Marketplace lending: An alternative in volatile public markets (Lending platforms vs stocks)

Picture is worth a 1000 words. Unfortunately for investors, there is not much to say when it comes to the volatility the public markets are having recently.

Including dividend returns the S&P 500 returned 1.19% in 2015. This year, 2016, its even worse. In fact it is the 4th worst month since 1987.

(source: Marketwatch)

And the Dow Jones? Down almost 15% from its recent bull high. Needs to fall 5% more to hit the Bear market. Yeesh.

Contrasting this with the stable returns of, lets say LendingClub Marketplace:

You get a median return of 7.4% in a portfolio of 250 notes.

Source: Lendingclub.com statistics page

Stock market volatility is a reality and no one is endorsing a 100% investment in marketplace lending or real estate lending or business lending. What this highlights is the LOW volatility of this asset class. Volatility destroys wealth, as detailed in prior post.

You can plug and play around with CAGR (compound annual growth rate) of the S&P 500 HERE

As a title II platform, Reamerge, or majority of other residential or commercial real estate platforms do not publish their return statistics online. However, if consumer lending returns are any indication, these platforms offer even more downside protection as they are usually asset backed while have uncorrelated strong returns in their niche markets.

It is certainly a good time to give these platforms a look be it business lending, real estate, consumer lending, mortgage lending. While there are no guarantees, a well diversified marketplace lending portfolio should provide good cash flow and low volatility.

You can read more extensive discussion of the stability of returns with analysis HERE in our previous post.

 

 

 

Lendit Conference 2015 – Presentation Video

We had a phenomenal time presenting the Reamerge platform. Check our CTO presenting Reamerge to a room full of eager, encouraging audience!

 

P2P (Peer to Peer) Lending Of Secured Loans

Peer to Peer Lending (P2P) continues to gain momentum thanks in part to platforms such as Prosper and LendingClub, the latter having launched a successful IPO driving further interest from investors. Looking at the loan volume just last quarter of 2014 for LendingClub over $1.4 billion of loans were issued (and growing).

 

Is it worth investing in P2P Lending (loans) : A short statistical analysis – part 1

Previously we had a major post on different asset classes and where P2P lending fits in a well diversified portfolio. Today, we would do a statistical analysis of annualized returns of loans in P2P lending, specifically, those that are available on major platforms specializing in consumer debt financing namely Lending Club and Prosper.

Of the two major consumer debt marketplaces in the USA, Lending Club (LC) has received the majority of media attention sans successful IPO in December 2014. Due to the exposure, more so than ever, retail investors are looking at LC as a viable alternative to generate stable returns. Let us take a deeper look.

BOND RETURNS:

Let us evaluate BND (Vanguard Total Bond Market ETF) returns which we will take as a good estimation of the bond market in general. Since 5/2007 till 12/22/2014 BND payed a total dividend of $22.07 (see monthly returns graph below)

Vanguard Bond ETF Yields

In these 2763 days, the Bond price it self has appreciated $8.91 (it increased from $73.84 to $82.75)

The Annual return is: (82.75 + 22.07)/(73.84)]^(365/2763)  – 1   = 0.047 or 4.7%

 

New eBook: Passive Secured Lending

One of the questions REAMERGE gets is what is secured lending and how is that different from unsecured lending that happens at other platforms.

We at REAMERGE are committed to educating investors about secured lending and lending in general. While there will always be risks, understanding the risks and mitigating those risks is the essence of investing.

We hope you enjoy the EBOOK in a series of many.

Click to see the Ebook

Real Estate Crowdfunding: Rehab Loan Risks

Many of the popular real estate crowd funding platforms offer a fix and flip, short term loans as an investment opportunity. Usually these investments have duration of 6-12 months with interest only payments paid to investors. The loan is secured by the underlying property until the borrower repays the loan in full. After earning monthly interest on their investment, investors receive a balloon payment at the end of their principal. With these fix and flip or rehab real estate loans, investors pool their money to buy debt securities that are tied to the performance of a specific loan or pool of loans.

The important item to note is that this type of investment does NOT provide amortized return; you only receive interest payments with your principle returned at the end of the loan term period, hence the interest only payments. While interest rates and investor returns are high (11-12%) there are some real risks associated with such loans that investors should be aware of while chasing yields.

Borrower Risk

 

Purchase price and pressures:     

Lured by the flip and profit infomercials, many get rich quick house flippers have entered the market under the assumption that they can make a quick return on their investments. The major profit in fix and flip is as the name suggests, the home purchase price must leave room for rehab costs and then an up sell to net a profit. The competition in the market however has led to increased bidding at auctions as the housing market recovers. This results in higher than distressed pricing which has reduced profit for house flippers.

P2P Lending Profits: Amortizated returns

When you are an investor in a P2P loan or a lender on a real estate crowdfunding platform in debt deals, your monthly payments or returns is a combination of principal and interest. Let’s get to calculating

Simple “CD style” return:

Certificate of Deposit (or CD in short) is a savings type investment vehicle that a bank offers which pays simple interest. Let’s say for example you invested $10,000 for a simple 10% return; at the end of the year you would have an extra $1,000 of interest income. This can be achieved in a CD or an annuity. It is beneficial to have FDIC insurance on a CD but the latest Bank of America return is a mere 0.08% APR AND let’s not forget an early withdrawal fees is levied (12 month maturity – so it’s not exactly liquid). Anyways, back to the topic – these fixed returns are simple non-amortized returns where your principal is still locked in the bank while you earn interest income.

 

Secured P2P Lending Part 2: Ratio Review

Previously, we looked at features of unsecured and secured debt lending, specifically difference between unsecured consumer debt at major platforms such as Lending Club vs real estate based business lending on Reamerge. We went into details regarding real estate capital stack structure and how each position (senior vs mezzanine vs equity) gets paid out if the borrower defaults.

In this post we briefly go, superficially, into the underwriting criteria by Reamerge to evaluate the business cashflow and its underlying real estate as it relates to the margin of safety. In general, businesses that borrow on REAMERGE platform are:

• FICO (Fair Isaac Corporation) Score – of 650+ of the borrower
• Debt to Service Coverage ratio of greater than 3
• Loan-to-Value (LTV) or Loan-to-Business-Value (LTBV) of 65% or less

Real Estate Crowdfunding: An introduction to secured lending

Unsecured vs. Secured Lending:

As we discussed before, P2P lending/crowdlending provides an investor with a low volatility, monthly fixed returns  generating passive income. Reamerge provides its members with a “P2P” or “P2B” lending platform. While LendingClub and Prosper offer investors unsecured loans, Reamerge offers investors opportunity to invest in loans secured by real estate, or other forms of assets (inventory, equipment etc).

What is the advantage here? Unsecured loan is not collateralized and if the borrower files for bankruptcy or fails to meet debt obligation, this presents lender with little or no recourse. The lender will have to file suit against the borrower or turn to collection agency.

Volatility and wealth destruction in the stock market – P2P Lending can help your portfolio

There has been a lot of talk about expected market volatility in 2015  – see for yourself (VIX Index). In fact CNN posted this yesterday. If market were to correct what will happen to your portfolio returns? And exactly how does volatility eats away at your prior returns?

For starters, nothing destroys your returns in the stock market CONSTANTLY like volatility. In this post we will delve into the concept of volatility drag, its effect on your returns and what can be done about it.

Man, what a drag!

 

What is it?

Imagine if you had a $ 100,000 portfolio that gained 100% in year 1 (hooray!) but then suffered a 50% loss the year after. The average apparently is 25% (wow! World beater!) but your compounded wealth is zero (why you ask? You went up to 200K after year 1 only to fall on your face back to 100K in suffering that 50% loss). This is also the very reason money managers advertise average annual gains – they look spectacular.