Search Results for: lendingclub

LendingClub Updated 2010 Review: Historical Returns and Trends

I’ve been investing with LendingClub for over two years now. They securitize person-to-person loans so that you can lend money to other people in $25 increments, and you collect the interest after some fees. The stated interest rates are about 7-16%. On their home page, they boast of very impressive returns:

If you had invested $10,000 in Lending Club Notes in June 2007 (when we started issuing loans) and continued to reinvest your returns, you’d have made over 9.5% net annualized returns to date, outpacing a high yield corporate bond index, the NASDAQ, S&P 500 and even 1-3 year treasuries.

While I can only assume this statement is technically true, you have to remember that the way they state the numbers includes a lot of new loans that have not had a chance to “age” until maturity. LendingClub notes are all for a three year term. It would be more informative, in my opinion, to specifically look at the return of only loans that have completed. Since LC is so new, how about as old as possible.

For that, I go to the Statistics section. I should point out that the date range is for the origination date of the loans. The observation date is today. Accordingly, the default view of “Show All Time” shows every single loan from mid-2007 until today. Again, this includes a lot of new loans, many of which are impossible be classified as defaulted yet (must be 120+ days late). Instead, let’s narrow down the origination dates so we can look at loans of a set age.

June 1, 2007 to December 31, 2007
We’ll start with the loans that originated in 2007, their first year of operation. Even though these loans aren’t all completely done, they are the oldest loans available with an average age of about 2.5 years. Here are the average returns and average interest rates, sorted by credit grade:

Here are the average returns by loan amount:

The interest rates being charged (blue) are predetermined by LC, and as you’d expect they increase as credit quality decreases. However, the returns (green) are not what you might expect. Grade A loans appear to have performed the best, but other than that there is no real direct relationship between return and credit grade. I see no clear relationship between loan size and return, either. Most importantly, by visual estimate, the average return for all of these loans is only approximately 2%. This is way off from 9% returns.

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LendingClub P2P Loan Portfolio Performance Update

Wow… The last time I wrote about LendingClub was about 6 months ago. Since then, I haven’t really been keeping up with person-to-person lending, which in this case are unsecured credit card-like loans between individuals. Looks like they got a new logo and revamped their website! I kind of miss the old Halloween colors.

Lending Club Portfolio
Back then, I had 62 loans outstanding, of which 58 were current, one was 30+ days late, and three were paid off early. Today, my portfolio has 90 loans, of which 77 are current, three are 30+ days late, one was charged off completely, and 9 have already been paid off early. My current invested principal is ~$1,800, and I’ve received over $1,100 in payments already (principal + interest). The new loans must have been acquired close to October, as I don’t even remember the last time I logged into this account. I suppose that’s good in terms of it being a low-maintenance investment. šŸ™‚

Performance & Commentary
In the last 6 months, my portfolio’s ā€œNet Annualized Return on Investmentā€ based on my interest payments received went from 9.14% to 4.45%. LendingClub puts me in the sad 12th percentile of investors:

What happened? Some bad loan-picking, perhaps some bad luck, but mostly age. The sharp drop itself is due to my recently charged-off loan and how their return calculation takes into account late loans. A “late” loan will affect your calculated return because you’re not receiving those monthly payments. On a $100 loan that might be $3.xx a month. But most late loans eventually turn into defaults. After 120 days late or so, LC will officially recognize the fact that you’ll never see the rest of your $100, and your return will suffer accordingly. Quick example – If you have 50 equal-sized loans, and two go bad immediately, that’s 4% of your principal gone.

As I stated before, if you have loans that are younger than 1-2 years old, do not expect your current return number to be your final return to maturity. One major reason why the advertised average return is so high, is that the average investor has very young loans in their portfolios. My oldest loan was issued back in December 2007. If you just look at the loans that are already 2 years old (full term is 3 years), you’ll see that the average return is only about 4-5%.

This doesn’t mean investors won’t still capture some risk premium for their loans, but I wouldn’t expect 9% returns over 3 years. This is not a low-risk investment, even though I still like the idea of making some fun and helpful loans. With much more data now available, I’ll be looking more into performance trends in a future post.

New Lender Incentives – Free $25 to $250 Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you donā€™t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

For those that have done their research and are willing to jump in with both feet, those that are willing to invest at least $2,500 at once and link a bank account can get a $250 bonus when you get a referral from an existing member. (Yes, you must actually invest $2,500 in loans.) Send me an e-mail if interested.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Give some information, and see what interest rate they offer you. Compare it with your credit card, Prosper, or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

LendingClub Offers No-Fee IRA

Speaking of LendingClub, I saw that they now offer a IRA with no opening fees and no annual maintenance fees. Previously, there was a $250 annual fee. However, it does now require an increased $15,000 minimum opening balance, which essentially restricts it to a 401k rollover or the transfer of existing IRA funds.

Since P2P loan interest is taxed at ordinary income rates like interest from savings accounts, the ability to place them in a tax-deferred account is attractive. But since person-to-person lending is such a new asset class, I would hesitate to make it larger than say 5% of my portfolio, which would require a total portfolio size of $300,000. So, I’m out.

It is interesting that the custodian EntrustCAMA allows a lot of options in their Self-Directed IRAs like holding physical precious metals, investing in private small businesses, and investing directly in real estate. I’m not sure if you can only hold LC notes in this free IRA.

P2P Lending Update: LendingClub Loan Performance (+$25 Bonus)

Here’s an update for my person-to-person (P2P) lending activity at LendingClub, which are unsecured loans between U.S. residents. It could be to help people pay off credit card debt, home improvements, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges much higher rates to borrowers.

LendingClub Portfolio
I now have made 62 active loans with $1,680.08 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Although they do have an automated service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine. Here is a screenshot from my account page:

Performance & Commentary
The good news is that out of my two previous late loans, one of them is now current again and the other one is on a “payment plan”. I am not sure if that means they lowered the amount due, or that they are just allowing a slower payback temporarily, but it is again showing regular payments (and contact) from the borrower. Much better than reading “left voicemail. left voicemail. we haven’t heard from them in 4 months…”. I have no defaults to date.

According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.14%. As an investor, I would not expect this rate to be my actual rate to maturity, but so far so good. While my goal is to get a substantially higher yield than from a online savings account, it also comes with a healthy dose of risk. Don’t put your emergency fund here!

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you donā€™t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

P2P Lending Update: LendingClub Loan Performance

Here’s an update for my person-to-person (P2P) lending activity, which for me are unsecured loans between U.S. residents. It could be for credit card debt consolidation, car financing, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges high interest to borrowers.

LendingClub Portfolio
I do my P2P Lending at LendingClub, where you can loan as little as $25. You can read more background in my previous update. Although they do have a service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine.

I now have a total of 49 active loans with $1,548.42 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Here is a screenshot from my account page:

Performance & Commentary
According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.06%. The bad news is that I now have two late loans in my portfolio. One has negotiated a temporary reduced payment plan, while the other seems to be dodging phone calls. Also, one loan was paid off early. But I suppose this is par for the course, you get late payments and defaults. If your interest rate is high enough and you have enough diversification in loans, you’ll still end up ahead. We’ll see what happens, even with a default my rate of return so far is still higher than what I’d have gotten with an online savings account. But the risk is still certainly there for more downside.

What really baffles me is that both of my late loans are A-rated. According to the LC stats page, out of all the A loans issued so far, there are only 12 late loans out of 943 still active. That’s a tiny 1.3% late rate with zero defaults for LendingClub in general, and yet I managed to invest in 2 out of the 12 late ones. So either I’m very unlucky or I stink at picking loans, or… both. šŸ˜›

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you donā€™t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

LendingClub: My P2P Loan Portfolio Update (+Bonus)

I’ve been meaning to post some smaller updates about my ongoing experiences with person-to-person lending at LendingClub, but I decided to wait and roll them up into one larger post.

Current Portfolio
I now have a total of 32 active loans with $1,122.21 in outstanding principal. Most are A grade, with a few Bs. Here is a screenshot from my account page:

These are the loans that originated after LendingClub completed their SEC registration, which means I can sell these loans on the open market. I also have $91.91 in 4 notes that were pre-SEC registration (these are accounted for separately), all A grade.

Performance
All 32 loans are current, with no late or defaulted loans. I don’t think any have even gone temporarily late. According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 8.80%. This is net of all fees. The oldest loans are about 16 months old now, almost halfway through the 3-year term. So far so good.

You can view the statistics for all LC loans here. This study states that as of the end of November 2008, lenders earned an average rate of 9.05%. If you are familiar with Prosper, you’ll note that this is significantly better than their stats. There are several reasons for this, in my opinion. For one, an A grade loan on LendingClub is a lot better quality than an A loan on Prosper. You need to have a 660 credit score as well as other additional requirements just to make their lowest G grade. Also, LC is much more stringent on approving loans. Only about 10% of loan applications are accepted. Their data verification system seems to be more comprehensive and weeds out a lot more questionable and/or fraudulent loans.

Loan Filters / Methodology
For the most part, I only lend to borrowers with a nearly perfect credit profile. I don’t use their PortfolioMatch tool, I handpick each of my loans. It doesn’t take very long; Here’s my basic search filter: A/B grade only, 714+ credit score, debt-to-income ratio < 10%, zero delinquencies, and 50% funding status. The high funding status usually means that the loan has already been approved, with LendingClub verifying enough application information. I check whenever I remember to, probably once every two weeks or so, and if I see something I like, I throw either $25 or $50 at it. My ideal borrower has a 10+ year clean credit history, a stable government job, and is just looking to consolidate debt into a lower rate. Paying 8% APR from LendingClub is a lot better than 10-20% from even the best prime credit cards, and new credit is harder to get now. I like the idea that they can clear out their consumer debt in 3 years or less. Open Market
You can now buy and sell loans, so there is no longer a fixed 3-year commitment. I’m happy with my returns so far, and have not yet tried to sell any of my loans on the open market. I do see that loans with a good payment history of 6 months or so are asking a 4-6% premium to outstanding principal, so it might be a feasible strategy to repeatedly find good loans and sell them after 6 months. You might be able to limit your exposure and still maintain a decent return. (Sellers pay a 1% transaction fee.)

Self-Directed IRA Option
In March, LendingClub announced that you can now hold their P2P loans in a Self-Directed IRA and get the tax benefits. The main downside to this is that you are subject to a $250 annual account maintenance fee. Unless you have a very large amount of IRA funds that you wish to commit to this, $250 is a big drag on performance (1% of $25,000, 5% of $5,000). However, you can also hold other things like real estate or physical gold bullion in this Self-Directed IRA, so it does offer additional flexibility.

Safety of Principal
With the new post-SEC setup, you are now technically buying notes from LendingClub. This brings up the question of what would happen if they went bankrupt. This was previously addressed in my Q&A with Rob Garcia, Director of Product Strategy. In addition to that, I saw on TechCrunch a couple months ago that LendingClub secured another $12 million in Series B venture funding.

$25 New Lender Bonus
If you are interested in lending, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you donā€™t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, my advice remains the same. Send in your information, and see what interest rate they offer you. If you like it, try and get a loan. If your full amount is not funded, you can either accept partial funding or walk away with no obligation.

RealtyShares Update: My First Loan Default and Foreclosure Recovery (Ongoing)

realtyshareslogoHere’s an update on my debt investment at RealtyShares. The borrower stopped paying for unclear reasons, and as a result this is my first investment to go into foreclosure proceedings. I am still hopeful for a full recovery of my principal and accrued interested, but it will take a while to come to a resolution. I wanted to share some interim details for those interested.

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Initial investment details.

  • Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
  • Interest rate: 9% APR.
  • Amount invested: $2,000.
  • Term: 12 months, with 6-month extension option.
  • Total loan amount is $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
  • Loan is secured by the property, in the first position. Personal guarantee from borrower.
  • Stated goal was to rehab, stabilize, and then either sell or refinance.

Subsequent summary of events.

  • January 2016. Funds committed. Loan closed.
  • July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
  • May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
  • June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
  • September 2017. Judgment granted in Wisconsin court. By law, there will be 3-month redemption period where they borrower can still keep house if they pay foreclosure judgment plus interest, taxes, and costs. Expected scheduled sale date in December 2017.

Payment history. I invested $2,000 and have gotten paid $210.84 of interest before the payments completely stopped. That’s paid interest of 10.5% of principal with a rough estimate of 24 months elapsed from January 2016 to January 2018 (could be longer). My total return will depend on how much money the property will fetch upon sale.

What’s next? It was only a matter of time before I got a default. The question is how often that happens and the size of any losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections might get you pennies on the dollar.

However, this debt is backed by a hard asset, and RealtyShares has already started the foreclosure process. Within three months, either the borrower will have paid it off or the apartment complex will be put up for sale. I tried to research some recent comps in the area using the popular real estate websites like Zillow, but this is a somewhat unique property (6-plex). I don’t see any reason why it would sell for significantly less than the loan amount.

This is complete speculation, but I wonder if the borrower is still collecting rent from all these tenants even after they stopped making loan payments and even now during the foreclosure process. Just pocketing the rent… Is that allowed? Otherwise, the incoming rents should be higher than the mortgage payment, so why not keep paying on the loan? Curious.

Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here is a copy/paste of my most recent updates:

October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.

September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expiresā€”sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.

September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.

August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.

August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.

June 29, 2017 Due to the borrowerā€™s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.

Bottom line. Well, I used to wonder what would happen in a foreclosure scenario, and now I get to find out. So far, I’m just waiting. There is no secondary market, so I can’t sell my share and invest it elsewhere. I must be patient, and hopefully I will earn an illiquidity premium as a result (i.e. higher returns). I will update again when there is more to report on the recovery process. If you are interested and are an accredited investor, you can sign-up for free and browse investments at RealtyShares before depositing any funds or making any investments.

I’ve also made investments in these other real-estate sites: PeerStreet, which offers $1,000 minimums and automated investing. Patch of Land, a debt investment backed by a single-family residential property in California. Fundrise eREIT, a basket of commercial property investments with an equity focus.

PeerStreet Review: Real Estate Backed Loan Investments, My 14-Month Experience

peerstreetlogo

I’ve been investing in various real-estate crowdfunding platforms since early 2015 with minimum $1,000-$2,000 investments here and there. In August 2016, I put $10,000 into a new platform: automated real-estate loans from PeerStreet. I decided to wait a year and see how it worked out letting someone else pick your loans. For this type of lending, you have to be an accredited investor. Here’s my review after 14 months of being an investor.

The basic premise of PeerStreet is simple (and similar to other sites). Real estate equity investors want to take out short-term loans (6 to 24 months) and don’t fit the profile of a traditional mortgage borrower. They are professional investors with multiple properties, need bridge financing, or they are on a tight timeline. As a real-estate-backed loan investor, you lend them money at 6% to 12% and usually backed by a first lien on the property. The borrower stands to lose the equity in their property (I keep LTV under 70%), so they are highly incentivized to avoid default. In the worst case, you would foreclose and liquidate the property in order to get your money back. However, this is better than Prosper or LendingClub where it is an unsecured loan and your only recourse is to lower their credit score.

What are PeerStreet strengths? Here are the reasons that I decided to put more a higher amount of money into PeerStreet as compared to other worthwhile real estate marketplace sites:

  • Debt-only focus. Other real estate (RE) sites will offer both equity and debt (and some thing in between). PeerStreet only focuses on debt, and I also prefer the simplicity of debt. There is limited upside but also less downside. Traditionally, this might be called “hard money lending”.
  • Lower $1,000 investment minimum. Many RE investment sites have minimums of $10,000 or $25,000. A few will go down to $2,000 but there is not a steady supply. At PeerStreet, $25,000 will get me slices of loans from 25 real estate properties.
  • Greater availability of investments. Amongst all of the RE websites that I have joined, PeerStreet has the highest and most steady volume of loans that I’ve seen. I dislike having idle cash just sit there, waiting and not earning interest. They apparently have a unique process where they have a network of lenders that bring in loans for them. This steady volume allows the lower $1,000 minimums and more diversification, as well as easy reinvestment of matured loans.
  • Automated investing. The above two characteristics allow PeerStreet to run an automated investment program. You give them say $5,000 and they will invest it automatically amongst five $1,000 loans. You can set certain criteria (LTV ratio, term length, interest rate). When a loan matures, the software can automatically reinvest your available cash. I don’t even have to log in.
  • Consistent underwriting. You should perform your own due diligence in this area, as you can only feel comfortable with automated investing if you think every loan is more or less underwritten fairly. The riskier loans get higher interest rates. The less-risky loans get lower interest rates. The shady borrowers are turned away. Otherwise, you’d want to pick and choose. After doing this for a year, I stopped wanting to pick and choose. I want to just sit back and let the software choose for me. We’ll see if it works out.
  • Backed by Andreessen Horowitz and also Michael Burry. Andreessen Horowitz did the Series A funding. Michael Burry was an early seed investor, using $6.1 million of his own money according to TechCrunch. As profiled in The Big Short, Burry is known for being analytical to a fault, as opposed to being a good salesman.

Here’s a screenshot of the automated investing customizer tool:

peerstreet4

(Tip: Even if you plan on investing only in $1,000 loans, once you are fully invested you might change later to a higher minimum like $1,250 in order to more quickly reinvest your idle cash. For example, if you have $78 in interest and then a $1,000 loan is paid off, then you could invest $1,078 automatically into your next loan.)

What is a potential PeerStreet drawback? In my opinion, slightly lower yields. This is just my limited understanding and I may be wrong, but PeerStreet has a network of lenders bringing in these deals and so the net yield to the investor feels lower than other sites. This “con” is also their secret sauce that brings in the high loan volume (and ideally the ability to be more selective), and so I am willing to earn lower interest rates for the added diversification and convenience of automated investing.

Here’s the 1-minute video pitch from PeerStreet:

How does PeerStreet make money? As with other real estate marketplace lenders, they charge a servicing fee. PeerStreet charges between 0.25% and 1%, taken out from the interest payments. This way, PeerStreet only gets paid when you get paid. When you invest, you see the fee and net interest rate that you’ll earn. In exchange, they help source the investments, set up all the required legal structures, service the loans, and coordinate the foreclosure process in case of default. In some cases, the originating lenders retains a partial interest in the loan (“skin in the game”). Here’s a partial screenshot:

peerstreet_fee

What if PeerStreet goes bankrupt? This is the same question posed to LendingClub and Prosper, and their solution is also the same. The loans are held in a bankruptcy-remote entity and will continue to be serviced by a third-party even in a bankruptcy event. From their FAQ:

PeerStreet also holds loans in a bankruptcy-remote entity that is separate from our primary corporate entity. In the event PeerStreet no longer remains in business, a third-party ā€œspecial memberā€ will step in to manage loan investments and ensure that investors continue to receive interest and principal payments. Additionally, investor funds are held in an Investors Trust Account with City National Bank and FDIC insured up to $250,000.

Tax forms? In general, unless you use a self-directed IRA, the interest earned will be taxed as ordinary income (like bank account interest). For tax year 2016, I received a simple 1099-INT and filing it with my income taxes was easy. Here’s what PeerStreet says:

PeerStreet investors will be issued a consolidated Form 1099 for the income distributed from their investment positions. Investors may receive one or more of the following types of 1099 form:

1099-OID for notes with terms longer than one year (at the time of issue)
1099-INT for notes with terms less than one year (at the time of issue)
1099-MISC for incentives, late fees or other income, if more than $600.

My investment performance. I starting investing with $10,000 in August 2016. I’ve already had over $10,000 in loan value paid back already, but I chose to reinvest immediately. As of this writing in 10/1/2017, my total account value is $10,863.46 invested across 10 different loans after reinvestment. My interest to date is $863.46, which works out to 7.7% annualized return net of all fees and taking into account the short periods where my cash was idle. Here are screenshots of my paid-off loans and a chart of cumulative interest earned.

peerstreet2

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Now, I don’t know what the default rate is overall, but sooner or later I will probably experience one. This will require patience as it will take a while for the foreclosure process to play out. In my experience, this is a critical difference with private real estate loans. You can’t make a few clicks and get your money back at the current market price. I might have to wait months or even more than a year. The good news that with a hard asset as collateral, eventually I have a solid chance of getting my money back with interest. I am willing to accept this illiquidity and hopefully earn higher returns in exchange.

Update: As of October 2017, PeerStreet has stated they have originated $500 million of loans with zero investor losses.

Bottom line. PeerStreet offers high-yield, short-term loans backed by private real estate. Instead of traditional “hard money lending”, accredited investors can diversify with only $1,000 minimum in properties nationwide with automatic investments, without having to do any physical legwork. The number of new, available investments is better than competitors in my experience. Will it provide superior risk-adjusted returns as compared to other high-yield bonds? I don’t know, but my experience so far after 14 months has been positive.

If you are interested and are an accredited investor, you can sign-up for free and browse investments at PeerStreet before depositing any funds or making any investments.

See also my previous investments: Patch of Land (accredited only), a debt investment backed by a single-family residential property in California. Fundrise eREIT (open to public), a basket of commercial property investments with an equity focus. RealtyShares, a debt investment backed by a 6-unit apartment complex.

Fundrise Income eREIT Review 2017: One Year Update

fundrise_logo

Here’s an update on my $2,000 investment into the Fundrise Income eREIT. Fundrise is taking advantage of recent legislation allowing certain crowdfunding investments to be offered to the general public (they were previously limited only to accredited investors). REIT = Real Estate Investment Trust. This specific eREIT initially sold out of its $50 million offering, but Fundrise has since opened regional eREITs called the West Coast, Heartland, and East Coast eREITs. The highlights:

  • $1,000 investment minimum.
  • Quarterly cash distributions.
  • Quarterly liquidity window. You can request to sell shares quarterly, but liquidity is not always guaranteed.
  • Fees are claimed to be roughly 1/10th the fees of similar non-traded REITs. Until Dec 31, 2017, you pay $0 in asset management fees unless you earn a 15% annualized return.
  • Transparency. They give you the details on the properties held, along with updates whenever a new property is added or sold.

Why not just invest in a low-cost REIT index fund? I happen to think most everyone should invest in a low-cost REIT index fund like the Vanguard REIT ETF (VNQ) if they want commercial real estate exposure. I have many times more money in VNQ than I have in Fundrise. VNQ invests in publicly-traded REITs, huge companies worth up to tens of billions of dollars. VNQ also has wide diversification and daily liquidity. But as publicly-traded REITs have grown in popularity (and price), their income yields have gone down.

Fundrise makes direct investments into smaller properties with the goal of obtaining higher risk-adjusted returns. They do a mix of equity, preferred equity, and debt. Examples of real-life holdings are a luxury rental townhome complex and a $2 million boutique hotel. From their FAQ:

Specifically, we believe the market for smaller real estate transactions (ā€œsmall balance commercial market or SBCā€) is underserved by conventional capital sources and that lending in the market is fragmented, reducing the availability and overall efficiency for real estate owners raising funds. This inefficiency and fragmentation of the SBC market has resulted in a relatively favorable pricing dynamic which the eREIT intends to capitalize on using efficiencies created through our technology platform.

Here’s a comparison chart taken from the Fundrise site:

fundrise_ereit1

Quarterly liquidity. As noted, the investment offers the ability to request liquidity on a quarterly basis, but it is not guaranteed that you can withdraw all that you request. In addition, you may not receive back your full initial investment based on the current calculation of the net asset value (NAV).

Update: I tested out the quarterly liquidity window and was able to withdraw my funds in a simple process and without issue.

Dividend reinvestment. I chose to have my dividends paid directly into my checking account. However, you can now choose to have your dividend automatically reinvested across currently available offerings.

Tax time paperwork? All you get at tax time is a single 1099-DIV form with your ordinary dividends listed in Box 1a. That’s it. Every other box is empty. This is much easier than dealing with the 10-page list of tax lots from LendingClub or Prosper.

Dividend income updates.

  • Q1 2016. 4.5% annualized dividend was announced. This was the first complete quarter of activity, so the dividend was not as large as when funds became fully invested. The portfolio had 13 commercial real estate assets from 8 different metropolitan areas, with approximately $31.5 million committed.
  • Q2 2016. 10% annualized dividend announced, paid mid-July. Portfolio now includes 15 assets totaling roughly $47.25M in committed capital.
  • Q3 2016. 11% annualized dividend announced, paid mid-October.
  • Q4 2016. 11.25% annualized dividend announced, paid mid-January. Portfolio now includes 17 assets and all of the $50 million has been invested.

Screenshot from my account:

fundrise1701

Recap and next steps? It has now been over a year since my initial investment in the Fundrise Income eREIT, designated my Real Estate Crowdfunding Experiment #2. I’ve earned $183.01 in dividends on my initial $2,000 investment. The quarterly dividends have arrived on time, I get regular e-mail updates, and it has been nearly zero-maintenance. I still accept the possibility of wide price fluctuations, as with any real estate investment.

Update: I tested out the quarterly liquidity window and was able to withdraw my funds in a simple process and without issue. Fundrise is still accepting direct investments into some of their eREITs, but I am now looking to re-invest into their new Fundrise 2.0 system, which has a new $500 minimum and allocates across multiple eREITs. You can sign-up and browse investments at Fundrise for free before depositing any funds or making any investments.

Distribution of Lifetime Returns for Individual US Stocks, 1989-2015

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Have an individual stock idea brewing the in the back of your mind? Perhaps the recent LendingClub drama has you itching to buy a few shares of LC at under $5 a share? Above is an interesting chart that shows the distribution of total returns for individual stocks when compared to the S&P 500 index (1989-2015). It was created by Longboard Asset Management, found via Abnormal Returns.

We analyzed 14,455 active stocks between 1989 and 2015, identifying the best performing stocks on both an annualized return and total return basis. Looking at total returns of individual stocks, 1,120 stocks (7.7% of all active stocks) outperformed the S&P 500 Index by at least 500% during their lifetimes. Likewise, 976 stocks (6.8% of all active stocks) lagged the S&P 500 by at least 500%. The remaining 12,404 stocks performed above, at or below the same level as the S&P 500.

I felt that this chart shows you the psychological risks of investing in individual stocks. I’ve been dipping my toes back into individual stock investing with a very small portion of my portfolio. My general idea is to invest in some high-quality, dividend-earning stocks and thus being able to earn those dividends without paying the expense ratio of an ETF. I’d also avoid some tax-efficiency issues if I am able to hold them for very long periods as opposed to a dividend ETF that keeps changing the components of their underlying index. Here’s one of my inspirations. In other words: Buy good stocks, hold them forever.

But as the chart above shows, some of your picks will do great, and some will do horribly. Some people will tell you about their “ten-baggers” and neglect to mention the losers, while the final math will show you lagging the index. As active investors, Longboard concludes that you should focus on avoiding the underperforming assets. But I’d be wary of being so careful about avoiding losers that they miss out on the winners. (The winners often look like losers at some point… can you say Apple?)

Even if you just plan on make a few trades here and here, individual stock investing is a mental sport that takes self-discipline and a calm rationality. Very few people have the characteristics needed, even when managing their own money with no management fee drag. Charlie Munger has his own take, but also admits that only a small percentage can add value:

I think a select few – a small percentage of the investment managers – can deliver value added. But I don’t think brilliance alone is enough to do it. I think that you have to have a little of this discipline of calling your shots and loading up – if you want to maximize your chances of becoming one who provides above average real returns for clients over the long pull.

[…] I think it’s hard to provide a lot of value added to the investment management client, but it’s not impossible.

Prosper Review for Investors: Understanding Risks and Returns

lcreview_logo200I lent out my first $25 to a stranger on Prosper nearly 8 years ago, in October 2007. Since then, the peer-to-peer (P2P) lending environment has undergone a variety of changes. I’ve made hundreds of P2P loans both hand-picked and algorithm-driven, sold them on the secondary market, and experienced the effect of defaults on my returns.

I’ve written several posts along the way, but here is my condensed (but still detailed) overview. Many of the other Prosper reviews tend to focus on the positives. While Prosper certainly has potential, I’d rather go deeper into the possible risks to an investor’s hard-earned money.

The attraction: Be the bank. Earn high interest rates. We’ve all seen the big banks charge mountains of interest, while us regular folks pay it. The average interest rate on credit card loans remains around 15% APR. The basic model for P2P loans is that anyone can become that bank and invest in loans to other individuals. Prosper will take a little cut for helping out, but the bulk of the interest (and risk) goes to the investor.

The reality: Higher net returns than other alternatives, but the risks hide in the details.

Detail #1: Significant loan defaults occur over time. The good news now that P2P loans have been around for a while is that you have more historical performance numbers to consider. Prosper lets you see this historical data in great detail, but you have to look carefully. Here’s a snapshot of what you’d see now at Prosper.com/Invest, labeled “Seasoned Returns*”.

lcreview_returns_10mo

Here’s what that asterisk means:

*Seasoned Return calculations represent historical performance data for the Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculations, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through May 31, 2012. Our research shows that Prosper Note returns historically have shown increased stability after they’ve reached ten months of age. For that reason, we provide “Seasoned Returns”, defined as the Return for Notes aged 10 months or more.

The initial interest rate on your notes is only a theoretical maximum return. For example, for the last quarter of 2015, the average interest rate was 11.06% for 36-months 15.47% for 60-month loans. Every time a borrower defaults – and trust me, if you buy any meaningful amount of notes, some will default on you – your return will go down. With loans as little as 10 months old, their quoted “increased” stability is not the same as stability.

Here’s a chart from competitor LendingClub showing how net annualized return has decreased with loan age (for different vintages of past loans). Note that the net return numbers still keep going down after 10 months.

lcreview_returns_vint

If anything, I would prefer to use this alternative table provided by Prosper. These estimated net numbers are more realistic. The table also includes a daily snapshot of their current inventory, which may give you an idea of relative availability by rating. Note that there are much fewer of the highest-risk, highest-expected return loans available.

prreview_returns_available

Finally, don’t forget that not everyone gets the average. You can’t buy a “Prosper index fund”. You may be above average, but be prepared for below-average returns as well.

Detail #2: Liquidity concerns. When you buy traditional mutual fund that holds investment-grade bonds, with just a few clicks, you can sell that investment on any given trading day. You will get a fair market price, and you will find a buyer for all of your shares.

If you invest in a Prosper note and you need to cash out before maturity, you will have to sell on the secondary market. Now, if you have pristine loans with a perfect payment history, today you’ll probably be able to sell your notes at near or even slightly above face value. But here are the possible haircuts:

First, you will have to pay a transaction fee of 1% of face value on all sales. Second, if you have loans that have ever been late or has a borrower whose credit score has decreased since loan origination (they track that), you will have a harder time finding a buyer and the price will probably be lower than face value. Finally, for Prosper if your loan is currently late, you can’t sell it on the secondary market for any price. You can’t even offload it for a penny.

In my experience, I liquidated ~85% of my loans at about a 0% net haircut, ~10% were sold at a slight loss due to their imperfect history, and ~5% could not be sold at all. While this is certainly better than having no liquidity at all (like a lot of real-estate crowdfunded debt), it also takes a few hours of work at least to maximize your selling prices on 100 or 200 loans.

All of these haircuts taken together can take a significant hit against your total returns. Also, just because you have buyers today doesn’t mean there will be buyers tomorrow. Therefore, I would not invest if you don’t expect to hold the loan until maturity. Some people try to arbitrage things by buying notes and selling them quickly on the secondary market to residents of states that can only buy notes on the secondary market.

Detail #3. Diversification is critical. A defaulted loan wipes out both principal and interest, resulting in a big hit on your overall return. Therefore, your best bet is to never put any more than the $25 minimum into any one note. Remember this statistic: For Notes purchased since July 2009, every Prosper investor with 100 or more Notes has experienced positive returns. In other words, no investor has lost money overall if they held at least 100 notes! 100 times $25 = $2,500 which I think is the minimum you should invest with.

Detail #4. Taxes. P2P notes are a somewhat different animal, and at year-end you’ll receive some tax forms that will be unfamiliar to most people. These may include:

  • 1099-OID
  • 1099-B (Recoveries for Charge-offs)
  • 1099-B (Folio secondary market)
  • 1099-MISC

If you file your income taxes yourself, it is not impossible to figure out but it will take some extra research and effort. Here is my Prosper tax guide that offers some guidance. If you pay a tax professional, they may charge extra for the added complication.

For the most part, the interest you receive will be taxed as ordinary income, the same rate as interest from bank savings accounts. This can be quite high depending on your income, so you may want to consider holding your Prosper notes inside a tax-sheltered IRA. Looking back, I wish I put my Prosper notes inside an IRA.

Detail #5. Automatic investing. The days of hand-picking loans are pretty much over. I recommend using the Quick Invest feature that Prosper offers in order to automatically filter through and buy the notes that fit your criteria. Loan supply is often limited, and this way you can actually get those loans before someone else buys them.

You can let Prosper pick the loans for you, or you can spend your time looking for “better” filters. There are some free tools out there that help sift through the past performance data. There are even paid services out there that do this for you, but I am uncertain how the cost/benefit would shake out.

Detail #6. Past performance vs. future possibilities. Although past returns are great, another economic recession may have a severe impact on your future loan returns. In the end, these are unsecured loans like credit card debt. If people lose their jobs, they will stop paying. Just because nobody has lost money in the past with 100+ loans, that doesn’t guarantee that you won’t lose money in the future. Unlikely does not mean impossible.

Traditionally, high-quality bonds are a diversifier to stocks. But Prosper notes are more like low-quality bonds. If the economy tanks, defaults will rise and your returns will drop. But if the economy tanks, your stocks will drop too. Are you ready for both to suffer significant drops during times of financial stress?

Detail #7. What if Prosper goes bankrupt? As a company, Prosper Marketplace Inc. (PMI) has historically had a hard time actually making a steady profit themselves. In 2013, Prosper started structuring their notes so that they are held in a new legal entity called Prosper Funding LLC (PFL). This remote entity is designed to stand alone and be protected from any creditor claims in the event that Prosper Marketplace, Inc. goes bankrupt. PFL can keep on running and servicing loans. This is a good move in my opinion, but it is still unknown how well this legal strategy will work, or if future lawsuits can put the assets of PFL at risk.

In other words, don’t put all your eggs in one basket. Due to #6 and #7, Prosper notes should only be a portion of your fixed income assets.

Summary. P2P loans are becoming a legitimate asset class, gathering billions of dollars from Wall Street and other institutional investors. Interest rates remain low, and thus the high yields and competitive past returns from these Prosper notes are still very attractive. Let’s face it, even a tempered expectation of 8% net annual return is hard to ignore! But before you make the jump, make sure you fully understand the risks and how to best mitigate them.

  • Understand that your final returns will be significantly less than your starting yield. Look at historical numbers for guidance.
  • Don’t invest money you will need before the loan ends (3-5 years).
  • Diversify across as many loans a possible (100+ notes).
  • P2P notes should only be a portion of your fixed income assets.
  • Expect to spend extra time to acquire notes and prepare taxes.
  • Consider holding notes inside a tax-sheltered IRA.

I hope that this information helps you decide whether investing in Prosper loans is right for you.

Realty Mogul Review: Fractional Investment Property Ownership, Hard Money Lending

rmlogo

Added bonus for new sign-ups. I’ve been a registered member of RealtyMogul for a while, and they recently emailed me that if I referred a friend, we’d both get a $150 Amazon gift card just for completing the registration process (i.e. zero investment required). Here is a screenshot. The restriction is that you must be an accredited investor, which means either a single income of $200,000, joint income of $300,000, or net worth of $1 million excluding primary residence. I’ve registered at a few of these sites, and you may need to send in a scanned W-2 (was allowed to remove SSN) or brokerage statements for verification.

This is a nice carrot if you are already interested in hard money lending or fractional real estate ownership. You must either use this special sign-up link or use the promo code JONATHANP7 during registration. Offer expires 12/31/15.

*The referrer and the referred will each receive a $150 gift card (redeemable at Amazon.com) upon successful completion of the investor registration process at RealtyMogul.com by the referred party. Gift cards will be mailed within 30 business days to the address on file. This promotion is limited to 6 referrals per referral code and is only valid until December 31, 2015.

Original post from mid-2013 below:

Realty Mogul is a new “crowdfunding” start-up that lets you invest in residential investment property for as little as $5,000. You either take a partial ownership position in a property, or you become a lender to (experienced) house flippers. The new thing here is that you can do it completely online with a few mouse clicks (no mortgage brokers, real estate agents, or tenants) and again that low minimum $5,000 investment. (Thanks to reader Johnson for the tip.)

Taking an equity ownership position means that you own a little slice of a single-family home or multi-unit complex while a professional does the buying, fixing up, renting out, and eventual selling. Realty Mogul only has done one deal like this so far (fully funded) and the intended timeframe is 5-7 years. You earn rent while the house hopefully appreciates in value, and cash out when the house sells.

Being a lender looks very similar to the age-old practice of hard money lending, just with smaller chunks. You lend the money to a house flipper who needs a short-term loan (3 months to a year) and doesn’t want to deal with traditional mortgage lenders and their closing costs and long underwriting delays. The loan is backed by a personal guarantee (not too special, you can try to sue and/or hurt their credit score) and more importantly you usually have a first position lien on the property (if they don’t pay, the lender gets the title to the house). Most of the previously funded loans have an annualized interest rate of 8%.

rmshot

Realty Mogul states that they differentiate themselves from other similar startups like FundRise and Prodigy Network by (1) outsourcing the real estate expertise to vetted professionals and (2) keeping a focus on cashflow, either via rent or interest payments. Right now they’ve only had about 7 investments, but they seem to open a new one up after the last one fully funds.

Currently, the SEC limits this type of investment to accredited investors, which means either a single income of $200,000, joint income of $300,000, or net worth of $1 million excluding primary residence. When I tried the application, the only screening process was to check a few boxes and state that you qualify. Supposedly, the recently passed JOBS Act will allow them to drop this requirement later this year.

If given the option, should I drop $5,000 into this to try it out just like with person-to-person lending? $5,000 is still a lot of money to put into an investment where you are not able to do much due diligence. Getting good returns on a single investment project is all about the skill of that particular rehab team. Will the teams that sign up for capital via Realty Mogul always be the good ones, or those that are having a hard time getting funding from elsewhere? I thought that hard money lending rates were more in the 10%+ range; I don’t know if I’d be happy with 8% but maybe that’s the going rate now. Even if you have collateral, recouping your principal in case of a bad loan can get complicated and time-consuming. At least with P2P lending I can spread $5k over 200 different loans such that even though I am certain to get some defaults, it is unlikely I will get a negative return overall.

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