Peer/Collective Lending

[Dreadnaught]

I know a few years ago we had a conversation about peer lending programs such as LendingTree, which is now all over the news for a bunch of reasons that I don't think necessarily undermine the model.

Wondering what people think of a variant, which is crowdsourced real estate investments. The example company here is Peer Street: https://www.peerstreet.com

Interestingly, the most cogent commentary I can find (that at least speaks to my fears) is on a UX-crippled spam site called reddit.com: https://www.reddit.com/r/RealEstate/...stors_who_are/

Anyone have thoughts about why an asset-back non-bank investment lending process is a valuable and scalable model? Especially when the world is awash in cash hunting for yield?

[wiggin]

I know a few years ago we had a conversation about peer lending programs such as LendingTree, which is now all over the news for a bunch of reasons that I don't think necessarily undermine the model.

Wondering what people think of a variant, which is crowdsourced real estate investments. The example company here is Peer Street: https://www.peerstreet.com

Interestingly, the most cogent commentary I can find (that at least speaks to my fears) is on a UX-crippled spam site called reddit.com: https://www.reddit.com/r/RealEstate/...stors_who_are/

Anyone have thoughts about why an asset-back non-bank investment lending process is a valuable and scalable model? Especially when the world is awash in cash hunting for yield?

Honestly, my feelings on this are not that different than my feelings on other P2P lenders. These loans, while theoretically secured, are high interest and subject to the same problem with other high interest 'secured' loans during the property bubble - you only recoup your money so long as valuations of the underlying asset remain stable or growing. If you get a property crash, you lose a lot of capital.

There are theoretically some advantages of this compared to other P2P sites - at least the loans are somewhat secured, and it looks like the target market is professional flippers rather than your Joe Schmoe trying to get a mortgage they can't afford. So theoretically it should be a bit more professional and a bit safer than unsecured consumer loans. I question this analysis, though - I have no doubt it's possible for truly 'professional' flippers to secure bank lending at lower rates - at the least they can probably incorporate or the like and get cheaper capital. This suggest to me that the market here is the mom-and-pop operations, which are prone to all sorts of disruptions and are likely the first to fall if the market turns. The size of a quality market here is probably quite limited.

Furthermore, I think the quality of the due diligence is a really critical piece here. They claim to do a lot of the due diligence themselves as they are 'professionals' - but we've seen what other real estate professionals can do wrt valuations and credit quality. It's easy to get into groupthink or to be overly optimistic about sets of loans when you have a vested interest in taking a cut of the loan. I'm not sure if they take any skin in the game, but my understanding is that they're just matchmakers, which means they have an incentive to increase volume at the expense of quality. It might be possible for the data available to the lenders to be good enough to do your own due diligence - and maybe there's some smart money out there doing precisely that. But I have my doubts that the retail investor will have the nous to parse this out appropriately.

I suspect that during good times all of the various P2P lending options are going to do pretty well. But we haven't seen a real downturn to the economy, or employment, or the housing market since P2P lending really got going. We're going to have to see how things look like when credit markets start drying up before we can declare them a success. And does it really help you all that much if you end up owning a 5% chunk of an unsellable house in Las Vegas as your collateral when the loan goes south? That's an incredibly illiquid asset that few retail investors have the expertise or time to handle.

I've never understood the obsession with investing in real estate, whether it be second homes or REITs or whatever else. It's a highly volatile, highly illiquid asset with substantial running costs - kinda like an illiquid and more expensive version of gold. Furthermore, a huge proportion of retail investors already have a huge chunk of their assets tied up in real estate in their primary home (even relatively well off investors) - why increase your exposure to a single market even further rather than owning a diversified portfolio of assets? Chasing yield seems like a fool's errand in such a poor investing environment.

P2P is an exciting idea, and the yields theoretically available to retail investors are very attractive. But IMO the risk-adjusted yield is quite poor, especially given the likely makeup of an investor's other assets. There are arguments to be made in its favor for specialized and well-informed investors, but even then I would treat it with caution.

[GGT]

Short answer -- it opens the door for predatory lending.

[Dreadnaught]

I've never understood the obsession with investing in real estate, whether it be second homes or REITs or whatever else. It's a highly volatile, highly illiquid asset with substantial running costs - kinda like an illiquid and more expensive version of gold. Furthermore, a huge proportion of retail investors already have a huge chunk of their assets tied up in real estate in their primary home (even relatively well off investors) - why increase your exposure to a single market even further rather than owning a diversified portfolio of assets? Chasing yield seems like a fool's errand in such a poor investing environment.

P2P is an exciting idea, and the yields theoretically available to retail investors are very attractive. But IMO the risk-adjusted yield is quite poor, especially given the likely makeup of an investor's other assets. There are arguments to be made in its favor for specialized and well-informed investors, but even then I would treat it with caution.

Isn't the risk-adjusted yield of anything quite poor?

I agree with most of what you say, though I'm not sure I agree with your overall skepticism of second homes or REITs. Especially REITs. Getting past the fact that a REIT is literally liquid, I don't think having underlying assets that are illiquid is a bad thing. Someone has to invest in that kind of asset, right? Why not pool capital for it? I mentally treat them like a volatile/high-yield bond. Risky, but also somewhat ordinary.

[wiggin]

Isn't the risk-adjusted yield of anything quite poor?

I know it was tongue-in-cheek, but the important question to ask yourself is this: if you are offering someone much cheaper capital than they can get elsewhere, what do you know that other people don't? Sometimes there are good reasons for a difference in pricing - alternatives might be pricier due to structural issues rather than the safety of the underlying investment. But sometimes it's because there's a sucker in the room, and the sucker is you. Comparing risk adjusted returns (admittedly a rather imprecise science) allows one to quantitatively analyze whether one's capital is better employed elsewhere for a given risk tolerance.

I agree with most of what you say, though I'm not sure I agree with your overall skepticism of second homes or REITs. Especially REITs. Getting past the fact that a REIT is literally liquid, I don't think having underlying assets that are illiquid is a bad thing. Someone has to invest in that kind of asset, right? Why not pool capital for it? I mentally treat them like a volatile/high-yield bond. Risky, but also somewhat ordinary.

I think that REITs can be part of a balanced portfolio when employed correctly, but they should only be a small part of a much larger investment mix. Some issues with REITs:

1. They are more liquid than individual homes, but hardly liquid. Many REITs were very thinly traded during the crash with attendant affects on price discovery, spreads, and liquidity.

2. REIT quality is a real issue here. When you're investing in a mutual fund or ETF you generally have a good idea of the major holdings of the fund and are familiar with the underlying products. REITs are often composed of large numbers of fairly obscure investments (even things like high end commercial REITs) and the ability of an individual investor to appropriately evaluate the investment is very poor. It's essentially a form of securitization that has great advantages in risk pooling and the like but substantial disadvantages in terms of complexity. Someone who does their homework might be able to do a good job, but it's much more challenging than with other retail investments.

3. It's fine to invest in some less-liquid and high-volatility assets for funds you don't need to access anytime soon. REITs are one way to do so. But my beef has more to do with people who tout real estate as a panacea investment due to such clever statements like 'they're not making any more land' and the like. Real estate, as an asset class, should be classed as an 'alternative' asset like venture or PE money or reinsurance - important, potentially lucrative, but niche for the typical investor. Having modest holdings in an REIT is fine, but it shouldn't feature too heavily in a portfolio - especially if the portfolio already has substantial exposure to the real estate market through a primary home.

[Dreadnaught]

I agree that people often think of real estate in the wrong ways, however I also think they can be rather important drivers and it's actually healthy for people who indirectly own real assets. Unlike large parts of the market cap of major indexes, which are dominated by companies like Amazon or Apple, whose liquidatable capital assets are relatively thin; it's mostly brand! Though certainly both companies are investing in data centers, which are capital intensive.

But I would argue that liquidity during the financial crisis wasn't confined to just REITs. That's why it was a crisis after all. And any index fund is basically a portfolio of assets that people don't scrutinize with a lot of detail. It's possible to discover which assets are owned by REITs, which is more than one can say for most public companies.

I don't want to be seen as hyping REITs. They are maybe 5-8% of my 401K and 0% of my non-retirement assets. But I do think they are attractive in the long-term, albeit not at these prices.