Read the last four quarterly reports before I put 10k in, and that was the education

I've been circling the investing side of this industry for about a year without a clear idea of where I'd fit, and the amount of money I have available is small enough that most doors were closed. 10k. A lot of debt funds start at 50 or 100.

Found one with a 10k minimum. Before I subscribed I asked for the last four quarterly investor reports. I half expected a no. They sent all four plus the most recent audited financials.

What I learned from reading them, in order of how much it changed my thinking:

The advertised weighted average LTV was 65. In the reports, the LTV was measured against after-repair value on about a third of the book. Against as-is value those loans were closer to 80. Same fund, same tape, two very different pictures depending on which value you're dividing by. Nobody was hiding it, it was in a footnote.

Second, extensions. Report to report I could track individual loans by their ID numbers and see which ones kept reappearing with a new maturity date. Eleven loans had been extended at least once. Four twice. Those loans were still counted as performing, which they technically were, because an extended loan that pays interest is performing.

Third, the manager's commentary changed tone across the four quarters in a way that felt honest. Q1 was upbeat, Q3 talked about slower sale times in two of their markets and said they'd tightened LTV on new originations by five points. I'd rather read that than four quarters of everything is excellent.

I subscribed in June. 10k, monthly distributions running about 0.65 percent, no drama yet, which after five months means very little and I know it.

What I'd keep. Asking for four reports instead of one. One report is a photograph. Four is a direction.

Answer

2priya_n21PO1C

The four reports thing is the best practical idea I've read here and I want to add what to do with them, because I did the same exercise on two funds this year and the loan ID tracking is where everything lives.

Build one spreadsheet. Row per loan ID, column per quarter. Fill in maturity date, status, and outstanding balance. Then look for three patterns.

Loans whose maturity date moves. You found those, eleven of them. What matters next is whether the extension came with a fee and a paydown or whether it was granted flat. A borrower who pays a point and knocks down principal to get six more months is in a different place than one who just got six more months.

Loans whose balance grows. On construction or heavy rehab that's normal draw activity. On a bridge loan against a stabilized asset it usually means the fund is capitalizing unpaid interest, which makes a struggling loan keep reading as performing.

Loans that disappear. This is the one people miss. A loan gone from the tape either paid off or got written down and removed. The reports should reconcile it. If a loan vanishes and there's no payoff noted anywhere and no charge-off in the financials, ask directly and get the answer in writing.

On the ARV point, that's the single most common gap between the marketing LTV and the real one, and you caught it in month zero, which is more than I managed on my first look. A 65 percent LTV against a value that assumes a renovation happens is a bet on the renovation happening.

The variable I'd watch on your fund: those two markets with slower sale times. If sale times keep stretching, the extension count goes from eleven to twenty and the reports will show it before the distribution does.

18 replies

2paulgrant17PassivePRO5

Saving @marlow's spreadsheet idea. I'm nowhere near this, I'm still learning how to screen a tenant, but the logic is the same. You're looking at whether the same problem keeps showing up under a new date.

3derekj19SB1B

Did they charge you anything to send the reports, or make you sign an NDA first? I've had two managers ask me to sign before they'd send anything past the one-pager and I couldn't tell if that was normal or a warning.

2omar_haddadActivePRO11

ARV lending is where I'd focus all my worry. I do renovations. I've never once seen a rehab budget hold that was written by someone trying to get a loan approved. The ARV in the appraisal is a number produced under pressure from a borrower who needs the deal to pencil.

So when a third of that book is measured against ARV, what you actually have is a loan against a house that doesn't exist yet, plus a construction manager who is the borrower, plus a scope that will grow. Ask the fund what percentage of their ARV loans have hit their projected ARV at sale. If they track it, they'll tell you. If they don't track it, that's your answer.

1aaron_fitz10 Get yoursPRO6

@harrow that's bleak and probably right. Plumb, does the fund control draws? Big difference between handing over the rehab money up front and releasing it against inspected work. The second one caps how wrong the scope can go before somebody notices.

2mitchell_ray4 Get yoursPRO6

Draw inspections. From the tools side, that's the only thing that keeps a rehab honest. Somebody with a camera who won't release the next 15k until the rough-in passes.

1kevin_lombardPG1BPRO5

Maybe this is too basic a question, but here goes: if a loan gets extended and keeps paying interest, why is that bad? The fund is still collecting. Isn't a borrower who needs more time and pays for it just a normal thing that happens?

1carlos_nunezActive

@juniper it's normal once. Extensions exist because projects run late and projects always run late. The signal is the second and third one. By then the borrower usually can't sell at the price they underwrote and can't refinance out, and the only thing keeping the loan current is that they'd rather pay interest than lose the property. That works right up until it doesn't, and when it stops the fund owns a house.

Plumb, four loans extended twice out of how many total? Eleven extensions on a 40 loan book is a different story than eleven on a 200 loan book.

1ryanmck27SC2C

Following this mostly to learn the vocabulary. The bit that surprised me is that a manager would send four quarters of reports to someone putting in 10k.

1ehernandez74PO2BPRO5

@halyard I've found the small minimum funds are often the most forthcoming, because they're still building an investor base and every subscription matters to them. The ones that stonewall tend to be the ones with a waitlist.

Plumb, the tone shift in Q3 is the detail I'd weight highest. A manager who writes down that sale times slowed and that they tightened LTV five points in response is describing a feedback loop that works. I'd ask to see the origination LTVs quarter by quarter to confirm the tightening actually happened in the numbers and wasn't just a sentence in a letter.

2devon_pierce Get yoursPRO5

@anchor that's the check. Commentary is free. Show me the weighted average LTV on new originations for Q1 versus Q4 and I'll believe the tightening.

2luis_carrera Get yours

I've been in analysis stage for eight months and this thread is going to keep me there another two, which is my problem and not yours. But the four-report method is at least bounded work. You can finish it.

2laurenkim53Passive

Which markets were the slow ones? Not asking you to name the fund, I'm curious whether it's the metros everyone piled into or the smaller places. Sale times in rural markets have always been long, so a fund lending there should have priced it in from the start.

3gregpowell66AG4BPRO8

Construction background here, and the draw question @kestrel raised is the one I'd chase hardest. Ask specifically who does the inspection. A third party inspector at 300 a visit is one standard. A photo from the borrower's phone is another, and I've seen funds accept the second because inspections eat into their margin on small loans.

On a 200k rehab loan the inspection cost across five draws is maybe 1,500. Skipping it saves that and risks the whole advance.

1renee_dubois Get yours

Small point from owning small stuff. Everything you learn about a fund's discipline comes from what they do when a deal goes sideways, and nothing in the first five months tells you that. Plumb knows this, he said so. Just repeating it because month five is where people start recommending things.

4aliyah_bAU2APRO6

10k minimum is what makes this post useful to me. Every fund I'd looked at was 50k and up and I mentally filed the whole category as something for later. Did you find it through a listing site or through someone here?

0angela_burkeServicePRO6

Running a small team teaches you the same lesson the quarterly commentary taught you. The reports that say everything is fine four quarters running are written by someone who isn't looking.

3megan_doyle15 Get yours

Everything in this thread is new to me and I understood maybe 60 percent of it, which is 60 percent more than last week. Writing down ARV, draw inspection, and extension count.