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.
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
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.
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.
How do you determine if investing in REAMERGE is a “good investment”? In simple terms, it comes down to value. An asset’s value depends mostly on risk and underlying cash flows it produces. With that definition, the best way to assess an asset’s value would be to find a comparable asset with similar risk profile to determine yield/ROI. One can also flip the script and look at it from the other side: compare similarly priced assets and determine the risk associated with the asset. Before delving into a proper comparison of an investment on REAMERGE, let us look deeper into two important topics: diversification and historical returns of popular assets – stocks, bonds and real estate.
Diversification:
At a basic level, diversification helps with risk mitigation, specifically idiosyncratic risk (i.e. Risk that is specific to an asset or a small group of assets). This is more than just investing in different stocks – which hopefully you are investing via ETFs – for example, real estate may be doing well when stocks are not in a bear market.
Institutions such as Harvard have performed very well when it comes to diversification of their portfolios. These institutions go beyond assets such as stocks and bonds.
Now they invest in P2P lending platforms as well. Always ahead of the curve there Harvard…
Modern concept of crowd funding (in equities) and crowd lending (REAMERGE, Lending Club, Prosper etc.) are changing the field of non-traditional investments by democratizing the opportunities. If properly included in the portfolio, investors can achieve higher risk adjusted returns than traditional stocks and bond portfolio while lowering volatility.
Why is that?, because private equity and private lending has traditionally had no correlation with the broader capital market on a local level. What an investor invests in REAMERGE are loans given to cash flowing businesses with real estate. Such private deals are now finally available to retail investors.
Peer to Peer lending has been around for a while. This form of microlending was popularized by LendingClub and Prosper with simple enough mechanics: Borrower applies for credit on these platforms -> The platform (LC or Prosper) does their own due diligence if the borrower is viable credit risk -> request gets posted on their proprietary platform. At this juncture, “Peer” investors can pool money and fund the loan. The magic is happening on the efficiency of connecting borrowers with lenders and there by taking out the traditional banks as intermediaries (What happens to savings accounts? Banks used to lend that money to then earn savers interest! except now that just pays less than 1%)
Since the financial crisis, banks have tightened their standards and have made it difficult for small businesses to secure the capital they need to expand and grow their businesses. From a banks perspective small business loans simply do not generate the revenue potential that loans to large businesses do.
Banks see lending to small businesses as risky, assessing creditworthiness is difficult due to a lack of information about small businesses, transaction and underwriting costs are simply not profitable enough, among other factors.
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