Patch of Land | Crowdfunding Real Estate

[RRD]

Might be of interest to some: Earn 10–18% on your real estate investment in one year.
https://patchofland.com/
Requirements for investment are a bit stringent:
An accredited investor, in the context of a natural person, includes anyone who:
a)earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
b) has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

 

[Matt]

Just looked through it... would be interested to hear your analysis of the investment.

 

[RRD]

Some of my observations:

Signup is free. You can sign up even if you are not an accredited investor as of today and change your accreditation when you become eligible. Once an investment opportunity is posted, a lot of details are made available, to make an informed decision, such as:

- Description of the project and address
- 3rd Party appraisal reports
- Comparative market analysis
- Details on construction/upgrade expenses
- Developer’s profile
- Risk profile

Your investment is backed by first liens and personal guarantees. In the end, your capital is recovered after the project is completed successfully and the property is sold at the expected appraised value. Knowing that the projects are led by experienced developers, one can feel relatively safe about their investments. Statistics on their website states a 0% loss of principal so far.

I’d say if you have some cash lying around, it would be worth trying this out instead of waiting for another HYIP account (such as NetSpend) to come around.

Do share other thoughts.

 

[Matt]

I signed up to explore it, my thoughts:

It is an alternative investment, it should not be compared with a checking account like NetSpend.
Your investment is not in real estate, rather in a collateralized note.
The rate of return is an average of 12.43% since inception, in Sept 2013. VNQ (Vanguard Real Estate ETF) was valued around $67.50 on that day, it is now valued at $82.37. Additionally, the VNQ has paid the following quarterly dividends:
$0.618
$1.008
$0.453
$0.695
$0.668
$1.103
$0.512

If we cash flow that investment, the IRR of VNQ including dividends from the same holding period is 13.57%

Using simple notions of modern portfolio theory, when comparing two investments we should factor in the risk of the investment, if it contains more risk then it should payback a higher rate of return.

My first question: What is more risky? VNQ or Patch of Land?

VNQ Top 10 holdings (representing 37% of the ETF)

• Simon Property Group, Inc. Comm SPG 8.48
• Public Storage Common Stock PSA 4.04
• Equity Residential Common Share EQR 3.74
• Health Care REIT, Inc. Common S HCN 3.74
• Ventas, Inc. Common Stock VTR 3.30
• AvalonBay Communities, Inc. Com AVB 3.21
• ProLogis, Inc. Common Stock PLD 3.04
• Boston Properties, Inc. Common BXP 3.00
• HCP, Inc. Common Stock HCP 2.77
• Vornado Realty Trust Common Sto VNO

Patch of Land:

You get a guy in New Jersey who has put down $30K of his own money who wants to flip a house. Apparently he has 'a lot of experience' but he can't actually afford to finance this project without a hard money lender...

Lastly, there is very little firm data on this company. To say that there is a 0% default rate during a monster bull market and with only $20M of investments in 2 years isn't very credible. Defaults will occur.

 

[RRD]

Matt - You blew the proposal to smithereens. Thank you for the analysis.

I did think about this too “Apparently he has 'a lot of experience' but he can't actually afford to finance this project without a hard money lender...”, but then on second thoughts, don’t all corporations take loans?

You are absolutely right about it being more risky than an ETF, and have now made me want to invest in VNQ. Amazed at your overall deduction/reasoning capabilities along with financial acumen (two thumbs up!!!).

 

[Matt]

don’t all corporations take loans?

Yes, most do. However the rate at which they must repay the loan is dictated by the associated risk of the loan. Bonds are 'loans to corporations' and you will note that not all bonds are considered the same investment risk. There are a couple of measures, Moody's and S&P being major ones: http://en.wikipedia.org/wiki/Bond_credit_rating.

In a low interest rate environment there are even arbitrage opportunities, you might note several cash rich firms that are issuing bonds in Europe due to the rates available (they can 'borrow' at less than 1% and then take that money and invest it at 4% or so in an equally ranked long term US bond http://www.bloomberg.com/news/articles/2015-03-04/berkshire-hathaway-plans-first-euro-bond-in-u-s-borrowing-surge)

However, the company you mentioned (Patch) is lending at what, 12-20% or more?

So you have your guy in NJ.... who has no assets (he cannot borrow using a home equity line of credit? He cannot mortgage another property in his portfolio?) borrowing at 20%. What is his bond rating?

have now made me want to invest in VNQ.

I used it as another way to invest in real estate - though you should note that even though I think it may be better than Patch it is not risk free!

 

[MickiSue]

Most experienced RE investors occasionally use hard money when the deal is right and they have a deal larger than their ability to cover the flipping costs themselves.

But, most experienced RE investors also know enough to carry increasing amounts of money that is liquid so that they don't need to use hard money.

There are organizations out there that offer the opportunity to loan money for RE investment as part of a pool. But this particular one doesn't smell good to me. I would be unlikely to either lend or borrow through them...the biggest cut will go to the organization, and the structure is risky.

 

[MickiSue]

And...if you really want to lend money to RE investors, become a hard money lender. The contract will protect you much better than this thing. If the flipper tries to renege, or stops payment on the loan, you get the house. Now.

What do you get if your flipper flips out in this scenario?