Social lending portfolio (February, 2016)

February passed so quickly that I didn’t really even have time to do much. However, despite the shortness, it was a nice growth month, with several interesting things happening on many P2P portals.

Bondora personal portfolio

Interestingly enough Bondora was by far the biggest surprise this month – after such a long time of investors complaining about all the things, they seem to have taken the investors’ wishlist and just started crossing off all the things that have piled up in the past few years. New cash flow & dashboard components allow for some interesting modelling options for your portfolio’s future. I haven’t had too much time to play around with it, but I must admit I like what I’m seeing!

febbondoraprivate

Interest returns are now slowly starting to drop (to 108€) due to the fact that I’m slowly starting my exit. I’ve transferred out my first 450€ (which is being sent to work on the stock market). I’ve also started to slowly sell parts of my portfolio that will be selling at a loss – I don’t have to take into account any taxation issues on those, and at this moment selling large amounts of loans on the secondary market is definitely not comfortable. However, I’ve started to scan through my loans and started selling off defaulted loans that haven’t really started to recover and loans that are suffer from pricing issues (old HR loans with 20%-ish interest rates). It takes some playing around with discount rates, but I’m happy with how it’s going so far. The loans I’ll sell with a premium I’ll start selling Jan 2017 – meaning the tax obligation hits summer 2018.

Bondora business portfolio

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The business portfolio is growing as planned. I’ll hit 200 loan pieces soon and then I’ll likely increase the bid size a bit. Overall absolutely no issues with money going out (I’m not using too strict criteria – just country & credit group limited). I must say I am pleased with the pricing changes since it’s clear to see when comparing my two portfolios that loans that are priced with the rating follow expectations reasonably well – AA, A, B loans are showing very good payment discipline, I hope the likelihood of defaults is also correctly determined, as my portfolio grows I’m becoming more of a fan of slow and steady.

Omaraha portfolio

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Omaraha is doing slow and steady, most important news is that there was an announcement that they’ve received the permit needed to keep functioning from the Estonian Financial Authority. Still, Omaraha has some downsides – at this point I haven’t had any loans go out for 8 days (usually the rate is about 1 loan/day). I’m wondering if it’ll start moving or I’ll have to play around with the interest rates. I like their no-hassle system but lack of a secondary market is making me balance investments between different portals, and not letting Omaraha move too far ahead.

Mintos, Twino, Viventor

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Interestingly enough the Latvian buyback triplets caused most hassle for me this month. Mintos could still use some usability upgrades, and it’s become clear that short-term investing there isn’t viable due to a lack of short term loans. However, my hopes for Twino becoming a major player in my portfolio were dashed with their brutal interest cut and some recent communication blunders. I did start investing in Viventor as well, but that’s mostly play-money at this point as they build up their reliability.

Definitely interesting choices to be made here in the near future – if the Latvians had managed to keep going as well as they were for the next few months, I think they would have wormed their ways into investors’ hearts even more, but as it stands, making decisions to divide my P2P portfolio is becoming difficult with all sites having some downsides.

Crowdestate portfolio

I contributed a small amount in the most recent CE project. A new one is opening for this months, I’m interested to see what it is. As it stands, the first round of investments that I’ve contributed in are starting to finish up, so I hope that the reinvestment snowball will start rolling at some point.

Estateguru & Moneyzen portfolios

Did not add any new money to either. Would probably exit if possible (at the very least to switch to business portfolios), but both stil lack a secondary market. At least my investments in MZ are small enough to get reinvested rather regularly. With Estateguru I’m just stacking up money to probably transfer it out at some point.

Social lending portfolio (January, 2016)

This month has been fun in social lending. I’ve been discovering new portals, rearranging investments to switch things to my business account and overall making plans for this year.

Bondora personal portfolio

I’m starting to take money out of my personal portfolio as of this month. Currently I’ve set it to invest into Estonian AA & A loans, seems like getting about 10 of those a month is a solid enough strategy. I’m hoping to take out all the money invested within the next two years and then make a full exit within the third. Despite that, January was a record month since the lack of reinvesting isn’t felt yet.

janbondoraprivate

Total interest earned climbed a bit over 110€, next month should probably be a bit smaller in terms of the total amount yet. This month brought about many changes at Bondora, a lot of the new reports I like, the lack of meaningful recovery data is still a bit annoying, but overall I like the new cash flow, especially the predictive part of it.

Bondora business portfolio

There isn’t much to report here yet. I’ve invested into about 150 loans, and most of them start repaying in February. January interest income was ~10€, but the interest income for February should already be in the range of 50€. Current strategy is Estonian loans, up to C class (a bit of D as well), currently investing 20€ per piece mostly, seems like getting 100+ EST loans with non-strict criteria is rather easily doable.

Omaraha portfolio

Now, Omaraha is rather interesting. The guesswork included in trying to figure out which interest rates to use is definitely an intriguing thought exercise. Seems like I’ve managed to reach a sort of a sweet spot where I have, on average, one loan go out per month. No loans have reached delinquency yet, but time will tell how that starts impacting my portfolio. The defaulted loans get sold off to a buyback fund, so you can assess your returns in a more immediate manner than you can do in Bondora.

janomaraha

I started with the portfolio in November already, the interest payments are however just now ramping up, February totals should be somewhere in the range if 45€ already. Overall, not much to follow here and you don’t really have access to any meaningful data to analyse. Lack of secondary market is still problematic, so this can’t ever be the biggest part of my portfolio, even if the returns at this point seem rather good.

Mintos & Twino

The two Latvian sites are also in experimental stages at this point. Since I wanted to add money into short term loans, then so far Twino has been winning out on that – super easy and sleek user interface, no cash drag to speak of, and a wide array of loans to invest into. For Mintos, it seems that short term loans (or invoices) are in short supply if you want to actually diversify reasonally. Due to this I’ve added less money into Mintos so far, and I’ve had to pick out more long term loans to actually employ all the money. Both sites have secondary markets though, so exit is possible. So far looks like Twino will be winning out for me personally in this duel.

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Estateguru & Moneyzen

I did not add in any money to Estateguru or Moneyzen. If possible, I would exit Estateguru as a private person and switch to a company portfolio. For Moneyzen a lack of a secondary market and lack of volumes makes me not want to add more funds either. Currently I’m just seeing how their recovery processes work.

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Crowdestate

Not much happening on this front either. Waiting for some projects to end (the first one I was involved in, was finished in December). There will be a new project open on Monday so I’ll look into that and decide whether to contribute as well. Still hoping they manage to actually hit the pace of 1 project/month.

2015 social lending summary

One of the focuses of this year has been to reduce the importance of P2P investments in my portfolio – at the start of the year P2P investments made up probably about 70% of my overall investments, then by the end of the year I’m finishing somewhere in the 25% range. Moving P2P investments under my business account will likely mean that I’ll allow this percentage to rise a bit again due to not taking such a huge tax hit.

The “winners”: Bondora, Omaraha & CrowdEstate

Bondora

I spoke about my Bondora portfolio in more detail in my previous post, but overall, despite all the drama, lack of information and overall chaos, Bondora is still performing well. Total interest earned climbed over 2K and my steady montly interest income was 100€. This level will start dropping with the withdrawals, but overall I’m happy. Total interest & recovery as follows:

2015totalinterest

2015recovery

Currently in the process of building the business account, focusing on Estonian loans only. Managed to give out 100 loans in December, if the pace keeps at that level, It’ll overcome my private portfolio rather soon.

Omaraha

For a long time I kept away from Omaraha due to not having enough extra funds available, and the relatively questionable reputation they had, but this year I finally looked into it. The interest rates are comparable to Bondora, and similarly to Bondora, I managed to give out about 100 loans in the month of December, making it seem realistic that it will keep up with the Bondora portfolio – so far other P2P portals in Estonia have struggled to offer meaningful volumes.

However, from others’ experience I am assuming a portfolio up to 10K shouldn’t be an issue even there. I’m predicting a 2:1 rate of deposits between Bondora and Omaraha. (Overall, lack of a secondary market remains an issue though!)

CrowdEstate

With the first exits made in the second half of this year, Crowdestate’s reliability also skyrocketed. One of my investments just exited and I have 9 more running (2 as a private person, the other 7 as a business). Other than the disastrous new web page they have done rather good. As usual, would have waited for more projects, but reliability is king, so I’d rather they take time and do proper due diligence.

Overall, will remain a part of my portfolio for sure, and waiting for interesting times once new projects start exiting – I’ll have to decide whether to start increasing my investment size or keeping it at the current level. This will probably largely depend on the amount of projects available.

The “losers”: Moneyzen, Estateguru

Moneyzen

Theoretically everything is fine with Moneyzen, practically if you want to actually build a meaningful portfolio, then no can do. Currently I haven’t managed to really increase my investments there (and in my opinion my loan % rates are low enough as they are). Also, two big issues – the promised low level of defaults (definitely not seeing that in my portfolio!) – still a lack of a secondary market (makes me not want to transfer in any more money). Overall picture at the end of the year, nothing too interesting:

2015moneyzen

Total interest earned for this year comes to ~60 euros, which is a nice sum of money, but as you can see from the standing money on the account – nothing is just happening. I’m rather sad about this, I hoped for a lot more from them.

Estateguru

Now, with Estateguru it’s an interesting case. They started out with a different profile than Crowdestate, but by the end of the year they had grown quite similar. Shows that there isn’t enough room in the Estonian market to be so specific.

Overall, I invested into some of their projects, but surprisingly I think the thing that put me off most was the minimum investment size of 50€. To keep any meaningful money moving (to reduce cash drag) I’d have to invest a bit too much money at the moment to feel comfortable (since, once again, no secondary market). Currently planning to not add more money in, maybe every now and then when I see a project that I really like.

The “unknown”: Mintos, Twino, Fundwise

Mintos

Mintos came to the market with a bang and is showing rather nice growth in terms of both loan volumes and investor amounts. Biggest draw is probably the buy-back guarantee, which I can see is luring in a lot of investors.

However, looking at the overall returns they are getting lower by the month, and I’m not sure it’s worth the effort to diversify into another portal (However, they do have a secondary market, so that makes them rather attractive). I might just throw in 500€ to see how they work.

Twino

Twino is another new portal that hit the market with a bang and as with Mintos, their main appeal is that of a buyback guarantee. However, due to the loans they give out – essentially payday loans – they run a rather more risky business model (or maybe more profitable, will have to read their financial reports to know that).

However, a guaranteed 12%-ish return is something that I can see people appreciating. Another thing that for me makes them more appealing than some others is the short time frame of the loans – being able to actually fully exit rather quickly instead of dealing with long term rescheduled loans and a drawn out exit. Once again, I might just throw in 500€ to see how they work (business accounts became possible just in December).

Fundwise

Fundwise is offering out a whole brave new world for P2P investors – equity based investing for those interested in start-ups. From afar it looks amazing, taking a closer look, there are a lot of problems and at this point I would still classify their main purpose to be similar to a charity.

Why? You get no rights, no returns guarantees (note even your principal is in any way guaranteed), there is no way of predicting any returns whatsoever, you are locked down for years and the valuations (500K-1Mil) are taken out of thin air. I get contributing if you feel very passionate about a business or a product, but I wouldn’t really take this as a serious investment.

 

 

Risk levels of real estate crowdfunding

With the (arguably) impending crisis, many people have started to look into the risk levels of their investments with a bit more diligence. I asked Loit Linnupõld (Crowdestate) and Marek Pärtel (Estateguru) a few questions about how risk is managed in their investment portals.

realestate

How to assess the risk of crowd funding real estate?

The problem with many hybrid ways of investing is that evaluating the levels of risk associated with it becomes difficult due to how some risks may help balance out others while some may actually compound and create additional risk. Some things to keep in mind:

  • All real estate projects, crowd funded or no, follow the ups and downs of the market. If the market falls out from underneath you, then this will influence you whether you are in rental real estate, business real estate or crowd funding projects.
  • Crowd funding adds both a level of certainty (wisdom of the crowds) and a level of unreasonable enthusiasm (others are investing, so it must be good). You should still base your decisions on your own analysis, not on what others are doing.
  • (Real estate) crowd funding is still a new enough investment that we don’t have significant historical returns to base our thoughts on. Then again, past returns don’t predict future returns anyways. We can however ‘ballpark’ based on existing data in similar fields.

What do the portals do to manage risk?

I asked both Loit (CE) and Marek (EG) about how they manage risks, and how they hope to prevent problems from happening in their portfolios.

In case of a real estate crisis do you feel that crowd funding real estate & real estate loans are overall more or less risky to own than individual pieces of real estate? (Let’s assume a reasonably diversified portfolio).

Loit (CE): It really depends on a specific property, it’s cash flows and financial leverage. Technically, property is property regardless of whether it has been acquired directly or through crowdfunding. Nevertheless, I believe crowdfunding adds a new layer of common knowledge and if we combine that with crowdfunding platform’s due diligence (if they do it), that can significantly reduce the risk of picking wrong assets. Crowd is much smarter than any single individual alone and it is quite remarkable, that the wisdom can be shared and spread digitally between crowdfunders.

Marek (EG): To be prepared for a potential real-estate crises, smart investors should watch out not only for high returns but also for low and diversified risks. Every investment is a risk and once you accept this fact, then next thing that comes into play – it is how well you understand those risks and what measures you take to control them.  One of the best things to control risks is diversification. Individual investors can’t typically buy several pieces of land or properties, to diversify their risks. If you bought a flat you still depend on developments in vicinity of your property. Its price may go down even without a crisis.

EstateGuru p2p lending platform gives you the possibility to significantly diversify your portfolio, splitting your money into smaller pieces between different types of loans (flip, bridge, buy to let, mezzanine, commercial, land, residential etc), in  different locations by different borrowers and in the future also even in different countries.

One should understand the difference between investing in property crowdfunding (investment into equity and no security to investors given) and crowdlending platforms (investment secured by mortgage). We would suggest investors to do always their own stress tests- what happens to their investment if market goes down 20% (predicted m2 price of  is not 2000 but 1600). In case of, say a 20% market decline, do investors  earn some profit still, do they get back their invested money in some portion or lose it all- it largely depends on the capital structure of the project – what obligations the Borrower or Developer needs to fullfill before paying to platform investors.

Today we see clearly from UK, Europe and US statistics (altfi.com, Lendit.co) that institutional investors prefer lending platforms over crowdfunding ones as safer bet when making their capital allocations.

How has Crowdestate/Estateguru prepared for potential economic downturn scenarios? What kind of defences are in place to keep oversight of the projects and protect the investors’ money?

Marek (EG): First of all, all investments on EstateGuru platform are protected with 1st or in some cases 2nd charge mortgage. Not all Crowdfunding platforms have this security in the first place and with any fluctuations in Economy, their investors will be hit first. Smart looking business plans and fancy projects are not sufficient when property prices go down. But at EstateGuru we implemented second level protection – LTV at our projects is never higher than 75%, normally its around 60-69%, which means that even if property prices go down 25% we would still be able to recover our investors’ funds in case the borrower fails to repay the loan. In addition to the mortgage EstateGuru often asks the Borrower for a personal guarantee as extra security in order to make his EstateGuru loan repayment the top priority.In addition our partners have years of experience in Real Estate and we are able to foresee bad signs much in advance, so we will start working with Borrowers (refinancing, sale of assets etc.) much earlier to prevent Investors from litigation process and from potential partial loss.

Loit (CE): We continue to do our proper due diligence, picking only the best and business wise reasonable investment opportunities. Someone has pointed out, that most of the profits are earned at the moment of purchase and a our due diligence is focused on eliminating the odds of opening a bad project for crowdfunding.

Regular meetings with Sponsors (i.e. developers) and pre-agreed reporting formats ensure we have adequate information on project’s progress.
As the real estate related bank lending becomes less and less available, there will probably be a decrease in new projects started and we might see some of its effects in next 12 – 18 months.
What is the absolute worst case scenario of what can happen to the projects in your portfolio?

Loit (CE): There are several absolute worst case scenarios, that might happen, and they all end up with real estate becoming worthless (Russian tanks invading Estonia) or completely illiquid (like in the end of 2008 to mid 2009, requiring the major global economic crisis hitting employment and income).  Both scenarios might probably lead to partial or complete loss of the investment, depending on the specifics of the project (location, timing, leverage, demand etc). Its all about project’s cash flow – if you are able to generate cash either through even slow sales or leasing the property out, you will probably survive. Collateral is not the replacement of cash flow.

Marek (EG): A sharp decline in property prices (say 50%) lack of overall demand for property and in case of default longer than expected litigation time could be the worst case scenarios. Since our projects are diversified between residential and commercial, in different locations and are on top of that protected with 1st Charge Mortgage (this means our investors  will have 1st claim on the money received from property sale) and LTV of no higher than 75 (currently average is 60% at EstateGuru) – we feel that all above mentioned measures make our investments one of the best protected on the market and give best risk/return ratio.


As you can see, both portals have given significant thought to what might happen in case of an economic downturn. I do agree fundamentally that a retail investor can never diversify to the extent that is possible with crowdfunding. However, it is important to keep in mind that you don’t stop analysing projects even while you are still diversifying – it’s better to not take in a bad project even when you aren’t really diversified yet.
In addition to that, I like that Loit also pointed out the wisdom of the crowd and Marek emphasised that all investors should stress test their own portfolios to make sure they are making correct investment decisions for their own risk levels.
Thanks to Marek (Estateguru) & Loit (Crowdestate) for answering!

The new Crowdestate project shows how spoiled investors are

This week, the Estonian real estate crowd funding site, Crowdestate listed a new terraced houses project, which differs from other projects in many ways. First being that the hope is to run the whole project without a bank loan, giving CE more freedom then usual since you’re not pressured by the bank to sell the project to pay back the loan. Secondly, the predicted returns are lower than other projects so far, and investors are behaving somewhat strangely.

cenewproject

The sum needed for the project is about 500K€, which is a bit more than usual, but nothing that the investors can’t put together. What is strange however, is that the project hasn’t filled up yet when most others filled up in a matter of hours. Looking at the discussions I’ve seen in many forums, then the main reason for that being the opinion that 10-12% predicted net return is “too low”.

Let me repeat that, many people aren’t choosing not to invest not because of risks associated or the fact that they don’t like the project (most people don’t do too much due diligence on the projects anyway), the main reason is that 10% interest earned on a passive real estate investment isn’t high enough to bother.

Expected returns?

Most people are going to have their bubble burst in a painful manner at some point. Due to social lending and crowdfunding becoming more popular and successes of some projects, private investors have ended up with a completely unrealistic expectation of how much money investments should make. To put it into perspective, when it comes to mostly passive investments:

12% return – Very good and optimistic in the long run

5% return – Pretty good, beats inflation

0% return – Yay! You aren’t losing money

Overall, I’d say if the project doesn’t fill up it would create an interesting precedent – people have a lot of money available but they’re not willing to invest it for an expected 10% return. This opens several possible options – 1) people who have money will be able to pick up good stable projects more easily, 2) investors hoping for super good returns will forever be stuck in analysis paralysis and wait for the “best” deal, 3) market will have to rebalance in terms of the scale of projects due to people being unwilling to lock down money, 4) it might turn out that CE has completely missed something in the risk valuation of this project. It will be interesting either way!