I have been pretty impressed with PeerStreet lately. It is not too hard to average 7-8% interest rate on hard money loans with maximum 75% loan to value ratio. My question is - what is the likely downside. I do not know a ton about funding real estate, but I have my ideas on how to estimate. Here are my thoughts. Let me know if any of this sounds off.
First, the good times. It seems reasonable to expect 1-2% foreclosure rates during the good times. This is what I have found at a couple web sites. It also matches PeerStreet's relatively short history. With a 75% loan to value ratio, I would expect to lose very little principle. I would still expect to make about 7-8%.
Second, the recession times. About every 4-5 years, expect a recession with loss of jobs, regional areas of high unemployment, and higher foreclosures. Maybe expect 10% foreclosure rate each year? With a 75% loan to value ratio, expect to lose a fair amount of interest and some principle. Maybe lose 4% of my investment for a total of 7%-4% = 3% gain during these years. Does this seem reasonable?
Then there are the major correction years. These are the 2006 - type years. These occur roughly every 16 years. Real Estate prices across the country would drop 10% - 50%. With a 75% loan to value ratio, expect to lose maybe 10% on my investment for the year.
If all this is true, then I would stand to make 5-6% or so long term. This sounds pretty good to me. This assumes the quality in the loans do not degrade. Does any of this look way off base?
Thanks for your thoughts.
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