M in capital from over 400 individuals) and also close with many high-quality sponsors who raise capital from HNW investors.

Thanks again for a look behind the curtain.   

@Matthew R. can you give a brief rundown of your likes and dislikes so far with this type of investment? We reverse engineered our syndication and would be curious of your experience to date, all things considered. Thank you for sharing and being transparent in your investments, very cool! 

@Matthew R.

Re: Taxes - You can easily avoid taxes by making all or substantially all of your Patch of Land Investments (and others) through a self-directed IRA Trust. I personally use IRA SERVICES TRUST CO. (https://www.iraservicestrust.com/)  and am pretty happy with them ( I have no conflict of interest in recommending them, other than as a satisfied user.)

The basic idea is that you set up a Regular IRA except that instead of limiting yourself to the same old set of boring Mutual Funds or Vangaurd ETFs (that everyone else is also invested in, and that is heavily correlated to the market at large; bad news when everyone is heading for the exits at the same time) YOU control where, how & what the IRA is invested in by directing the Trust.  

It's simple, legal (of-course), tax-efficient, and very common among slightly more sophisticated Investors. 

(Note that all the same annual IRA contribution limitations would still apply, but you can easily liquidate and roll/move your existing IRA, or a part of it, into the IRA Service Trust Account without paying any penalties )

@Brooklyn R.

Thank you. Yes, I have a self directed IRA, but I am not sure how much income I want to defer or cash I want to lock up...

Maybe it wouldn't hurt to have more. 

Iv'e been mostly focusing on moving income from "earned" to Cap Gains & PassiveI can cut tax hit almost in half that way.