Real Estate Crowdfunding Experiment #1: Property Details and Numbers Breakdown

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Woohoo, I just received my first interest payment on my real estate crowdfunding experiment #1. I put in $5,000 at 11% APR, which should work out about $46 a month but the first partial payment was an underwhelming $16.81. I e-mailed Patch of Land and they said I could share the details of my loan, so here they are. If you are a SEC accredited investor and a (free) registered member, you can view it on their site.

Financial details. Here is the summary and breakdown from the Patch of Land listing:

The developer is requesting a loan of $179,000 in order to purchase and renovate the underlying property. The property was purchased for a total of $155,000 in April of 2015. There is minor renovation needed for the underlying property, totaling $55,000. The borrower will receive 2 draw(s) totaling $175,420 over the course of the loan. The initial draw in the amount of $120,420 occurs when the loan closes. The second draw of $55,000 will be disbursed when renovation is completed. The borrower plans to sell in 1 year or under.

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Loan is secured by the property, in the first position. Also have personal guarantee from borrower (not worth much). 6-month term (roughly April 15th to October 15th). 11% APR interest, paid monthly.

So the developer is contributing roughly $40,000 and the loan is roughly $180,000. So a total of $220,000 is being put into this house. Considering that the loan will charge roughly $10,000 in interest over 6 months, plus a potential 6% brokers commission upon sale, this house would have to sell for around $245,000 for the developer to break even. The developer thinks the house can sell for $275,000 but it all depends on how well they spend that $55,000 in renovation costs and how the local market holds in the next 6 months. A 3rd-party appraisal gave a estimated after-repair value of roughly $240,000, which is probably a conservative number but suggests a potentially tight profit opportunity for the developer.

In the end, I do believe it likely that the loan amount of $179,000 can be recovered from this property in a liquidation scenario (see below). It is important to note that the developer doesn’t actually get the final $55k until the renovations are completed and thus the home will be worth more.

Property details. Single-family home in West Sacramento, California. The address is 508 Laurel Lane. You can look up details from public records using sites like Zillow or Trulia. Built in 1954, 3 bedrooms, 1 bath, 1,675 sf living area, 7,000 sf lot. The pictures provided suggest a house that is definitely in need of a kitchen remodel and light repairs, but it wasn’t destroyed inside. The house is about the same size and appearance of other houses in the neighborhood.

I am not familiar with the Sacramento area. The zip code of 95691 appears to have slightly above-average selling prices compared to West Sacramento overall. According to Google Maps, the neighborhood is relatively close to freeway access and downtown Sacramento. I also looked at Google Street View and I liked that the neighboring houses all appeared to have well-maintained houses and manicured lawns. That suggests pride of ownership and/or a certain level of peer pressure to keep your house looking nice. Based on a quick Craiglist search of comparable rentals, this house should support roughly $1,400 to $1,500 in monthly rent, which is not bad compared to the ~$245,000 that I’d like this house to sell for once fixed up.

In the end, there are a number of risks in this deal, but otherwise it wouldn’t pay an 11% annualized interest rate. From my vague understanding of hard money loans, I was hoping for much lower LTVs in the 50% range instead of the 80% range. Perhaps the lessening of loan standards from new money flooding this new asset class is already happening. It would be educational to see how they handle a liquidation… but I should just sit back and quietly cash my interest checks.

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Real Estate Crowdfunding Experiment #1 – Background and Introduction

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After I took out roughly $7,500 out of my P2P lending experiment, I started looking for another place to put my money at risk. 🙂 I decided on trying out real-estate crowdfunding, which tries to make real estate investing (either through equity or debt financing) more accessible to individual investors. Right now, all of the major sites require you to be an accredited investor as defined by the SEC. Keep in mind that these investments can be quite risky and that this is an experiment with a small portion of my portfolio set aside specifically for such purposes.

I’m going to be upfront; I didn’t spend an enormous time vetting each and every website out there. I swapped a few quick e-mail questions with a few sites and signed up with some of them (you have to sign up for a free account in order to view the investment opportunities). Due to my analytical tendencies, I missed a bunch of them because the good ones were often fully funded within 24 hours. Other times, I had time to do more research and simply never got back around to it. I finally set some simple criteria and decided that I would jump on the next one that fit the bill. The criteria:

  • Try out one of these new crowdfunding real estate websites – Realty Mogul, Fundrise, Realty Shares, Patch of Land, and others.
  • Single or multi-family residential property.
  • I wanted to be a lender, and the loan must be secured by the property, in the first position.
  • Short-term financing deal with 1 year term or less.
  • Loan-to-value of under 80%, based on my own rough numbers.
  • At least 10% annualized return (10% APR interest).
  • Invest only $5,000 per property.

I found an investment that fit, electronically signed the required documents, and the deal appears to have completed funding. Here are the results:

  • Patch of Land
  • Single-family home in West Sacramento, California
  • Loan is secured by the property, in the first position. Also have personal guarantee from borrower.
  • 6-month term (roughly April 15th to October 15th), with the goal of a quick rehab and reselling of the property.
  • LTV is 78% per my rough numbers.
  • 11% APR interest, paid monthly.
  • $5,000 invested.

pollogoI’m not sure exactly what details of this investment I am allowed to share, so I’ll save that part for later. It will be good for you guys to pick apart, but it doesn’t really matter for other investors as the project is already 100% funded. I’m just waiting on my first interest payment in May, and hope to be done by October. At the end of the year I will get a 1099-INT.

Here’s part of the pitch for Patch of Land:

Patch of Land is a curated real estate debt crowdfunding platform that sources, originates, and underwrites loans to professional, experienced real estate developers. Patch of Land is one of the first real estate crowdfunding platforms. We have been building a strong track record of funded projects and investor returns since 2013. We are considered one of the top 5 real estate platforms by leading crowdfunding publications.

Loan proceeds are used to rehabilitate residential and commercial real estate properties across the country. Loans are secured by the underlying property and personal guarantees from the borrowers. Patch of Land then matches those loans with accredited and institutional investors for funding. Loans are issued for terms of 12 months at rates ranging from 10 to 18% APR, paid monthly to investors.

What I liked about Patch of Land is their stated commitment to individuals provide significant funding and also that many of their borrowers are experienced individual real estate investors. In that way, it’s almost a peer-to-peer feel, as opposed to institutional investors providing the cash to large real estate organizations.

Along those lines, Patch of Land recently completed a $23.6 million round of funding, and $3.6 million of that came from SeedInvest, a crowdfunded start-up investing firm. So technically, I could have also been a part-owner of this start-up as well. For now, I’ll stick with being a “real estate lender” and maybe I’ll add the “venture capitalist” title later. I would like to invest another $5,000 into partial ownership of a commercial property via another crowdfunding site.

My Money Blog has partnered with CardRatings for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.