Author Topic: Value of P2P Lending Sector Diversification  (Read 17776 times)

JustTryinToMakeABuck

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Value of P2P Lending Sector Diversification
« on: August 14, 2016, 09:18:10 PM »
I currently have P2P lending investments in two sectors: consumer debt (e.g., LC) and small business lending. I'm now planning to add real estate exposure, split 50-50 between residential real estate and commercial real estate.  My ultimate goal is to have about 30% of my P2P investments in consumer debt, about 30% in small business debt, and about 20% in each of residential and commercial real estate debt.  For each sector, I work with (or plan to work with) a different platform (i.e., company), and that should reduce my platform risk, but I'm wondering if by diversifying across marketplace lending sectors (consumer debt, small business debt, residential real estate debt, commercial real estate debt) I'm decreasing my overall risk in the P2P asset class or if I'm just making myself feel better.

Comments? Insights?


Fred93

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Re: Value of P2P Lending Sector Diversification
« Reply #1 on: August 14, 2016, 09:25:19 PM »
You're reducing one kind of risk, and taking on a different kind of risk.

Unfortunately, there are no P2P platforms in real estate or small business lending which I trust.  (I'm investing a bit thru some, but that's an experiment.)

None of them have been around long enough to establish a track record.  With no track record, you're flying blind.

LC has over 1 million loans in the publicly available database.  Sure there are some problems here and there, but you can see what happened in the past in considerable detail.  You can see the quality of their work.  For these startup real estate and small business lending guys you don't have anything like that.  You're flying completely blind.

rawraw

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Re: Value of P2P Lending Sector Diversification
« Reply #2 on: August 15, 2016, 06:30:31 AM »
If you decided to give $50 dollars to five homeless people at a 10% interest rate or $250 dollars to one homeless person at a 10% interest rate, which do you think is risky?  Well surely the bet on five reduces the risk somewhat, but it doesn't tell us how much.  Why would anyone invest in P2P real estate instead of buying a REIT?  I still don't understand why, other than the fact the P2P guys seem to do perhaps much riskier real estate.

JustTryinToMakeABuck

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Re: Value of P2P Lending Sector Diversification
« Reply #3 on: August 15, 2016, 11:19:49 AM »
Why would anyone invest in P2P real estate instead of buying a REIT?  I still don't understand why, other than the fact the P2P guys seem to do perhaps much riskier real estate.

I'm attracted by what I believe are two advantages:
  • With a REIT, the underlying value of the investment can decline. With a P2P loan, it can't.
  • With a REIT, you may be paying for more management than you pay for with a P2P loan.
This is new territory for me, however, so I could be mistaken. If I am, I hope others will step in and correct me.

Half Right

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Re: Value of P2P Lending Sector Diversification
« Reply #4 on: August 15, 2016, 12:05:36 PM »
I agree with your logic and am also concerned about the viability of these online real estate lenders.
On the other hand Lending Home has now issued over $750 million in loans and with a current balance outstanding of approximately
$500 million, they are taking in $5 million a year ( at 1% of the outstanding) which is helpful in covering overhead.

In addition they are using a Bankruptcy Remote Vehicle which makes me feel even better. And their rate of return is equal to or surpasses Lending Club.
So I wouldn't put my last dollar with them but all in all I feel relatively comfortable.

Fred93

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Re: Value of P2P Lending Sector Diversification
« Reply #5 on: August 15, 2016, 01:45:33 PM »
...Lending Home... And their rate of return is equal to or surpasses Lending Club.

You have no idea what their rate of return is.  They haven't been around long enough to calculate a rate of return.

rawraw

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Re: Value of P2P Lending Sector Diversification
« Reply #6 on: August 15, 2016, 03:27:33 PM »
I agree with your logic and am also concerned about the viability of these online real estate lenders.
On the other hand Lending Home has now issued over $750 million in loans and with a current balance outstanding of approximately
$500 million, they are taking in $5 million a year ( at 1% of the outstanding) which is helpful in covering overhead.

In addition they are using a Bankruptcy Remote Vehicle which makes me feel even better. And their rate of return is equal to or surpasses Lending Club.
So I wouldn't put my last dollar with them but all in all I feel relatively comfortable.
Do you think credit risk of highly levered real estate deals (when the market is at all time low cap rates) is lower, equal, or higher than the company facilitating it? Surely the BRV only matters as much as you think the business is unsustainable. A BRV just leaves the average risk of a levered transaction, so don't focus on it too much.

In terms of returns, AAA Subprime paper was marketed as risk free but higher than treasuries. The sure fire way to mess up in investing is focusing on returns vs focusing on what creates those returns.

In terms of the underlying value can't decline, how do you arrive at that? Just because you're investment isn't marked to market daily doesn't mean the value isn't changing. Or are you suggesting it's risk free?  I've been looking at the fundrise ereit but still can't find any information on why it's different from a reit other than marketing sound bites.

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reidy83

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Re: Value of P2P Lending Sector Diversification
« Reply #7 on: August 15, 2016, 09:40:57 PM »
I agree with RawRaw/Fred93 that the P2P RE sites all carry risk bur risk is a relative term. I am big proponent of P2P RE and have been investing in this alternative space for 42 months. I know what you are thinking........this is a very short window to determine if this is a good long term play. However, reading your thread I assume your an accredited investor and  I think it is a good idea to try it out and see what happens. Start small and add/subtract based on your results. I have done 110 deals on 8 different sites with 60 deals completely closed. I have lost principal in only two cases and yet my overall return is north of 10%.

I feel the best overall site right now is Realty Shares which gives you Debt/Equity & Commercial/residential opportunities and solid returns. Lending Home/Patch of Land are good for debt positions and short term turnarounds. Most of the deals on the debt sites are done within 12 months so it is pretty easy to get your rate of return.

I used to invest heavily in Fundrise and they were one of my favorite sites until they shut down their interest in specific properties and channeled all their efforts into the eREIT.  Their fees are higher than other REIT's that I invest in so I no longer have any interest in Fundrise.

Another way to participate and potentially spread your risk further is using AlphFlow. The guy who started this site left Realty Shares and created a fund that invests in multiple P2P RE platforms. In addition, this site is awesome if you want a single dashboard for all of your P2P websites. 

Good Luck

JustTryinToMakeABuck

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Re: Value of P2P Lending Sector Diversification
« Reply #8 on: August 16, 2016, 11:50:37 AM »
Another way to participate and potentially spread your risk further is using AlphFlow. The guy who started this site left Realty Shares and created a fund that invests in multiple P2P RE platforms. In addition, this site is awesome if you want a single dashboard for all of your P2P websites. 

I've been looking carefully at the AlphaFlow offering. It has some very attractive features, foremost among them that they refund the full management fee if investors don't get 8% per annum on their investment. I also like that the management fee is assessed in arrears. Neither of these things pertains to the fund's ability to choose wise investments, but in a world where fund managers typically get paid in advance no matter how poorly they execute, it's refreshing to see a manager get paid AFTER doing some work and to keep their fee only if they deliver what they promise.

If anybody has comments on the AlphaFlow fund or the people behind it, please chime in!

Fred93

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Re: Value of P2P Lending Sector Diversification
« Reply #9 on: August 16, 2016, 02:39:30 PM »
If anybody has comments on the AlphaFlow fund or the people behind it, please chime in!

Two guys.  No track record.  Their fund charges 1% AUM fee!  They just buy some loans.  Get real.

JustTryinToMakeABuck

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Re: Value of P2P Lending Sector Diversification
« Reply #10 on: August 16, 2016, 02:58:27 PM »
Two guys.  No track record.  Their fund charges 1% AUM fee!  They just buy some loans.  Get real.

I've spent a fair amount of time looking, and from what I can tell, if you're looking for a fund with a track record that invests in real-estate-backed marketplace lending debt, you're not going to find one.

For this fund, one of the two guys manages the loan acquisition, and this is the same guy who did the project underwriting for RealtyShares for two years. Not a long track record, but at the same time more than just some random guy.

The interesting part of the 1% fee is that it's fully refunded to investors if the fund doesn't produce a net 8%/year return. I've identified 19 funds that invest in marketplace loans (not all invest in real estate), and this is the only fund I've found that has a hurdle rate for its management fee. Most of the funds charge a management fee regardless of performance, and most have no hurdle for their performance fee. In what appears to be a world of 1% of AUM plus 10% or 15% of all profits, 1% of AUM with an 8% hurdle and no performance fee stands out.

At the end of the day, any fund that invests in marketplace loans "just buys some loans." That's what they're supposed to do. Ideally, they choose good loans, but the AlphaFlow fund is the only one I've found that gives up its management fee if it doesn't achieve a certain level of performance. Saying "Their fund charges 1% AUM fee!" leaves out important information.

Fred93

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Re: Value of P2P Lending Sector Diversification
« Reply #11 on: August 16, 2016, 03:35:45 PM »
I've spent a fair amount of time looking, and from what I can tell, if you're looking for a fund with a track record that invests in real-estate-backed marketplace lending debt, you're not going to find one.

Bingo.  You and I do a different thing with that information.  To you it means go ahead.  To me it means stop.  There is a good reason why there are no funds in this area with a track record.  There are no originators in this area with a track record!

Quote
For this fund, one of the two guys manages the loan acquisition, and this is the same guy who did the project underwriting for RealtyShares for two years. Not a long track record, but at the same time more than just some random guy.

That's not "a track record".  That's an employment record.  RealtyShares hasn't been around long enough to have a track record.

Quote
The interesting part of the 1% fee is that it's fully refunded to investors if the fund doesn't produce a net 8%/year return. I've identified 19 funds that invest in marketplace loans (not all invest in real estate), and this is the only fund I've found that has a hurdle rate for its management fee.

Having a hurdle rate is certainly better than not having one, but that's not a reason to invest, and it doesn't overcome the no-track-record issue for me.

Given that there is no fund guy with a track record of any kind, why don't you just invest directly with an originator, and then you won't have to pay a 1% fee in any case?


JustTryinToMakeABuck

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Re: Value of P2P Lending Sector Diversification
« Reply #12 on: August 16, 2016, 05:25:50 PM »
Given that there is no fund guy with a track record of any kind, why don't you just invest directly with an originator, and then you won't have to pay a 1% fee in any case?

Two reasons:
  • I don't want to choose the investments myself. I have no experience in loan evaluation, and I don't want to acquire the necessary expertise. Just as I pay somebody to prepare my income tax returns, I'm happy to pay somebody to evaluate and select loans and lending platforms for me.
  • I don't want to be limited to the loans available on a single platform. Places like LendingHome and PeerStreet offer auto-investing options (which I use with LC), but they can choose only from the loans available on their platform. 
Fundamentally,  I believe somebody who does loan selection for a living will do a better job at it than I could myself.

That doesn't mean that I will definitely invest with a fund. I'd like to, but only if I have confidence that the fund is likely to pay off for me. I'm not terribly put off by the lack of a track record, but I don't ignore it, either. For you, it'd be a deal-killer. That's fine. We each weigh our investment options in different ways.

reidy83

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Re: Value of P2P Lending Sector Diversification
« Reply #13 on: August 16, 2016, 05:28:59 PM »
Fred93...........I know you have been critical of P2P lending, specifically Prosper since 2006 and in many cases I agree with your synopsis. No disrespect to you but  there is money to be made in P2P RE sites. Obviously, the market could change and the P2P RE vendors could implode but I don't think that is anytime soon.

I'm sure one could wait another two or three years to invest in P2P RE once these companies become "established" or have a "track record".  By that time, one could miss out on a lot of gains. Again, it comes down to the individuals risk tolerance.

My recommendation for "JustTryingToMakeAbuck" is to try it out and see what happens. I have three years of positive gains and my returns are better then my LC/Prosper returns.


Fred93

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Re: Value of P2P Lending Sector Diversification
« Reply #14 on: August 16, 2016, 05:55:26 PM »
Fred93...........I know you have been critical of P2P lending, specifically Prosper since 2006 and in many cases I agree with your synopsis. No disrespect to you but  there is money to be made in P2P RE sites.

Actually, I'm a strong PROponent of P2P lending.  I'm heavily invested in Lending Club & Prosper loans.

I argue that one should be very careful of the startups, ie two-guys-who-put-up-a-web-site. 

What money is to be made or lost on the present round of P2P RE web sites is completely unknown.  I understand the allure of high interest rates, but frankly, that's all you have at present.  I am investing a bit at Groundfloor.