Investment guru advise

[sirbob]

I have been meaning to move some funds into some higher performing investments for a while - I have gotten OK returns but feel I could be doing better over the long haul.

I have been looking at some private placement stuff that loans for construction.

• They loan the last 50% - meaning the party getting the loan must already have cash and own the prop.
• The loan is a first position
• The prop is collateral
• The portfolio right now has mostly things like fast food restaurants being built - some apartment buildings and a very few custom homes.
• The average float is for 9-18 months.
• Liquidity is controlled by the loan - meaning, I can't call and get it all tomorrow like selling a stock. I would have to wait until the loans that my funds are in are paid (again ave time is 9-18 months) or the collateral property is sold to get my funds out.

It all looked pretty good until the last few months when the market started these wild swings and who knows what the future is regarding that right now...

Now I'm wondering if this is a bad time to make this move - I'm considering moving about 10-15% of my investable funds into this.

What do the smart people think? Do it or not?

 

[ChumpChange]

Nope.

 

[sirbob]

Nope.

Give me more???

I get we are due for a slow down etc and the real-estate "bubble" is coming to the next cycle....

 

[DrunkenSailor]

Is this through a family office/direct lender or an investment advisor like Rich Uncles?

Either way I would want to see track record. Get your hands dirty look at the pay histories, what percentage of the portfolio is performing vs semi vs non performing. What happens when the property that you lent on defaults? Who is responsible for default costs? Do you get to pick the project or are you involved in a REIT situation where you are one of 100 investors on the project?

CMBS issuance stalled towards the end of the 3rd and 4th quarter of 2018. I am assuming the exit strategy is corporate finance on the projects once improvements are completed. If this is the case the commercial bond market is hugely inflated right now and new issuance has slowed way down. These two factors would give me concern about financing up front costs on a project with your takeout being in flux. If the takeout is different it may not be a cause for concern. Is the total LTV at 50% or is it higher?

I would be willing to take a look if you wanted a second pair of eyes on it.

 

[cofooter]

Being locked in for an indefinite time would be scary, especially if there is a downturn. Is there some guarantee or insurance on at least the initial investment? Don/t know much about these.

 

[nowski]

Lots of scams start when there is a sudden down turn in the stock market, just my .02

 

[sirbob]

This would be an example of one of the investments.

http://www.parkviewloan.com

And here is something about the principals.

http://www.parkviewloan.com/about-us

 

[sirbob]

Lots of scams start when there is a sudden down turn in the stock market, just my .02

This example I just posted has been around for while, its not a fly by night / just popped up sort of thing.

 

[sirbob]

Is this through a family office/direct lender or an investment advisor like Rich Uncles?

Either way I would want to see track record. Get your hands dirty look at the pay histories, what percentage of the portfolio is performing vs semi vs non performing. What happens when the property that you lent on defaults? Who is responsible for default costs? Do you get to pick the project or are you involved in a REIT situation where you are one of 100 investors on the project?

CMBS issuance stalled towards the end of the 3rd and 4th quarter of 2018. I am assuming the exit strategy is corporate finance on the projects once improvements are completed. If this is the case the commercial bond market is hugely inflated right now and new issuance has slowed way down. These two factors would give me concern about financing up front costs on a project with your takeout being in flux. If the takeout is different it may not be a cause for concern. Is the total LTV at 50% or is it higher?

I would be willing to take a look if you wanted a second pair of eyes on it.

I'm not sure it it would actually be a REIT or not - I would be putting money in and they invest as they see fit - the projected return is 10-12 % and has meet expectations for years...


This would be an example of one of the investments.

http://www.parkviewloan.com

And here is something about the principals.

http://www.parkviewloan.com/about-us

 

[DrunkenSailor]

I know a couple of people over there through 2 degrees of separation. I will do some asking around.

 

[Spudsbud]

RUN.... do not walk, RUN away from this.
Even in a good market scenario (not now) its a bad idea. Stay in whatever stable or all cash for now.

 

[sirbob]

RUN.... do not walk, RUN away from this.
Even in a good market scenario (not now) its a bad idea. Stay in whatever stable or all cash for now.

I understand its not as predicable nor liquid as some things ... but why?

Can you share some metrics or economic bell whether that would say this is a bad investment? I have some close friends that have had money in these for years and they have done very well with these investments.

It is not FDIC insured and generally not available through a Schwab type brokerage so i'm very cautious about it - but I would like to understand more of why informed investors would be reluctant to invest in these.

 

[530RL]

It is a private lender. It all depends upon how much faith you have in the individuals, their honesty, their systems, their underwriting and their people.

You would want to carefully read their PPM and make sure what their underwriting really is and how it is really done. These types of loans if done correctly are document intense and management intense.

The statement that they only loan 50% is sort of nebulous as it can get kind of semantic in how one defines what the value is when determining that 50%? Is it 50% of cost, hard cost, including soft costs, is the land being marked up for changes in entitlements, how is the money advanced, whose money is advanced first and on and on.

I think these types of funds can be very risky, or less risky, depending upon who is running them, but in no way are they free of risk.

Lastly remember the most important rule when searching for higher returns; it is not return on investment that matters, but return of investment. If you lose 50% of your principle, you have to double your money to get back to even.......

 

[sirbob]

It is a private lender. It all depends upon how much faith you have in the individuals, their honesty, their systems, their underwriting and their people.

You would want to carefully read their PPM and make sure what their underwriting really is and how it is really done. These types of loans if done correctly are document intense and management intense.

The statement that they only loan 50% is sort of nebulous as it can get kind of semantic in how one defines what the value is when determining that 50%? Is it 50% of cost, hard cost, including soft costs, is the land being marked up for changes in entitlements, how is the money advanced, whose money is advanced first and on and on.

I think these types of funds can be very risky, or less risky, depending upon who is running them, but in no way are they free of risk.

Lastly remember the most important rule when searching for higher returns; it is not return on investment that matters, but return of investment. If you lose 50% of your principle, you have to double your money to get back to even.......

Good points and I especially like the thoughts regarding how the value is defined.

I've learned about he people and the track record - thats really what has me considering it. I feel very comfortable with what I have learned.

My bigger concern is is this a good time for this type of investment or not. Im told by people in it that the comfort comes form the prop as collateral, and while it would take to time to sell etc - there is a value there and ultimately it can be converted to cash.


???

Thx

 

[530RL]

Good points and I especially like the thoughts regarding how the value is defined.

I've learned about he people and the track record - thats really what has me considering it. I feel very comfortable with what I have learned.

My bigger concern is is this a good time for this type of investment or not. Im told by people in it that the comfort comes form the prop as collateral, and while it would take to time to sell etc - there is a value there and ultimately it can be converted to cash.


???

Thx

I'm suing my crystal ball manufacturer for a construction defect so I have no idea.

I do know that banks are flush with liquidity and looking for loans, so it would stand to reason that these loans would be ones where something could not be worked out with a financial institution at lower rates, and would therefore be higher risk.

Secondly, I like these types of deals coming out of a recession as opposed to after a long period of economic growth.

Thirdly, these types of construction projects take a while to build so your risk needs to be looked at from the standpoint of when the project will be completed and what are the challenges at that later date.

And lastly, are you investing in a loan participation in a single loan, or are you going into a pool with geographical and asset type diversification?

 

[sirbob]

I'm suing my crystal ball manufacturer for a construction defect so I have no idea.

I do know that banks are flush with liquidity and looking for loans, so it would stand to reason that these loans would be ones where something could not be worked out with a financial institution at lower rates, and would therefore be higher risk.

Secondly, I like these types of deals coming out of a recession as opposed to after a long period of economic growth.

Thirdly, these types of construction projects take a while to build so your risk needs to be looked at from the standpoint of when the project will be completed and what are the challenges at that later date.

And lastly, are you investing in a loan participation in a single loan, or are you going into a pool with geographical and asset type diversification?

Great points -

This would be investing in a fund that does these loans across different projects not a single loan tied to a specific project.

 

[Halvecto]

I'm suing my crystal ball manufacturer for a construction defect so I have no idea.

I do know that banks are flush with liquidity and looking for loans, so it would stand to reason that these loans would be ones where something could not be worked out with a financial institution at lower rates, and would therefore be higher risk.

Secondly, I like these types of deals coming out of a recession as opposed to after a long period of economic growth.

Thirdly, these types of construction projects take a while to build so your risk needs to be looked at from the standpoint of when the project will be completed and what are the challenges at that later date.

And lastly, are you investing in a loan participation in a single loan, or are you going into a pool with geographical and asset type diversification?

@530RL makes very good points.
Lending is a funny thing. You are right there is more liquidity from traditional banks, but there is also more "red tape". Dodd/Frank Bill, etc. has caused undue burden for many of the small to mid-size banks and large banks don't have a clue what the left hand is doing from the right. I have worked with some guys in this area that did loans to a contractor that was completing Chase Bank branch remodels, but contractor was having a hard time getting his LOC from Chase Bank to work with him. Go figure. So the hedge fund lender stepped in and did a debt/equity deal. Worked for all.

I have talked with some bond traders that are selling bonds to community banks, etc. who would rather simply borrow from the Fed, buy a bond portfolio add a few German govt bonds for yield and eliminate the headache. At times, the speed and efficiency of "underwriting" or simply the access to funds is advantageous to the sponsor (builder, fund, etc.). They may be willing to give up a few basis points to have the relationship and simplicity of non-traditional loan.

@sirbob on @530RL last point, look at the number of projects that are behind the loan. Is it a pool of loans, or deal by deal. Even in a good market, one deal can go bad with one wrong kind of chemical found in the dirt. He makes a very good point about knowing the diversification and collateral mix and capital stack (order of repayment).

Ask if the investors have title to deed in the case of foreclosure. Is the "fund" a pass-through or simply an operating LLC. I have worked with a group that required title to go in escrow. One slip and title is transferred. No drawn out foreclosures. Boom.

There are some straight-up guys and opportunities in these types of investments. Do your homework.

Simple reminder. There are a few characteristics to an investment: 1.Liquidity 2. Performance (yield) 3.Time (lockup) 4.Risk/"the credit" (return & amount of capital): Never give up one without getting that and more (better) of another.

 

[sirbob]

@530RL makes very good points.
Lending is a funny thing. You are right there is more liquidity from traditional banks, but there is also more "red tape". Dodd/Frank Bill, etc. has caused undue burden for many of the small to mid-size banks and large banks don't have a clue what the left hand is doing fro the right. I have talked with some bond traders that are selling bonds to community banks, etc. who would rather simply borrow from the Fed, buy a bond portfolio add a few German govt bonds for yield and eliminate the headache. At times, the speed and efficiency of "underwriting" or simply the access to funds is advantageous to the sponsor (builder, fund, etc.). They may be willing to give up a few basis points to have the relationship and simplicity of non-traditional loan.

@sirbob on @530RL last point, look at the number of projects are behind the loan. Is it a pool of loans, or deal by deal. Even in a good market, one deal can go bad with one wrong kind of chemical found in the dirt. He makes a very good point about knowing the diversification and collateral mix and capital stack (order of repayment).

Ask if the investors have title to deeds in the case of foreclosure. Is the "fund" a pass-through or simply an operating llc.

There are some straight-up guys and opportunities in these types of investments. Do your homework.

Simple reminder. There are a few characteristics to an investment: 1.Liquidity 2. Performance (yield) 3.Time (lockup) 4.Risk (return & amount of capital): Never give up one without getting that and more (better) of another.

Good details to consider - thanks!

 

[530RL]

Good details to consider - thanks!

Don't get me wrong, some of these deals can be good.

But they are complicated in the underwriting and then in the lending process. For example, does the lender get a lien endorsement for every draw with respect to possible construction liens? They are quite technical to do correctly.

The other thing to consider is how the fees are charge on a pooled fund. For example, management fees are no longer deductible under the new tax bill. So you may have a high stated yield, but when you back out the fact that management fees on the fund are with after tax dollars, the after tax yield gets skewed.

If you are using non-taxable accounts, they are better for tax purposes, but if you have a loss, it is a non-taxable account.

In either event, you can figure it out as long as you have the proper sense of objectivity and skepticism when going into this type of asset class.

 

[DrunkenSailor]

Don't get me wrong, some of these deals can be good.

But they are complicated in the underwriting and then in the lending process. For example, does the lender get a lien endorsement for every draw with respect to possible construction liens? They are quite technical to do correctly.

The other thing to consider is how the fees are charge on a pooled fund. For example, management fees are no longer deductible under the new tax bill. So you may have a high stated yield, but when you back out the fact that management fees on the fund are with after tax dollars, the after tax yield gets skewed.

If you are using non-taxable accounts, they are better for tax purposes, but if you have a loss, it is a non-taxable account.

In either event, you can figure it out as long as you have the proper sense of objectivity and skepticism when going into this type of asset class.

All good advice. Are you in the industry?

 

[530RL]

All good advice. Are you in the industry?

Nope, I'm on the other side of the table as the capital provider like sirbob would be.