Archives for February 17, 2016

Real Estate Crowdfunding 10-Month Update – Patch of Land


pol_house200Here’s an update on one of my real estate crowdfunding experiments. In mid-April 2015, I invested $5,000 into a loan for a single family fix-and-flip in West Sacramento, California. The loan was supposed to be for 6-months (one of the main reasons I chose it). (More details in my initial update.) Well, the short version is that the fix part happened, but it has now been 10 months and the house is still on the market. The borrower took the option of a month-to-month extension. The loan is still current. Here’s a screenshot and some more thoughts:

pol_feb16

Interest received in a timely manner. So far, I’ve been receiving my $45.83 every month ($550 annualized) on my $5,000 initial investment (11% APR). I enabled the option of having my interest automatically swept to my bank account each month. So far, this investment has required zero maintenance.

Read your contract. Just because there is a “6-month expected term” doesn’t mean you’ll get your money back in 6 months. You should read the terms carefully to see what options are available to the borrower if they can’t make that date. Is an extension automatically granted? Is there an increased interest rate? How long does the extension last?

Liquidity, liquidity, liquidity. One of the defining features of this type of investment is that it is highly illiquid. If I buy a mutual fund, I can sell the entire thing and get fair market value as cash in my bank account in a few business days. With an investment like this, the borrower could pay it back early, take their sweet time, or even default entirely and they’d have to liquidate the home before I get my principal back. You must be prepared for all scenarios.

Be happy with your loan-to-value ratio. I personally believe the house is listed for too high a price, but that part is not under my control. What was under my control was choosing to invest only in a loan where I was comfortable with the collateral. For example, they may be asking ~$320,000 but the loan amount was only for $179,000. As I am (one of the folks) in first position lien on the property, the house would need to sell for under $179,000 in net proceeds for me to lose principal.

In other words, have an adequate cushion so that you don’t lose sleep about it at night. It also helps that I’ve already earned 8.6% of my initial investment back over the last 10 months, cash in hand. Finally, I will repeat that this is a speculative investment using “experimental money” that makes up a very small portion of total assets. (Even Burton Malkiel and Jack Bogle have such “funny money” accounts.)

Tax documents. I received a 1099-INT for the interest earned through this loan. The 2015 form was made available in a timely manner on January 27, 2016. As such, it should be rather easy to add this in at tax time.

Behavioral Economics on Bigger House vs. Shorter Commute


mcman286Inside a post about what economists think about buying vs. renting a house, Alex Tabarrok of Marginal Revolution ended with a nice sentence that I think applies to both buying and renting:

One final point: behavioral economics tells us that we quickly get used to big houses but we never get used to commuting. So when you have a choice, go for the smaller house closer to work.

In general, our current choice of house is aligned with this advice. We could get a bigger, newer, and/or cheaper house in exchange for a longer commute, but are happy with our size (2,000 square feet) and location (I work primarily from home and my wife’s distance to work is 3.5 miles). Our jobs are relatively stable, however, as jumping to a new job could easily change our commute.

Going for the shorter commute over the bigger house certainly feels like good advice. But what are the behavorial economics studies that support this statement?

First, let’s take the statement we get used to big houses. The overall concept of the hedonic treadmill has been found in a variety of circumstances. Brickman, Coates, and Janoff-Bulman (1978) found that lottery winners and paraplegics eventually returned to their baseline happiness levels over time. That is, both the joy of winning the lottery and the sadness from being paralyzed was not permanent. Per Wikipedia, Lucas, Clark, Georgellis, & Diener (2006) also “ultimately concluded that people completely adapt, return to their baseline level of well-being, after divorce, losing a spouse, birth of a child, and females losing their job.”

However, but I couldn’t find one that studied housing specifically. There’s probably one out there? Perhaps a bigger house can simply be lumped in with other consumer material goods.

Second, if we can get used to being paralyzed or losing a spouse, who says that we don’t get used to commuting? Perhaps this is taken from Stress That Doesn’t Pay: The Commuting Paradox (Stutzer and Frey, 2004). Abstract (emphasis mine):

People spend a lot of time commuting and often find it a burden. According to economics, the burden of commuting is chosen when compensated either on the labor or on the housing market so that individuals’ utility is equalized. However, in a direct test of this strong notion of equilibrium, we find that people with longer commuting time report systematically lower subjective well-being. Additional empirical analyses do not find institutional explanations of the empirical results that commuters systematically incur losses. We discuss several possibilities of an extended model of human behavior able to explain this ‘commuting paradox’.

If you know of more please let me know in the comments.

https://rs-clinic.com.ua

eurobud.com.ua/bitumnaya-cherepitsa-iko-armourglass/

www.eurobud.com.ua/bitumnaya-cherepitsa-iko-monarch/