As mentioned in a previous Real Estate Report, we have been looking into real estate loans. We have even already had a meeting with a real estate loan platform, and have been “approved” to become dedicated investors. Let’s have a look at said platform and associated pros and cons.
Disclaimer: we have no interests in Mogelijk.nl nor do we get any compensation for writing this post!
Real Estate Loans via Mogelijk.nl
A reader from our blog (which we also met in person during on of the meetups) gave us a hint a while back. She had been in contact with the people from Mogelijk.nl and believed it could be interesting for us. And right she was! We dropped them a message and got talking about the services they provide and the opportunities they have.
The platform works sort of as a crowdfunding platform, but with one main difference. Instead of having many different investors, there will only be one. Yes, one investor per project. The reason is simple, the investor will get the first lien right (hypotheekrecht or “mortgage right”) on the property. With crowdfunding this is not the case, the property is however used as collateral for the crowdfunding loan.
How does it work? it’s rather simple actually. You first have an initial meeting with the people behind Mogelijk.nl. It’s their policy to screen all potential investors to see if they are a good fit. We had a very good, about 2.5 hour long, conversation about them and us. We reviewed options, discussed risks, opportunities and limitations.
Next, they grant you access to the platform and place you on the distribution list for new prospects (posted every Tuesday). Once you have found one that your like, you take an option on that project. The short version of what happens next: you, the person requesting the loan and someone from the platform visit the notary public. Here the money is transferred, mortgage documents are prepared and signed and you are on your way.
When the contract is signed and the money is transferred, the monthly repayments commence. Similar to a mortgage (and most crowdfunding loans), you now receive interest and repayment of principle. Depending on the conditions of the loan, the principle could be paid back completely, or partially over a 20 year amortization period.
What are the neat perks for this type of investment loan? The following come to mind:
- Good yield considering the risk profile (most are around 5-6% per annum after fees);
- Choices between residential and commercial real estate;
- Mogelijk.nl provides all administration, collection and distribution of funds (and legal advice/support), so you don’t have to worry about any of this;
- You invest in real estate without any of the associated hassles!;
- It is possible to transfer the mortgage right to another investor (various fees apply), so you can get your money out of the investment if required;
- You have first mortgage right (and generally low loan-to-value ratios), so even if the project runs into default and needs to be liquidated, the changes of losing your principle are (very?) small;
- If the project runs into default, you have the chance to purchase the property yourself during auction and add it to your portfolio; and,
- Long term contracts (normally a 20 year amortization period and 5 year fixed interest rates).
The Cons (and fees)
Not everything is perfect obviously. There are some downsides and costs to consider:
- As with most investments via financial platforms there are costs associated with participation. As an investor you pay a 2% commission at the start of the loan agreement;
- You also pay 0.5% fees over the monthly interest portion of the repayment for administrative works performed by Mogelijk.nl;
- There is a risk that the loan is repaid in full before the end of the loan agreement (and you need to start looking for a new project or other investment), hence the higher interest rate;
- If we are in a (housing) crisis, the project runs into default and needs to be liquidated at an action, there is a change you get less principle back then you put in. If you don’t have the means to buy the property yourself at that time, you will lose money;
- The interest is fixed for 5 years, but you don’t know what interests will do afterwards;
- No possible real estate taxation benefits in Box 3 (you have to include the entire loan value for your tax assessment); and,
- You need a lot of money to start with! The minimum amount to invest is €100.000 (max. loans are €500.000).
In summary, you get a pretty decent return on investment with these loans for pretty much no work required. That’s very appealing! Especially to us lazy investors. There are some inherent risks to this investment, of which early repayment is our largest concern. Due to the low loan-to-value ratio and the ability to buy the property at auction, we consider the risks associated with defaults limited.
Another thing you need to consider is that you will not benefit from any value increase of the property (it does work in your favor in the sense that it further reduces the loan-to-value ratio over time).
I hear you think, why not buy a property yourself if you have that much money? We have, very actively, be looking to see if you could find one, but none that we found even came close to this net return on investment (even after taxes!). Considering the effort and risks that go into having a property yourself, you really want the return to match. With the current high valuations, the limitation that we want to property managed (for tax and risk reasons), it’s hard to find a good deal. So if you cannot find one, what do you do?
We actually just made a private loan deal with other real estate investors last week for a total value of €125.000. So we are out of money for the next little while, that is until we sell one of our rental units early next year to family. With the proceeds of that sale we are seriously considering picking up one of these loans.
We doubt that we will see a major housing market correction any time soon that will make local real estate appealing again. We are also not really looking to take on a lot of leverage in the near future either. Loans such as these therefore become quite an appealing investment (unless we see a major stock market correction in the mean time).
What do you think? Have any of you ever done any of these type of real estate loans before?