Real Estate Loans

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.

Real Estate Loans - Mogelijk.nl

Real Estate Loans – Mogelijk.nl

The Setup

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.

The Pros

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).
Real Estate Loans - Possible Investments

Real Estate Loans – Possible Investments

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).

Other considerations

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?

Real Estate Loans - Deal

Real Estate Loans – Deal
Source: http://leadersinrealestate.com/finding-the-greatest-deals-in-commercial-real-property/

What’s next?

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?

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15 comments

  1. Congratulations on the investment Cheesy. Very interesting I didn’t see this type of P2P loaning before.
    What’s the going bank rate for a (commercial) real estate mortgage in the Netherlands? Here in Belgium you could get one for 2-3% so I wonder: why would a loan taker lend using this platform?

    1. The commercial real estate loan rates vary between about 2.5%-4.5% (-ish), considerably lower then what you have to pay here. The key here is flexibility, with a normal mortgage you have fixed (pre) payments and terms. If you want or need to deviate from these, it will costs you considerably sums of money. Here you can pay of however much you want, when you want without penalty. In return you pay a higher interest rate, seems like a fair deal to me. Another reason why companies or people like this setup is that you can also decide not to pay the principle back (or very little), this helps cash flow (and the interest is deductible from your taxes as it’s an expense).
      Another interesting point is that this company apparently found a niche where the banks are not keen to provide loans (which is this EUR100k-500k range), if you already own a business, and have a building that is paid off, you have a very easy and flexible way to get an investment loan for your company (which would be way more than a conventional business loan, which runs in the 7-9% range). So there are many legitimate ways why this option with a higher interest rate is more interesting.

    2. Oh, and some people (including us), don’t like to be dependent on banks! They have tendencies to be difficult to deal with, change rules and regulations in their favor and are notoriously inflexible. Not to even mention that they are an unreliable partner when it comes to investment mortgages (Many banks stopped doing real estate loans after the last financial crisis, being able to refinance an existing mortgage is not a guarantee!).

  2. Is it possible for you guys to invest in U.S. Turn-key rentals? Mark over at Invest4More.com has written extensively about those. Just not sure how and if overseas investments are viable for you guys.
    It seems that return of 5-6% is pretty slim – especially when you chip off the 0.5% fees.

    1. The 5-6% is after fees, but I have seen that rates are higher in the states. Not sure if the risk profiles match, as you (should) have a relatively low risk in these investments. That being said, I have not investigated options to invest into the US RE market. I do know other foreigners and expats have done it, just not sure what the (tax) implications are (not withstanding the exchange rate risks).

  3. Good luck with this cheesy. I too am a lazy investor so active real estate is out of the question for me, and likely these too. I’m happy with the Vanguard REIT Index fund as my real estate wedge in my pie. But it seems you could have significant upside here.

    Thanks for the post!

    1. Hey AF, it’s just another option we have to play with and it has its up and downsides. It might be a good way to hedge our wealth for the next downturn. It was a good exercise to put my thoughts on this option on “paper”. Cheers!

  4. Looks like a decent investment/diversification strategy. Initial investment is quite high. With some of the crowd sourced real estate options in the US it is possible to invest in multiple properties. I would rather directly own a rental unit 🙂

    1. Same as you, we would also prefer to own RE directly, but with the current crazy market conditions this is rapidly becoming less profitable. This loan option might be a (temporary) solution with a relatively low risk. Who knows!

    1. Too much work? One visit to the notary public? Really?! How lazy are you 😉
      Don’t compare this with equity investments, you should see this as a fixed income option (and associated low risks), and in that case the return is rather good actually! Something like this would be really great from a cash-flow perspective when the next market correction/crash roles around. If I have the choice to get a 6% a year cash-flow income vs. a portfolio that drops 40%, it’s an easy call!

      1. O, but I am very, very lazy!

        It was my understand you need to visit a notary for each and every loan. Which, yes, I do consider to be a lot of work. Off course the real work will come if there would happen to be a default…

        You could argue that at 100.000 euro per loan the visits would be very rare, which is actually another issue I have with it. It doesn’t scale very well. If you make 10.000 euro of your first loan you can not reinvest those 10.000 euro in the same product. You will need to go look for another investment for that money which means more work …

        Also, it partners you with people who find it a good idea to borrow at 6.6% to make real estate investments. I wouldn’t make a real estate investment with those kind of interest rates, especially not in the current low rate environment … To each it’s own and there is a reason why I am increasingly leaning into options and leveraged constructions and have never touched real etate investments ..

      2. Check out my comment to “the good life”, there is very good reasoning why these rates make very good (and financial) sense for lots of people & businesses. Delving deeper into the current low rates, you see that they often don’t apply and they quickly go up once you don’t fit in the boxes the bank uses for your application (even though you might be in a financially good position).
        The other reason why this is interesting for us is that it does allow for reinvestment during the next crash on a cash-flow principle, would give us more buying power during the next crisis, at least so goes the theory!

  5. Very interesting Cheesy. I’ve heard of several people realizing decent returns from these crowdfunded real estate platforms, but it looks a lot like the P2P lending craze to me. Eventually the big money comes in and drives down the returns on the loans.

    I’ll be watching to see how it goes. Like all things in investing, there’s fees and a risk that be balanced against other options.

    1. Thanks Mr Tako, we were intrigued by this too. But it does have some risks too, they early return of funds would be rather annoying if you are counting on the cash-flow. Actual RE would be better for this..

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