I’m getting 7-8% on collateralized, relatively short term loans. Can you beat that?

[underwrite]

Can you beat that? Serious question as I’d love to find other ways to get yield. I checked out some of the discussions on the preferred board and you really have to buy some low quality preferreds to get decent yield.

The loans I reference in the subject line are from Peerstreet. The loans are backed by a house that is being renovated and then sold (flipped). The company doing the remodeling puts down 25% equity. That leaves you with a decent cushion when the deals occasionally go bad. I’ve had 2 homes out of approx 50 go into foreclosure. I believe, even on these two, I’ll get my principal and interest back due to the equity cushion.

The loans are generally 6-24 months in length.

Anyways, interested in any recommendations on ways to get yield. I have plenty of stock market exposure and am looking for ways to diversify.

 

[USGrant1962]

If you are looking at something that risky, something like Doubleline Income Solutions (DSL) provides similar yield and is WAY more diversified.

 

[marko]

"Beat" is hard to define if you go beyond raw percentage.

I get ~6% on a HY bond fund with a lot less risk. Almost 20 years of reliable interest.

If you're just looking at the percentage, no, but I like to consider percentage/risk. There's vehicles paying 6% that beat your 7% with much less risk and seem a lot less complicated. Just wondering if that extra 1% risk is worth it.
IMHO.

 

[Gumby]

You could try an oil & gas royalty trust - SBR, PBT, DMLP, SJT, CRP. They're all yielding around 8-9%.

 

[joeea]

Lottery tickets yield much, much higher returns.

A bit more risk though.

 

[jetpack]

Not many investments there to choose from. If the site doesn't take off, will it go under?

 

[underwrite]

If you are looking at something that risky, something like Doubleline Income Solutions (DSL) provides similar yield and is WAY more diversified.

Thanks. I will check it out. I am familiar with Jeff Gundlach, but have never spent any serious time looking at his funds.

 

[underwrite]

You could try an oil & gas royalty trust - SBR, PBT, DMLP, SJT, CRP. They're all yielding around 8-9%.

Thank you. I will take a look at these.

 

[underwrite]

Not many investments there to choose from. If the site doesn't take off, will it go under?

They add 3 to 5 new mortgages every couple days to choose from. Each mortgage is funded within a few days. I’ve been investing there for about two years now and have had no issues. I’ve had about 20 mortgages where the home has sold and the loan paid off. Currently, I have (parts of) about 50 mortgages outstanding.

Since Peerstreet is a relative start up, there is some danger in dealing with the sponsor company. However, there are two things that make me feel a little better about them. First, all of the investments are (supposedly)set up in a trust separate from the sponsor company. Second, the main guy from the Big Short is one of the many investors.

 

[underwrite]

Lol!

 

[marko]

They add 3 to 5 new mortgages every couple days to choose from. Each mortgage is funded within a few days. I’ve been investing there for about two years now and have had no issues. I’ve had about 20 mortgages where the home has sold and the loan paid off. Currently, I have (parts of) about 50 mortgages outstanding.

Since Peerstreet is a relative start up, there is some danger in dealing with the sponsor company. However, there are two things that make me feel a little better about them. First, all of the investments are (supposedly)set up in a trust separate from the sponsor company. Second, the main guy from the Big Short is one of the many investors.

Respectfully, it sounds like a lot going on for 8%. Many of us here average 7%-8% (or more) with just simple funds and stocks.

If its only interest or dividends you're looking for, as noted there's quite a few energy stocks doing that with considerably less risk involved.

Maybe I'm old fashioned but their website didn't really motivate me to drop $100K their way. Even when stocks tank, I still have a piece of paper (figuratively) that's worth something from them.

But that's just me.

 

[calmloki]

We do funding on individual flips and house projects. We hold the first interest; no partners. We choose pretty local places we can go see - just cruised a couple existing loans last night on our way back from Portland. We've had to foreclose on one and start foreclosure on one and did cash for keys on one and had a RE funding company go POOF! with a year's worth of retirement living money. Make 10-12% + a point or two.

 

[corn18]

S&P 500 is up over 19% over the last year.

 

[underwrite]

We do funding on individual flips and house projects. We hold the first interest; no partners. We choose pretty local places we can go see - just cruised a couple existing loans last night on our way back from Portland. We've had to foreclose on one and start foreclosure on one and did cash for keys on one and had a RE funding company go POOF! with a year's worth of retirement living money. Make 10-12% + a point or two.

That is awesome. Can I ask how you got started? Also, how did you find a network of flippers to fund?

 

[underwrite]

S&P 500 is up over 19% over the last year.

I’ve been close to 100% stocks for most of my working life, but looking to diversify. I don’t mind some risk, but I don’t want to go through another cycle of down 30-40% which will come at some point. Always does. Thus, looking for some alternatives in a low yield world.

 

[calmloki]

That is awesome. Can I ask how you got started? Also, how did you find a network of flippers to fund?

Was hand carrying payments in to a small loan company for the $30k house we were buying - I'd bought it from a neighbor's son after my neighbor passed away. The son sold the loan at a discount! I would have stretched for a discounted amount. Told the man running the loan company I wanted to get on the other side of the loan process. After the loan was paid off we did some small loans; owner of that loan company sold and we went with the new company, making loans they presented to us. The loan companies were getting all kind of fees and 4 points. Hmm. We got our numbers up and visited a group making loans in downtown Portland - put a big chunk with them and they evaporated in about a year, taking our money with them. Hmm.

We continued to make loans through the loan company, but kept seeing the same faces over the years - somewhere in there we just started loaning direct to the borrowers we were familiar with. Feel our risk is reduced because we know the practices of our borrowers. We don't charge as much as we maybe could, so our borrowers come back to us.

 

[COcheesehead]

For the risk, you should target closer to 15%. It’s a business, not a passive investment, no matter how you look at it. Anyone having that much at risk needs a higher return. I’ve owned a business for 22 years and our average return has been 14%. At that rate I still feel like we’ve under performed for the amount of risk I’ve taken on.

 

[copyright1997reloaded]

Can you beat that? Serious question as I’d love to find other ways to get yield. I checked out some of the discussions on the preferred board and you really have to buy some low quality preferreds to get decent yield.

The loans I reference in the subject line are from Peerstreet. The loans are backed by a house that is being renovated and then sold (flipped). The company doing the remodeling puts down 25% equity. That leaves you with a decent cushion when the deals occasionally go bad. I’ve had 2 homes out of approx 50 go into foreclosure. I believe, even on these two, I’ll get my principal and interest back due to the equity cushion.

The loans are generally 6-24 months in length.

Anyways, interested in any recommendations on ways to get yield. I have plenty of stock market exposure and am looking for ways to diversify.

The question isn't 2 out of 50 bad loans in 2017/2018, the question is how many bad loans if things quickly go the other way. Flips/renovations are great while prices are moving up, but .... when prices are moving down.

I'm not saying it isn't a good investment, just wondering if the risks are fully understood here.

 

[ESRwannabe]

If you are looking at something that risky, something like Doubleline Income Solutions (DSL) provides similar yield and is WAY more diversified.

I second DSL as a good CEF option. Pimco also has a lot of good debt CEFs if you can buy them at a discount (which is very hard to do).

I also like the etf XMPT which is made up of 70+ municipal bond CEFs. Yield is around 5% which is equivalent to 5 / (1 - .X) where X is your tax bracket.

Example for 25%, you have 5 / .75 = 6.67. So in a 25% tax bracket the 5% municipal bond is the equivalent for a 6.67% completely taxable bond.

For a 39.6% tax bracket 5% tax free is equivalent to 8.28% taxable.

 

[COcheesehead]

I second DSL as a good CEF option. Pimco also has a lot of good debt CEFs if you can buy them at a discount (which is very hard to do).

I also like the etf XMPT which is made up of 70+ municipal bond CEFs. Yield is around 5% which is equivalent to 5 / (1 - .X) where X is your tax bracket.

Example for 25%, you have 5 / .75 = 6.67. So in a 25% tax bracket the 5% municipal bond is the equivalent for a 6.67% completely taxable bond.

For a 39.6% tax bracket 5% tax free is equivalent to 8.28% taxable.

XMPT looks like a A ticket ride. Not for the faint of heart. High expenses, long duration, leverage and junk. To me this would be a classic example of reaching for yield, but under the premise of the OP’s question I can see why you would recommend it in this case.

 

[ESRwannabe]

XMPT looks like a A ticket ride. Not for the faint of heart. High expenses, long duration, leverage and junk. To me this would be a classic example of reaching for yield, but under the premise of the OP’s question I can see why you would recommend it in this case.

VanEck Vectors CEF Municipal Income ETF Report (XMPT) | Asset Allocation Summary

Vanguard High-Yield Tax-Exempt Fund Report (VWAHX) | Asset Allocation Summary


Lets compare XMPT and VWAHX.

Both have a BBB credit quality. XMPT has an effective duration of 8.37 years and VWAHX is 6.84.

XMPT has a 5 year total return on NAV of 7.26% and VWAHX is 5.53%.

Seems like a pretty reasonable trade off to me. An extra 1.53 years duration risk for 1.73% more total return.

There is no need to throw around scary hyperbole. Just look on morningstar or whatever and do a comparison.

They have the same credit quality. So it comes down to whether you want a little more duration risk for a little more total return. If you do, great. If you don't, great.

Me, I would take the extra 1.73% total return. It doesn't seem like much but it is when people are looking at 4% withdrawal rates. I am also willing to gamble that we will not see run away inflation, and an extra 1.53 years duration risk is ok with me.

 

[njhowie]

Lets compare XMPT and VWAHX.

The fees and expenses on XMPT are very high compared to VWAHX and relative to the return. XMPT is also leveraging, while VWAXH is not. So, personally, I don't think the additional return is worth the extra risk here. XMPT is forced to taking additional risks to generate that additional return in addition to the higher fees and expenses.


Fees and Expenses XMPT

Net Expense Ratio: Prospectus 1.59%
Net Expense Ratio: Category Average 0.30%
Gross Expense Ratio: Prospectus 09/01/2017 1.70%
Expense Waiver* Yes
Expense Waiver/Reimbursement 0.11%
Expense Waiver/Expiration Date 09/01/2018

*Expense Waiver Note: Van Eck Associates Corporation (the “Adviser”) has agreed to waive fees and/or pay Fund expenses to the extent necessary to prevent the operating expenses of the Fund (excluding acquired fund fees and expenses, interest expense, trading expenses, taxes and extraordinary expenses) from exceeding 0.40% of the Fund’s average daily net assets per year until at least September 1, 2018. During such time, the expense limitation is expected to continue until the Fund’s Board of Trustees acts to discontinue all or a portion of such expense limitation.

 

[ESRwannabe]

The fees and expenses on XMPT are very high compared to VWAHX

That's why it is important to use the total return when comparing two funds. The total return includes all expenses.

On a total return basis XMPT has been significantly better for a minor increase in duration risk.

 

[njhowie]

That's why it is important to use the total return when comparing two funds. The total return includes all expenses.

On a total return basis XMPT has been significantly better for a minor increase in duration risk.

I'm well aware that total return includes all expenses. The problem is that the only way the fund generates returns that are higher than the Vanguard fund is not simply due to a minor increase in duration risk. In generating the 1.73% additional total return, they have to really outperform by 3.13% - as their expense ratio is 1.59% vs. 0.19% for Vanguard. The only way you can outperform by over 50% (on a pre-expense basis) in the municipal bond space is by taking on significant additional risk - it is not simply an additional 1.53 years of duration risk.

"has been" are the key words in your reply. Please remember - past performance is not a guarantee of future returns.

As I mentioned, XMPT is leveraging. They are using margin for some of their investments - as you can see they have a negative cash balance, have short positions, and bond investments totalling over 100%. There's more risk involved than simply the additional 1.53 years of duration risk.

 

[ESRwannabe]

I'm well aware that total return includes all expenses.

njhowie,

Everything you are talking about is reflected in the information found on the morningstar web pages. Instead of making guesses, you can compare the two funds directly and then determine which one you want to purchase.

I will be ignoring this thread for now on as it appears you just want to argue instead of learn.