Peeter Pärtel’s real estate course, part 2

Last weekend I had a chance to take part of the 9th real estate course that Peeter Pärtel organizes. The 10th, which will take place in autumn is almost sold out, if you happen to want to grab a ticket. It was a very intensive 2-day course that firstly gave me a lot of inspiration for blog posts and secondly it was a very high quality look into what is happening on the real estate market. This is why I wanted to give an overview of how the days went.


Presenting your projects

The second day started with people presenting their projects that they had picked out the previous day. It was interesting to see what people had come up with, since some were clearly very realistic and had done a lot of overnight work, while some were very optimistic both in terms of returns and investor interest towards the project.

The key idea behind this part is obviously the fact that to find deals it’s not just enough to look at the ads and surf mindlessly. You have to actually go through the numbers to figure out what works out, and if it doesn’t then you’ll have a chance to figure out which part of the project should be altered to make that project work. (And to realise that some projects won’t work whatever you try to do.)

Recovery of debt

Lately there has been a lot of media attention on various cases of tenants refusing to leave apartments and the hassle that this brings. The laws in Estonia are quite strongly in favour of the tenant, which means that as a property owner you’re pretty screwed if something happens to not work out, since getting the person evicted or even getting the debt they owe you recovered is barely possible.

This section introduced an actual case of attempting to get a debt recovered by going the whole way – to suing the tenant. While this topic was quite familiar to me because I’ve researched it because it’s relevant to social lending as well, then it was really an eye opener in terms of just how depressingly slow and incapable the legal system can be at times.

Impromptu panel

Since the room was clearly full of many experienced people to whom you could talk during breaks and whatnot, it was reasonable to give them some time to discuss their thoughts on stage as well.

They gathered up the most experienced investors with the biggest portfolios to share some thoughts about what has worked out well for them and what kind of advice they wish they would have had when they were starting.

The main learning point was that to grow that big, you have to be aggressive. To be aggressive in growth however you need extra financing from somewhere, it’s not easy to just start growing a portfolio and end up with 50 apartments.

Bizarre happenings

The final, stress relieving, section of the day had a visitor who spoke about the two tiny apartments that got a lot of media attention a while ago. (The apartments are 5 & 6 square metres respectively.)

It offered a chance to think about just how static the Estonian market really is, and what a long way we have to go in terms of alternative housing methods. Plus, it was a quite funny retelling of the events that surrounded the media attention.

Summary of second day

Clearly everyone’s brains were quite overloaded with the information from day one, so the pace was a bit slower and the topics were a bit more lecture-like. This wasn’t necessarily a bad thing, since I don’t think people would’ve been clearheaded enough to listen to the taxes section on the second day.

Overall I’d say I was deeply impressed by the quality of the event and I can see why they have been organizing it for years already. I will probably not attend the next event, but I’m likely to attend one in the not so distant future if things go well with my plans of real estate investing.


Peeter Pärtel’s real estate course, part 1

Last weekend I had a chance to take part of the 9th real estate course that Peeter Pärtel organizes. The 10th, which will take place in autumn is almost sold out, if you happen to want to grab a ticket. It was a very intensive 2-day course that firstly gave me a lot of inspiration for blog posts and secondly it was a very high quality look into what is happening on the real estate market. This is why I wanted to give an overview of how the days went.


The next financial crisis – when?

Understandably the start of the first day after the intro and expectations part (which was a bit slow for me) focused quite heavily on what exactly is happening on the market. Many investors were (surprisingly to me) very worried that a new crisis is literally around the corner, while others (like me) didn’t have such a pessimistic outlook on the situation of the market.

It is clear that there is a crisis on the horizon, because there is always a crisis on the horizon. A lot of people seemed to be slightly too panicked about this topic, and this motivated me to write a series of posts about how to prepare for a crisis that I’ll hopefully publish next week. People are right to be careful when it comes to real estate since the previous boom wiped out the life savings of many people. However, taking sudden action might cause more harm than good.

Taxes – who, how much, when?

Like with other classes of investments, taxes is a very important topic when it comes to maximizing income you get from investments. When it comes to real estate then some things you need to know to not make mistakes, so this part focused heavily on how to operate as a business, what kind of tax cuts are available for you and how to optimize taxes as a business.

I found this part super valuable because people asked a lot of very good questions and I got a chance to take the time to think of a perfect tax strategy for my own apartment for when I sell it at some point in the future. Since I have a company myself, I know how important it is to know how taxes work even if you have an accountant, so I was happy to see this topic get a lot of attention.

Checking real estate for any faults

There are dozens of different ways your purchased piece of real estate could be a “lemon”. This section focused heavily on what to check starting from a visual overview, looking over the documents and all the way to finding big faults in construction.

With my own apartment I’ve experienced some of those issues, so it was a very valuable part. I went to look at an apartment a few days after the course, so there were definitely a few things that I paid more attention to than I would have otherwise. (For example ventilation systems.)

Construction & remodeling

Since a lot of people focus on finding apartments that aren’t in the best order to fix them up and then either rent them out or “flip” them, then this was obviously another important section of the course.

What I learned from this is the fact that unless I have a very trustworthy person next to me, I’m not likely to be the person who is interested in doing flips. While I know at least a reasonable amount about construction I’m not the type of person who finds it all that fascinating.

Financing purchases

As we all know, real estate is expensive and trying to make any purchases means that you need thousands or tens of thousands of euros. This is why most people use loan money to be able to make purchases they otherwise wouldn’t be.

There were a few people who talked about what are the conditions to get loans from banks and what you should be prepared for when trying to get a loan to invest into real estate. This part also spent some time on the idea of getting money from FFF – family, friends & fools. A lot of people who had started investing into real estate said that they had gotten their first round of financing from friends.

Summary of first day

Sadly I missed the last section that focused on a different way of analyzing real estate, but since it was based on the book Property Magic, I’ll get around to that at some point. The day ended with a home work assignment to find a project that you’d want to invest into and to be prepared to present it the next morning.

Overall I was quite impressed by the first day. The start was a bit slow, but the topics got very specific and very valuable very quickly. Also, the people who attended the event were impressive in many ways, a lot of them had experience they were very much willing to share, and that added even more on top of the value of the information from the presentations.


Of portfolio balance

There are many different portfolio balance theories out there in the world of personal finance. Some are based on risk management, some based on diversification, and some have a logic so complex that it takes a while to even figure it out. Whichever portfolio strategy you use, one idea is constantly emphasised – you must diversify between different asset classes and markets.

Why diversify across asset classes?

The somewhat classical theories focus on three main asset classes – stocks, real estate and loans. Other options include metals, entrepreneurship etc. The idea behind diversifying asset classes is that they behave differently in different market situations. While stocks can be quick to drop, they can also generate incredible short term returns and are considered relatively stable long term.

With real estate the main value is the idea that you own a physical asset – while a company may go bankrupt then you still own an apartment or a house and while it may drop in value, it won’t completely drop to zero. Real estate and loans also help generate cash flow in a way that stocks generally don’t.

This means that to reduce risk levels you should have different asset classes in your portfolio because in case one asset loses value the others may keep theirs for longer. In the case of a big economic crisis of course all parts of the market drop, but different asset classes recover at different speeds and being able to generate cash flow while you wait for capital growth recovery is valuable.

Why diversify across markets/geographically?

In the case of social lending diversifying across hundreds of loans helps you manage risks by betting on the fact that not all regions of the country lose jobs at the same rate. In case of a crisis it’s clear that the less wealthy regions of Estonia will be hit harder while the bigger cities are likely to have more job opportunities therefore people will be more likely to pay back their loans.

For stock markets geographical diversification in its broadest sense means picking different markets. I invest both into the Baltic market and into the US market. Maybe soon I’ll add in general European markets as well. The benefit of this is easy to see – if you take side by side the growth charts of Europe and USA, then you can clearly see that they don’t always move in a similar direction, which means more stability for your portfolio.

Why diversify across different risk classes?

Everyone who invests wants high returns. It is however important to keep in mind that higher returns are linked to higher risks as well. This means that while you may enjoy higher returns when the market is climbing upwards then higher risk investments also mean a much bigger hit when the market takes a steep downwards turn.

Generally stock indexes are considered much safer than individual stocks due to the lowered risk provided by higher diversification rates. Social lending is inherently riskier than real estate backed loans where you have less of a chance of walking away empty handed.  The same way smaller apartments close to city centres are generally considered lower risk since they’re likely to maintain renters’ interest even in the case of an economic downfall.

How to assess your portfolio?

The easiest way to look at whether your portfolio is balanced is to either write it down in numbers or have a visual outline of your portfolio. Taavi I. wrote a nice piece of code that allows you to visualise your portfolio and I must say I quite like the visual aspect of it.


For example the image above is the balance of my current portfolio. It lists all social lending, stocks, indexes and crowdfunding. As you can see, my portfolio is very heavily influenced by whether or not Bondora does well (Bondora used to be 75% of my portfolio) so I’ve been working hard to push it down to 50% overall portfolio value.

Ideally your portfolio should be close the 1/3 in each asset class. In my case what is arguably missing is real estate (since Crowdestate is not pure real estate), which is why I set the goal of getting into rental real estate this year. Overall though, you can see that my portfolio is getting better in terms of overall balance. While my portfolio isn’t all that big yet, then getting into the habit of it being balanced will help a lot in the long run.


Understanding social lending returns

A problem that’s been popping up more and more when people discuss social lending is that some people who have experienced some loans going bankrupt are creating a lot of panic about social lending making you lose money. This causes quite a lot of questions about social lending returns that I often have to answer, so I thought I’d go over some frequently asked questions.

How do I tell how much money my social lending portfolio makes?

There are many different “axe” methods that people use. Looking at defaults vs interest earned, looking at interest earned vs portfolio value and any other super simplistic methods. While those can give you relevant feedback about your portfolio in some cases, the only 100% sure way to assess your returns is calculating them yourself using (X)IRR.

This means that you have to use Excel or another data analysis program and run through the numbers yourself. I regularly go through my portfolio returns like this to see how my portfolio is moving.

What about the defaulted loans?

At start defaulted loans hit very hard. If you’ve just started with small amounts then you might not have even made 10€ in interest by the time the first 10€ loan piece has defaulted. This doesn’t mean you’ve made a loss yet – until you’ve made an exit any and all losses are theoretical. This means that unless you sell delayed loans before they default you have to wait for recovery to begin to meaningfully assess how they impact your portfolio.

After two and a half years of investing only four loans so far have made a complete recovery in the value of principal owed with about a dozen others slowly making payments. This means that I’ll be able to assess how well my first loans have recovered by the end of 2016 – and some may not have recovered at all by that point.

What creates high returns for social lending?

The main concept you have to understand when investing into social lending is the fact that your returns start to stabilize as time goes on. The money that gets paid back gets reinvested instantly helping create more returns every month. This means that after a while you start seeing the classical growth curve that starts to curve up more and more due to compound interest working in your favour. This effect is difficult to see if you’re just starting out or your portfolio consists of a small sum of money only.

How to avoid losing money in social lending?

Every investment decision has to be based on a strategic decision. Many people invest into social lending just because it sounds good and its currently popular instead of actually having a strategy or doing any calculations whatsoever. With social lending there are several key points you have to take into account when building your portfolio.

Firstly you need to diversify to at minimum 200 loan pieces as quickly as possible while 500 loan pieces should be your goal. Secondly, the more risky loan groups you invest into, the longer your investment period should be due to the impact of recovery on your returns.

How do I know that my portfolio strategy is working?

Provided that you’re constantly investing you need to also constantly keep track of your portfolio. This means either XIRR, following the growth of defaults and comparing them to site provided averages, assessing interest growth in comparison to portfolio size and other such metrics may be used.

Not a single investment works without additional care, especially not one like social lending that’s new enough that it doesn’t even have a decade of history yet. The credit ratings, the portfolio managers and the overall logic is likely to change, which is why it’s important to keep track of changes.

Do your own analysis, read blogs and newsletters or have an investment group or whatever else necessary. Social lending was and still is a high risk investment, and for that very reason you can’t invest passively even though it’s super accessible to everyone it’s not for everyone.

Reducing the risk of my Bondora portfolio

The new Bondora rating system has been live for almost four months now, and it’s time to see how my portfolio has changed. I set out to slowly start to lower the risk of my portfolio for two reasons. Firstly, because the lack of the country filter means that allowing in all risk groups in my opinion isn’t reasonable and secondly since my portfolio is getting bigger, then I’d like to make the portfolio a bit more stable as well.

At the end of November this is what my portfolio looked like:


Even though by the old logic 50% of my portfolio consisted of “good” A1000 credit group loans, once the new ratings were added, the picture completely changed. This is why I decided to try to slowly reduce the amount of risky loans, only adding them on manually and allowing the new portfolio bidder to invest into AA, A, B & C loans. The results have actually been less dramatic than you’d expect.


The actual changes are as follows:

AA (0%), A (-1%), B (+3%), C (+4%), D (-3%), E (-1%), F (0%), HR (-3%)

Now, the question is, why are the changes so small? Four months should be a reasonably long time. The answer consists of many components in this case.

1.) There are very little AA and A loans, and my portfolio had more than the marker average for both. This means there just aren’t all that many loans for me to add into those categories even if I want to (I have 1,2% of AA loans while the historical average is 0,3% and I have 6% of A loans while the historical average is 2,5%)

2.) Since E,F&HR credit groups include a lot of my defaulted loans (440€, about 70% of my defaults), the principal amount of those groups is slow to change, because loans in other groups are getting paid back and reinvested, while there is a lot of locked in principal in those groups.

3.) Since my portfolio is at just about 5500€ currently, then to meaningfully change the balance of different credit groups take quite a lot of money to see the impact. At the rate I’m going I’ll get the HR rate to drop to about 12% and about 4% for E&F by the end of the year since I haven’t completely stopped investing into those groups.

This demonstrates very clearly why it’s important to have a long term strategy for your portfolio. If you just wish to change things quickly, then it won’t really work in social lending. The 600 or so loan pieces that I had before I started to slowly lower risk levels will impact my portfolio for a very long time, and to completely overhaul my portfolio I’d have to sell a lot of loans (which I don’t want to do).