As I indicated in a prior post, I've decided to experiment with real estate crowdfunding to determine if it's a viable way to earn passive income.
Crowdfunded real estate is a popular choice for investors. Some real estate funds offer investment opportunities to the “everyday” investor. One of the newer entrants in this space is DiversyFund. Investors can get into multifamily real estate with DiversyFund for as little as $500. Another option for smaller investors is Fundrise. We offer a detailed review of both in this post.
In my case, I narrowed the field down to 2 online platforms, each with their particular twist on real estate investing.
The plan is to invest $10,000 with each platform over the next 12-18 months to get some hands-on experience with how they operate. The ultimate goal, of course, is to turn the experiment into a permanent investment strategy to help fund my Freedom Years.
This review covers YieldStreet, the online platform I funded.
You can check out my reviews of PeerStreet, the other platform as well.
YieldStreet Company Background
Milind Mehere is the Founder and CEO of YieldStreet. His bio describes Milind as “a serial entrepreneur, builder, thinker, angel investor, husband, and father.”
Prior to founding YieldStreet, Mr. Mehere helped scale Yodle from zero to $200 million in revenue. Web.com bought Yodle in 2016 for $342 million. He describes his mission at YieldStreet to change the way wealth is created. His background in technology brings the skills and innovation needed to help YieldStreet stand apart from many of its competitors.
Michael Weisz is Founder and President of YieldStreet. Mr. Weisz heads the investment strategy team, originator network, and investor acquisition. His background is in specialty finance. He spent time at a credit opportunities hedge fund that managed over $1.2 billion. His team specialized in asset-based loan transactions, including a specialized niche in the legal finance markets.
They have a strong stable of investors and advisors providing the funds and leadership to execute the investment and company strategies the team puts together.
The team at YieldStreet does extensive due diligence on all of their investments. They put each project through a five-point due diligence process.
- Asset-based – Each borrower must provide verifiable collateral. That might be real estate, a legal case (litigation finance-real, motor vehicle accidents, etc.), or various kinds of equipment.
- Low stock market correlation – In other words, the investment returns from these investments do not follow the stock market. That means whether the stock market rises or falls, the goal is for their investments are not affected by the movement of the stock market. A low correlation to the stock market helps diversify investment risks.
- Experienced management – The investment team makes sure the investments they make have management teams with long term experience in their niche. Doing so can reduce the risk of your investment. Startup returns may be attractive on the surface. The risk that comes with it is not. Experience helps mitigate some of the investment risks.
- Short duration -Since YieldStreet investments are in loans, the team looks for loans with shorter durations. They look for loans with 1 to 3-year terms. Targeting shorter-term loans allow investors to reinvest their money in new opportunities.
- Target annual returns – To date, YieldStreet investments go after annual returns of 8% to 15%. They have over $1 billion invested to date.
Investments are debt-based (loans) usually senior secured (top priority in default), of short duration (1 – 3 years), and diversified. Here's what Michael Weisz says about their investment philosophy:
“The premise of YieldStreet is not to hit home runs. It’s to consistently hit doubles and triples.”
Risk In Asset-Backed Investments
In asset-backed investments, you don't own the assets. You're investing in the loans made backed by those assets. Compared to investing in real estate directly, asset-backed investments would be considered riskier investments.
For example, investing in multifamily housing units (apartments, condos, etc.) that have cash flow from rents would be less risky. They would be easier to sell than, say, an investment in a fleet of cars. Cars depreciate. Real estate, in general, would appreciate in value.
In a bankruptcy, senior asset-backed loans have a higher position than stockholders or unsecured bondholders. YieldStreet strives to have loans back by senior or preferred position. It still makes these investments riskier. Having the shorter terms mitigates some of that risk.
YieldStreet investments are alternative investments. Like hedge funds, they are primarily offered to accredited investors, who have higher incomes and net worth than smaller investors. Theoretically, they are supposed to be more sophisticated investors with the ability to assume more investment risk.
Here's a brief description of the qualifications of accredited investors.
Though some real estate funds target smaller investors, YieldStreet is only available to accredited investors.
Accredited investors are those who make at least $200,000 a year in income ($300,000 for married filing jointly) or have $1 million in liquid assets (not including a residence). The downside of this restriction is it eliminates investors who don't meet those minimum criteria.
Nonaccredited investors should consider DiversyFund and Fundrise.
Keep that in mind as you read the review.
I signed up for the YieldStreet platform around the same time I funded my PeerStreet account.
Upon registration, I completed some questions to confirm accreditation and other details. I received a welcome email with some introductory information, and an opportunity to speak directly with the YieldStreet team.
I didn't have any time to connect for the intake call but was ready to invest in open offerings within 2-3 days.
Unfortunately, the investment process and my first experience with YieldStreet was not that positive. They pre-announced an investment opportunity that I was very interested in, which was launching the following day at a specific time.
I made sure I was ready the next day during that time to make my first investment since I had heard they tend to sell out fast. At the designated opening time, I accessed my account, and the system crashed on me after multiple tries within the first 5 minutes.
This was a very frustrating initial experience, especially since things went a lot more smoothly on PeerStreet. I sent them an e-mail expressing my frustration. Within 24 hours, they had issued an e-mail to all investors that tried to access the opportunity apologizing for the technical issues.
They acknowledged their site was not prepared for the level of interest and volume and offered to guarantee a pre-commitment on any future opportunities for those affected. That meant I would be guaranteed a spot on any future investment of my choosing.
I appreciated the fact they proactively addressed the issue, unlike other companies, and signed up for an opportunity a few weeks later.
YieldStreet focuses primarily on real estate investment and legal finance opportunities. The litigation financing opportunities are what drew me to this platform. They're unique offerings compared to the other platforms, which mainly focus on real estate.
The YieldStreet team conducts due diligence on these opportunities and allows less than 10% of them to make it to their platform.
Each litigation financing opportunity is essentially a portfolio like a mutual fund.
That portfolio is made up of multiple lawsuits “packaged” up as one investment.
YieldStreet evaluates the following characteristics of the portfolio during their due diligence:
- Obligor's Credit Rating, which works like an individual's credit score ranging from AAA to D. They look for a high percentage of A- or higher ratings.
- YieldStreet looks for a healthy concentration of advances, so the portfolio is not heavily dependent on anyone's advance or lawsuit.
- They also make sure they balance the concentration concerning the number of obligors, as well as case type.
- Interestingly, they apply a Loan to Value (LTV) ratio to their litigation portfolios in a similar manner to real estate. They make sure that the value of advances does not exceed 10% of the overall case value.
In addition to the above type of legal financing, they will also occasionally finance law firms directly.
Most of the litigation opportunities I've seen on YieldStreet have ranged from 12-15% interest roughly speaking. The terms are typically longer and can vary from 16-36 months.
They are also involved in commercial real estate, which is another attractive option on this platform.
My YieldStreet Strategy
Since their volume of offerings is relatively low compared to other platforms, and their minimum investments are higher, I decided to invest the full $10,000 in a litigation offering.
These offerings are relatively widespread and sell out very quickly, but since I had a pre-commitment from them, I was able to invest in one immediately.
Here's a summary snapshot of the investment I made.
The portfolio I chose offered a 12% interest rate with an 18-month term.
You can check out the details of the make-up of the portfolio below. It's reasonably diversified, and matches the general characteristics YieldStreet follows during their due diligence.
The actual investment process went smoothly at that time since I had a pre-commitment guarantee. I uploaded all the necessary documents for proof of accreditation and confirmed my commitment.
Based on the investment returns anticipated, and assuming I don't run into the issues covered below, here's what I should be expecting about a year and a half from now:
Accelerated Pre-Settlement Portfolio IX: $10,000 Investment @ 12% for 18 Months = $1,800 in Interest
My initial investment of $10,000 should return $1,800 in total since the duration is 18 months.
The investment just recently started paying interest and paying back principal, so it's already cash flowing. It will be interesting to see how it performs overall.
They are some risks with this type of investment, which I've summarized below:
- Court decides against the plaintiff(s) / Assuming it even goes to trial
- Settlement amounts are lower
- Obligors could default / Note that 76% of them are A- or higher
- Plaintiff does not pay/mitigated by the fact they're 3rd inline for payment after me
- The term goes beyond 18 months / This is an estimate by YieldStreet
I've been reasonably happy with the YieldStreet litigation portfolio so far. It's already returned a healthy amount of interest and some of my principle. Both of which get deposited back directly into my bank account, unlike the other platforms.
I'm about a third of the way or 6 months into the investment, and it's returned $570.37 in interest, which is still on track with the 12% expected return.
Since this investment is event-based, the timing on the returns has been inconsistent, which makes it challenging to have a good sense of the performance on the overall portfolio.
I like the ease of the platform so far, and how quickly investments start earning interest.
So much so, that I decided to invest in an additional opportunity on the platform.
This one is a commercial real estate opportunity with an expected return of 9.5% interest and pays out monthly. They pay the first six months upfront. The minimum investment was high at $25,000, but the LTV ratio was attractive at only 45.6%.
Assuming it lasts for 12 months, I should expect a return of $2,375. YieldStreet could extend the offer for an additional year.
We'll see how this one performs, but I feel comfortable with the risk relative to my principal protection.
So far, YieldStreet has had the most interesting opportunities on its platform. The funds have reasonable diversification and not always correlated to the stock market or traditional real estate. They sell out quickly, and they close at a much faster pace than the other platforms.
If I had to consolidate my investments into one platform eventually (but across various investments), I'm leaning towards YieldStreet. We'll see how I feel at the end of the experiment.
I'm looking to eventually build a steady stream of income to either support my base expenses or fund my slow travels during the summer.
This investment approach may be a practical way to accomplish those goals.
So far, YieldStreet still gets a Thumbs Up!