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!

Estateguru portfolio status, 3 months

A while back I wrote that I took a look into Estateguru as an investment opportunity due to wanting to both diversify and perhaps move a part of my lending portfolio into real estate backed loans. Since then they’ve slowly gotten their pipeline going and there is new projects happening every now and then.

estateguruaugust

What do I like about Estateguru so far?

  • While the interface and web page could be smoother, all numbers and transactions are clearly visible and I’ve had no issues so far trying to find information and failing to. (Looking at you here, Bondora!)
  • There’s a reasonable amount of data on each investment and there’s enough projects moving currently to have hope of not much cash drag happening.
  • The loan terms are short, meaning that the lack of a secondary market at the moment isn’t as big of an issue as it would be if the investments were 3+ years.
  • I don’t need to log on often to keep track of what’s happening – in that sense it’s way more passive than some other investments I have. (I trust they won’t make any big changes without previous info.)

Portfolio plans?

I’m currently a bit torn when it comes to my plans for Estateguru. Due to the short term of the projects, it doesn’t take long to create a kind of a cycle of investments. (It’s shorter than with Crowdestate for example). This means that in theory out of all my investments Estateguru is closest to a classical CD ladder (A strategy in which an investor divides the amount of money to be invested into equal amounts to certificates of deposit (CDs) with different maturity dates.), with markedly higher interest though!

This means that I’d have the option to keep investing 50€ per project (the minimum), until the year comes full cycle (next July) and then re-evaluate whether I want to increase the sums that I invest or keep them at the same level and lessen contributions. (Since you get interest paid, then for every next 50€ investment you need to add in less of your own money, and just reinvest the returns).

My current plan is to keep to the minimum to slowly diversify my portfolio and then re-evaluate after like half a year. There is always the question of what happens if a project defaults and issues arise or how many projects they’re capable of bringing out to keep cash drag to a minimum. Definitely they seem to have hit the ground running and are doing well enough that I’d dare to give them more importance in my P2P portfolio.

*’If you feel like starting to invest with them, then using the promotion code EGU05422 will cash back 0,5% of your invested amount to both yourself and me as the person who referred you for the first year of investing.

First look into Estateguru

Estateguru is one of the six crowdfunding/social lending platforms that are active on the Estonian market. It’s one of the two portals that focuses on real estate, and while Crowdestate helps investors make capital investments then Estateguru is focused on giving out loans that have real estate as collateral. (Meaning if a loan defaults then there’s something you can take away from the lender, unlike in social lending.)

estateguru-logo-live

Why not before?

Estateguru is currently on its 10th project (and it’s a 400 000€ project!), and has definitely gotten the project pipeline going. When I was picking an additional site to invest into, I ended up choosing Moneyzen before, because they were just around earlier, but currently since there’s not money really moving at Moneyzen, then it’s probably time to think a bit about switching out a part of my portfolio to Estateguru.

Upsides & downsides of Estateguru

For investors who are looking at reliability, I can see the definite appeal of investing into real estate loans. If something were to go badly, then it’s obvious why an investor would feel more confident if there’s collateral attached to the loan.

One of the downsides is probably a similar issue that Crowdestate has – it’s difficult to quickly diversify your portfolio, since the minimum sum here is 50€ (it’s 100€ at CrowdEstate). This means that while in social lending it’s easy to reach a goal of 100 contracts to diversify then you can’t really reasonably expect that when it comes to real estate crowdfunding.

Another key difference that a lot of people probably enjoy is the fact that while Crowdestate is more focused on capital growth investments, then Estateguru investments allow for cashflow, which means that you can get the ball of compound interest rolling quicker.

The interest rates of real estate loans are obviously far lower than in the consumer credit market (Estateguru averages 11,5%), but since in theory they have less risk, then the difference is probably justifiable for most investors.

Current plan

Since my original plan for 50€/month into MZ has turned out to not be viable, then I’m currently planning on investing the 50€/month into Estateguru instead. Depending on the way they get their project pipeline going that might end up being more if they have projects I truly enjoy. Since there is curerntly silence on the CrowdEstate front, then I’m intrigued to see what will happen once both sites have projects up at the same time – whether or not investors will have the resources to fill up the investments.

(If anyone feels like signing up, they have a referral program that earns a 0,5% cashback to you and your referrer. Feel free to use the code EGU05422)