All Forum Posts by: Sean Kelly-Rand

@Jay Hinrichs @Chris Seveney @Don Konipol- we were solicited as well as potential underwriting/originating partners however typically all of our loans remain in the fund (investors want the yield, we, the GPs, are the largest investors in the fund). If we do have a partner I want to make sure they are well capitalized with insurance or pension fund capital.

The issue with the underwriting of the private lending crowdfunding platforms (or really most national lenders) is that one: it's hard to dedicate significant underwriting time and effort to loans under $1m - it's becomes check the box - and if lenders aren't in the local market, the nuances (one side or the other of the street, or one end of the zip code) aren't captured in the underwriting. So it becomes purely FICO and appraisal based. And two  is on the asset management: As they aren't in the market they can't keep track of the borrowers/loans post closing. And if anything goes into default they aren't in a position to one help the borrower or two step in and finish the project. I am guessing pro-active management would have helped in the situation you mentioned Don. 

While I am not overly fond of regulatory oversight/overreach I do believe there has to be some industry body protecting the individual investors (hopefully private industry).  Otherwise we'll lose the confidence of the individual investors. We had our in-house counsel do some investigation and put out our thoughts in the PeerStreet legal items (we're not invested but it affects the industry). We're audited, do regular investor reporting (directly, via Bloomberg, and now Fidelity) and considered having one of the ratings agencies rate our fund however I am not sure that anyone trusts the rating agencies anymore.  I don't have a solution but am very welcome to ideas on how the industry as a whole can restore investor confidence (feel free to DM me with concepts). 

Thank you to those that have posted your thoughts already.
-Sean-

@Matthew J. - it's a fair question but part of it is legalese. "Risk" is a vague term - so for the sites really what they need to disclose is facts - do you own a direct participation in the loan or is it indirect. What you are asking is: "Am I knowingly taking the risk the the borrower on the loan doesn't pay or am I unknowingly taking the risk that the platform isn't profitable and doesn't get the next venture round?" Correct? @Chris Seveney explains it well.

Our team put out a post on linkedin on the PeerStreet bankruptcy that did a bit to describe the structure so that might be useful reading to ask the specific questions on the structure.  We'll do an update in a week or two.

We tried crowdfunding our fund but we found that investors don't view a fund of senior debt investments that sexy and didn't seem to risk weight investments. I.e. investors that self-direct seem to prefer direct investments into a single property versus diversification into a strategy (it's also harder to underwrite a manager / strategy than it is a single investment) - that's my personal experience. 

@Carlos Ptriawan - made fair points on risk levels and experience. We're a local private lender, so perhaps biased, but agree with his assessment that the local sharp shooters (local/regional funds) are better positioned to know the lending landscape than a national player. Another question to ask is how much money does each manager have in each loan/strategy (in our case its substantial). Another lender in the market commented that "you lend like its your own money" i.e. we really care because it is our funds. The same can not be said of a platform that syndicates investors to investors without holding a piece of the risk.  

I am not saying crowdfunding doesn't have it's place however the disclosures don't seem to be as clear as they should have been and the managers don't seem to hold enough residual risk. Also for many of the platforms it's only the loans that can't be sold to the institutions that go onto the platform for retail investors which has it's own inherent risks. 

@Matthew J. I would add our (RD Advisors) fund RD REDF II,LP to Chris's list. Also it's probably good to compare offerings for structure as everyone is a little different. We're a regionally focus (c. 90% of our loans in the Boston MSA) - others might be pro's at ground up lending, or cannabis etc... and different minimums etc... 

We did a webinar awhile back on debt investing which I believe people found useful. We've also raised on Crowdstreet in the past so while we aren't a crowdfunding website we offered our fund on their platform (they just introduce to be clear, it doesn't go through them)

Chris, you are a wealth of knowledge. I'm in the industry and I appreciate your posts here. I have no idea how you find the time to answer all the questions you do but it is impressive!

 Agree 100%. 

@Chris Seveney - do you know off hand the note holding structure of the investors in other crowdfunded private lenders? YieldsStreet/FTF/GroundFloor? Curious if it's similar or did investors actually hold a participation in the note. 

Similar to yourself we are a direct lender and run it in a fund structure (equity investment  as LP).

-Sean-

@Joshua Poitras - @Kyle Spearin - I would say the majority of our clients that are still buying multi's in Boston are getting them off market (below market prices). However because our business is primarily investor/developer focused I see a shift to the suburbs with more single family renos for sale and or rehab and rent outside of the city. Honestly I don't see the BRRR model working in Boston for the moment (or many places).

And many of the investors buying the standard 3 families in Boston proper have deep pockets and its about allocating cash (better than sitting in an SVB account) and less about return on the capital. Also if you are a high income earner the depreciation really helps with tax mitigation. 

Or it could simply be that buying 3 units and living in one is still better financially than buying one and living in one. It's all about next best alternative. 

Hey @Casey Dimascio - I am a private lender / HML - we don't typically do the 30 yr DSCR loans - some HML's do but I'm not a fan as far better to stick with local banks if you can.

I've done quite a few loans (construction and refi) in LLCs with banks and found it relatively straight forward you just need to know which bank to go to with which property/situation.

 @Colin Kelly-Rand has been able to get his clients great terms recently even with cash outs - it's all about knowing the local banking market and being able to approach 5-10 banks to see who has the best terms. 
 

If you do need to use non-bank financing to complete the rehab then come back to me and we'll do a construction loan to then be refi'd when complete.

@Griffin Coyne - material costs are the same and labor could be slightly cheaper but I wouldn't discount it too far. That's why it's really hard to renovate in areas were the rents are lower.

I remember going to Detroit and seeing a beautiful place for $15K it was huge and only needed $75K of reno... then realized that with the reno I'd rent it for about $700 and my operating costs and time value of my own personal time just meant that it wasn't worthwhile, plus renovated at the time I could buy for $60K.... 

@Justin Chan - is this in the suburbs of Boston? Fall River/New Bedford or Lowell/Lawrence?

$285k sounds very cheap - that said I don't know the condition. $150K is not a "full gut" of a 3 family. Full gut of a decent sized triple starts around $300K but I would say closer to $450K for good quality reno... now $100K can completely 'resurface a property' - new kitchens, baths, sandfloors, paint etc... but you're not touching electric, plumbing, or moving walls, replacing windows, structural, etc... big advice is walk the property with a trusted contractor. 

The numbers work if reno is under $150K. 

No harm in waiting and saving up a little more either. 

@Lien Vuong , @Colin Kelly-Rand- what are you advising your clients? And how do the numbers look to you?

@Justin Chan - I actually did very well investing in areas that are on the edge of much more expensive areas. Eventually the neighborhood changed and prices increased dramatically - not saying it happens in all areas - I would say just make sure that the yield makes it worthwhile. If not than don't rush wait to see it out and perhaps prices adjust. 

I would say differentiate between where you personally want to live and where is a good investment as they are not one and the same.