We’ve watched with great interest as real estate crowdfunding platforms like Fundrise, RealtyMogul, PeerStreet, CrowdStreet, Patch of Land, and many others have evolved in the seven years since the 2012 JOBS Act made it possible to raise debt and equity online. While much has been written about the sudden demise of RealtyShares in 2018, it’s likely that at least a few platforms will have the staying power to survive the next inevitable economic slowdown, which could arrive any day now. In the meantime, here’s our candid YieldStreet review, based on an actual deal we invested in during 2019.
In the interest of learning as much as possible about how these real estate crowdfunding platforms work, we made a modest investment in YieldStreet’s Houston Multi-Family Property offering that closed on March 29, 2019. It’s a bridge loan deal secured by a lower-end 300+ unit apartment complex that projects an 8% yield net of fees over an expected 12-month duration.
We’ll post concise deal updates here in chronological order, so you can follow along until the bitter (or hopefully sweet) end.
YieldStreet Review: Day 0
I first set up two accounts with YieldStreet: one to invest regular savings funds and another for my Solo 401(k). I then submitted photos of my driver’s license to verify identity and provided contact info for my CPA, who promptly verified my status as an accredited investor.
Next, I linked my primary savings account, which currently accrues interest at 2.2% annually, directly to my personal YieldStreet account. This institution was available for a direct online connection, which means the funds were instantly accessible. YieldStreet “Wallet” also pays 2.2% interest, so I went ahead and moved $10,000 over to my new YieldStreet Wallet in preparation for my first investment.
I also linked my Solo 401(k) savings account directly to my YieldStreet retirement account, which is thankfully accessible under the same YieldStreet login. I had to set up this connection manually, which means YieldStreet will make a couple of small deposits, which I’ll then have to report back on to confirm the connection. This can take a few days and these funds are not available to invest until the bank link is finalized.
Finally, I then clicked and confirmed a $10,000 investment (the minimum) in the aforementioned Houston Multi-Family Property offering as the remaining available allocation quickly dwindled and then went to zero, indicating a fully funded offering. The email confirmation of my new investment allocation arrived almost immediately and promised that the investment would be confirmed within five days, assuming everything was in order. We’ll see what happens next…
On Track: Day 6
I received a “Congrats! You Are Ready to Invest,” email today confirming my final accreditation status and banking connections. I also received an email saying that my $10,000 allocation in Houston Multi-Family Property is now officially all set. So far, I really like that YieldStreet’s emails are short and concise and entirely free of other marketing crap, offers, etc. That’s classy and increasingly rare among companies offering financial products direct to consumers.
Active & Earning: Day 7
I received a follow-up email confirming that my investment in Houston Multi-Family Property is now active and earning interest. It’s interesting to note that for the seven days between March 29 and April 5, my $10,000 investment was committed and the funds were unavailable, but it was obviously not earning interest. I wonder who did earn interest on that money during the seven days?
This same email also provided a link to my YieldStreet Portfolio, another link to the investment prospectus, and a final link to the Post Investment Guide, presumably to help manage my expectations around reporting, interest deposits, etc. Everything seems to be on track!
Art Financing? Day 13
I received an email from YieldStreet today announcing a new class of investment offerings: Art Financing. Yikes!
It appears YieldStreet acquired Athena Art Finance Corp from the Carlyle Group and now plans to offer debt deals backed by fine art collateral. The email goes on to say, “Athena uses strong underwriting standards backed by proprietary data models and an algorithmic risk scoring system to evaluate artists.”
I don’t know much about the art world, but I do know that fine art valuations are notoriously fickle and highly volatile. Maybe that’s changed now that there’s a seemingly permanent global class of uber-wealthy investors who are (mostly) immune to economic cycles, but I’m not sure. Contemporary artists seem to fall in and out of favor like the seasons. I’ll be interested to see what the first art finance offering is and how it’s structured.
Marine Salvage? Day 20
I received an email today announcing a new marine investment offering titled, Vessel Deconstruction III, with a target annual return of 10.25% over the six month term. In this offering, the borrower intends to purchase, transport, and deconstruct three shipping vessels that have reached the end of their serviceable lives. If all goes according to plan, they’ll then sell off the raw materials for considerably more than they paid to purchase the ailing vessels. While the concept is interesting, I know absolutely nothing about the business of buying and scrapping marine vessels so I think I’ll pass. The Sage of Omaha said it best, “Never invest in a business you cannot understand.”
Receiving this email did, however, inspire me to log in to my YieldStreet account and check the progress of my Houston Multi-Family Property investment. Here’s what I see today:
The net of the situation is that since investing $10,000 on March 29, I’ve accrued (but not yet been paid) exactly $31.11 of interest. That works out to an annualized 5.7% yield. It’s lower than expected thus far for the simple reason that YieldStreet investments aren’t credited until a few days after the money is committed. Regardless, I’ll be tracking all stats from the day I no longer had use of the invested funds. You should do the same to assess your true all-in return!
Finally, it’s also worth paying attention to the fact that the $31.11 is merely accrued, but not yet paid or deposited into my YieldStreet Wallet account. That matters because I won’t start earning the 2.2% Wallet interest rate on the interest earned from the Houston Multi-Family Property investment until it’s actually paid and deposited. It’s no big deal when it’s only $30 and change, but it certainly does matter if you’re investing 10x or 50x these amounts.
YieldStreet Review: Day 162
It’s been a while since I checked my YieldStreet dashboard, so I was pleasantly surprised to log in today and see that some interest has finally been paid out.
Since day zero, I’ve now received three actual interest payments from the Houston Multi-Family Property deal. The first was on June 25, 2019 for $22.22, which the balance of what remained after paying off the remainder of my $100 annual fund expense obligation. The second and third payments were both for $66.67 and came on July 23, 2019 and August 19, 2019. All funds went straight into my YieldStreet Wallet account, where they immediately began earning 1.95% annual interest. (The Wallet interest rate was recently reduced from 2.2% to 1.95%, which is still pretty solid given the low current yields on US Treasury bonds).
As of August 19, the all-in yield on this investment thus far is calculated as $22.22 + 66.67 + 66.67 = 156/10,000 = 1.56% over 143 days, which is equivalent to a 3.98% annual yield. This is not awesome, but it’s worth noting that the result is net of the annual $100 fund expenses fee. For my $10,000 investment, the annual fee is reducing the yield so far by a whopping 2.55%. If you invested $100,000 (10x my investment), the fixed $100 annual fee would only clip about 0.25% off of your yield to date.
The takeaway here is that spreading your available funds out across many different YieldStreet investments may substantially reduce your expected returns due to the inevitable drag created by multiple $100 annual fees. YieldStreet should be more transparent and do a better job of explaining how the annual fund maintenance fee will impact smaller investments. They should also consider taking the annual fee as a “success fee” when all principal is returned, instead of paying themselves first. The current structure further depresses the net investor IRR and means small balance investors have to wait too long to see their first interest payment.
YieldStreet Review: Day 178
Another interest payment was released today, straight into my YieldStreet Wallet account. The amount was $66.66. The net (after fees) total of all interest payments received to date now stands at $222.22. This represents a 4.56% annualized yield, which is held down by the impact of the aforementioned $100 fund maintenance fee. With a $100,000 investment (instead of just $10,000), the annualized yield to date would be a healthier 6.40%.
To sum things up, neither scenario is tracking at the full 8% coupon rate due to two factors:
- The initial delay between the day your investment dollars are committed and the interest begins accruing.
- The fixed $100 annual fee per investment.
It’s also worth noting here that if the loan is paid off early without a pre-payment penalty, it’s unlikely either scenario will deliver an all-in IRR anywhere close to the full 8% advertised coupon rate. When you’re doing the math based on the time value of money, front-loaded fees and delays on interest accrual can be hard to make up down the road.
Here’s Your Principal Back: Day 195
It’s October 10, 2019 and I just received an email noting that the loan has now been repaid in full. I’ve received a payment in the amount of $10,066.67, which is presumably the original $10,000 investment plus monthly interest in the amount of $66.67.
A quick XIRR calculation shows a final annualized all-in return of only 5.51%, which is really disappointing for a “successful” deal. This outcome falls far short of the advertised 8% coupon rate and, in my opinion, shows the extent to which YieldStreet investor outcomes are not well-aligned with deal sponsor outcomes. I’d be a bigger fan of YieldStreet if early loan payoffs had some variation of a yield-maintenance clause or significant pre-payment penalty to help make investors whole in this scenario.
What’s it All Mean?
In terms of the big picture, my YieldStreet experience highlights a dangerous asymmetry inherent in these types of crowdfunded debt deals. When things on the ground go well for the borrower, the borrower typically pays the loan off early. That’s great for the borrower but disappointing for the investor. Investors need more time (and interest payments) to bounce back from the front-loaded fixed fund fee and interest accrual delay. Otherwise, the investor yield never quite recovers.
On the flip side, when things go south for the borrower, interest payments are often reduced or they stop altogether. If problems continue, the underlying principal is suddenly at risk. In theory, investors can lose everything.
In my opinion, this asymmetry of possible outcomes tilts the playing field away from passive investors in these types of debt deals. Good news for the borrower usually doesn’t translate into good news for the investor, while bad news for the borrower inevitably does lead to a bad outcome for the investor. You could almost sum it up as, “Heads, you win less than expected. Tails, you lose a lot.”
Strangely, the best outcome for crowdfunding investors in debt deals like this one, actually seems to be a sort of middle-of-the-road borrower performance. You want them to do just well enough to make all interest payments and repay the loan, but not so well that they pay the loan off early and kneecap your returns when you’re just getting started.
As an investor who always wants to be as fully aligned as possible with deal sponsors, I’m not sure I can get on board with this structure. I’d be more interested if crowdfunding platforms started structuring their debt deals with pro-rata fee refunds, yield maintenance, and/or prepay penalties to better protect the all-in investor IRR.
At the end of the day, it’s kind of not cool that YieldStreet charged me the full $100 “annual” fee, even though they ended up managing the investment for only about six months.
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