Peer Street
peerstreet.com
peerstreet.com
I'm drawn to these kinds of investments because they (hopefully) aren't tightly correlated to the stock market. And, unlike Lending Club, they are secured loans that are tied to property that can be liquidated if the borrower defaults.
Mr. Money Mustache had a writeup on Peer Street this week: http://www.mrmoneymustache.com/2016/05/02/peerstreet/
When things are good, as they have been from 2009 until today, then you can roll debt over and these high risk, high return loans look like a goo investment.
When things go bad, people stop having access to capital to roll their loans and it isn't one loan that goes bad, its the entire sector that goes bad.
The problem with this lender is that they can't show data for a period like 2008, when there were defaults all over the place. That's not their fault as they weren't around then but its something to keep in mind.
if you are getting above average return for loaning money then you are by definition taking above average risk.
Ask banks in 2008 how having their loans secured by the property worked. When someone defaults on their loan it isn't always because they can't pay, its often because the property is worth less than the loan value on it.
This should be marketed as high yield, super risky investments, but they try and make it sound that it is great and safe. It's one thing to have good originators, and another to have bad credit loans that actually get repaid.
It's probably the former though since it appears to be very short.
Edit: It's neither:
> As an investor, you’re usually funding loans, which are then used to buy and improve real properties, and you get paid for doing so. But because you’re not competing in the well-developed 30-year residential mortgage market, you can expect to collect annual interest in the 7-10% range, rather than the 3-4% that mortgage securities pay their owners.
So essentially its more like a REIT.
>The SEC requires all PeerStreet investors to be accredited investors
Funny they don't seem to have the same requirements for lotto tickets...
But take a step back and think about it for a second. You can put 'ways to make money' on the axis of 'conscious involvement'. On the left you'd have 'keeping a job', then on the right you'd have 'hiring a professional money manager'.
As you traverse the scale, returns on investment vs. conscious attention devoted tends to decrease. You need no money to get started on a job, but investing in the stock market requires large amounts of cash to generate significant returns.
Until you have a quarter of a million dollars net worth, it just doesn't make sense to do more than slow-growth passive investment over time to fund a very specific event, retirement. Even there it's a hard sell for many people. You need to make a lot more than the average for retirement investment to really work for you.
In the middle of the scale, between having a job and investing, is running a business. If you want to move up the economic ladder, the move isn't from salaried professional worker straight to investor, it's to hanging out your shingle and carving out an economic niche. In business, it's much easier to earn the kind of money you need to make investing work.
Over time, you can learn your niche to the point to where you can direct others to exploit it rather than do it yourself. This is where the line blurs between business and investment, where you have a working system turning inputs to revenue, and all you have to do is watch the numbers to make sure they keep going up. And you don't need to be accredited to do it.
You might think, "oh, but I could day trade and earn a ton of money if the SEC would just let me!" If you don't know the principles, the market is going to burn you badly. If you know the principles, then you'll know it's not a fast road to riches. Business will get you there much quicker.
The SEC is aware that the accreditation limitations are somewhat onerous, so what they're doing is opening up some Series A rounds to unlimited numbers of unaccredited investors. If you want to bet on an emerging market, this would be the best way to do it:
I considered investing in Virtuix, but decided I needed the money accessible right now more than I needed a lottery ticket, no matter how much I believe in the potential of VR. What did I need the money for? Tiding me over while I get my startup off the ground.
Don't shy away from learning or starting a business. It'll make you a better investor when the time comes.
No credit card debt. You can have credit cards, just don't run up the balance. This should be the first place your disposable income goes to. You can let the balances run up if you're saving for a down payment for your house, that might be the only real way to save it up on a salary. Pay it back down immediately after the close.
A paid-off vehicle. Paying off your car loan frees up that money for the rest of the list. You can buy a home while you're making car payments, but you need to be making enough to pay down your credit card debt incurred from saving the down payment, your mortgage, and your car loan all at the same time. A car loan doesn't look expensive until you stack it up with everything else, just drive a used car unless you really need a new car for some reason and are willing to pay the significant premium.
A house. You should be making double your monthly payment on your mortgage. The equity you're building up will be an asset worth more than most financial instruments you have access to. Buy a house before you start investing, it gets you situated in your community and helps to provide a safety net in case of a sudden loss of income.
An emergency fund of perhaps $20K. Pick a comfortable number, this is an essential part of your safety net, not so much because you'll actually need it, but because it will give you a nice inner psychological cushion that will let you really relax. It's the next best thing to actually being rich, don't neglect it.
Finally, you need a side project, something that will eventually turn into your business. Start doing this while you're holding down a job, rather than quitting and living on credit cards / savings unless you are a masochist or are in your early twenties. (pardon me for repeating myself) You need your mistakes to be cheap and not lifestyle-threatening.
A fully-funded retirement account. I think this is the least important part of your safety net if you're planning on going into business. Very important though if you're not. Best play it safe and put the maximum amount the government will let you. The tax-deferral makes these accounts far more lucrative than day-trading.
If you have all of these things fully funded with your current income, then you can start playing around with trading. Take a percentage of excess emergency funds, (do not jeopardize your safety net, it's way more important than gambling) and start making expensive mistakes, oh I mean day trading. Trade only after you've done all you can for your side project that day.
Does this look impossible to achieve? It is. You need a yearly income of perhaps $150K to do all this, and still retain a healthy lifestyle. This assumes you're not in a ridiculous real estate market like New York or San Francisco. It assumes you're living a "Millionaire Next Door" lifestyle and not trading financial security for expensive psychological self-medication like a coke habit or worse, retail therapy. Get a real therapist instead, it's way cheaper and far more effective.
This doesn't mean "ignore me and do whatever you want." This means "don't day trade." Any gains you'd make from day trading don't outweigh the risks, they can't even cover the opportunity cost of not doing everything else on the list. If you day trade without a safety net, then you are mortgaging your future on bad bets. If you think your bets aren't bad, then you don't understand how betting or investing works and you will lose a lot of money.
If financial security is one of your goals, the above list is how to get it. It's the shortest path that is still reliable. If getting rich is your goal, then you can move your side project up the list to between house and vehicle. But the list is still valid because the things on it are going to be the first things you're going to want to buy once you actually get rich, and besides, very few people get rich overnight, so you're still dealing with climbing each rung individually over time. Even if you won the freaking lottery then the list, minus the side project is the first thing you need after the immediate short-term necessity of a good lawyer. You're just buying them all at once rather than working up to each step.
Also fundrise invests in real estate and you don't need to be accredited. If you are accredited you can invest in more options on their platform, but it's not closed off to unaccredited.
Anecdotal hypothesis: I found it very easy to be approved for a house I could hardly afford, so if there is another recession on the job market, I could see a lot of mortgages defaulting again. On the flip side, that's why Mortgage insurance is there. However, will we bail out the insurers next time, instead of the banks?
Sounds a whole lot like subprime. In a rising market, it's not a bad deal. In a flat/down market, expect a lot of these to crater.
I know absolutely nothing about the market, but I was under the impression that it is much less risky now.
What gives you that impression? (Genuinely curious)
Since the crisis, people now have a much better idea of what's in mortgage-backed CDO's than they did during the bubble. The ratings agencies are also under much more scrutiny to properly classify the risk of these vehicles. On the consumer side of things, it's much harder to get a mortgage than it was before the crisis. Adjustable rate mortgages are much less common, don't have misleading intro rates, and don't make brokers sky-high commissions. I grew up in Miami in the bubble, and I remember every other radio ad was for no-questions-asked home loans. You just don't have that kind of culture now.
When the numbers are this far apart, I can't help but be suspicious.