In our conversations with investors, we often get asked about scheduled payments and the variations they see in the breakdown of principal and interest within each payment. Let’s take some time to address the difference between amortized payments and interest-only payments, how that will affect investors’ cash-on-cash return, and the advantages of each type of repayment schedule.
Unlike litigation offerings, which have no set timeline and make event based payments depending when cases within a portfolio settle or are paid out, offerings within commercial lending and real estate often follow a set monthly payment schedule.
There are a few factors that are integral in putting together a repayment schedule.
The cash-on-cash yield of an investment is the return an investor gets excluding the principal balance repayment, in other words – their return on capital. The biggest factor that will affect cash-on-cash return is the structure of the investment. If the opportunity is structured so that principal is repaid throughout its lifetime, the investor will receive monthly principal + interest payments. If the investment is structured so that principal is repaid as the loan matures, investors will receive monthly interest-only payments and a few principal distributions.
Let’s look at two examples.
Let’s say you invested $10,000 in a 12% opportunity with a 12 month duration. When the amortization schedule gets put together, a formula determines a set amount to be paid over the 12 months that this investment is active.
The payment for Month 1 is calculated as follows: 12% (target yield) * $10,000 (amt. invested) / 12 (loan duration) = $100. This is the interest payment for Month 1. This interest payment then gets subtracted from the determined monthly payment ($888.49) for a total of $788.49 repaid in principal for the month. The principal portion of the payment is then considered repaid principal, and lowers the overall principal invested in the opportunity, lowering it to $10,000 – $788.49 = $9,211.51.
This makes the calculation for Month 2 slightly different. Instead of using the beginning principal balance ($10,000), the formula will now use the remaining principal balance ($9,211.51) to calculate the principal and interest breakdown for the Month 2 payment. So, 12% * $9,211.51 = $92.12 / 12 = $92.12. This interest payment then gets subtracted from the pre-determined monthly payment to yield $796.37 in principal repayment. The repaid principal gets subtracted from the beginning principal balance, which will get used in the calculation for Month 3, and so on.
An advantage of this investment schedule is that investors have a pre-determined schedule of payments that does not change as the loan progresses, so they can expect the same payment month to month. The payment schedule also returns the principal amount quicker to investors who do not want their money to be tied up for longer periods of time. The downside to this type of repayment schedule is that it can make the target interest repaid at the close of the opportunity confusing for some investors.
Looking at the 12% interest and $10,000 invested, some investors may expect to get $1,200 cash-on-cash return on their investment. For this type of repayment schedule, that would be incorrect, as the principal gets paid down throughout the lifetime of the investment, while the target 12% return is always based on the outstanding principal balance. So the actual cash-on-cash return on this investment would be the sum of all interest payments ($661.85), not $1,200.
In other cases, the opportunity will make interest-only payments until a part of the loan, or the whole loan is mature. This can happen when an opportunity that features three real estate loans will make three principal payments at the time those three loans mature. Throughout the rest of the cycle, investors will get paid their accrued interest in a monthly payment.
Let’s look at another example using the $10,000 investment in a 12% opportunity over 12 months.
The payment for Month 1 is calculated by multiplying 12% (target yield) * $10,000 (amt. invested) / 12 (duration) = $100. Because this purely an interest payment, it does not get subtracted from the ending principal. In the following months, the same payment is made until there is a principal repayment event at Month 12.
This type of repayment schedule is advantageous for those investors who are seeking higher cash-on-cash yields on their investment. On the flip side, the invested principal is tied up until the end of the investment opportunity, making this type of repayment schedule less convenient for investors who are seeking quick liquidity.
1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.
2 Represents a net estimated, unrealized annualized internal rate of return (IRR) of your portfolio and is based by reference to the effective distribution dates and amounts to and from the investments, as well as any outstanding principal and accrued and unpaid interest as of the current date, after deduction of management fees and all other expenses charged to the investments.[read more]
3 "Annual interest" represents an annual target rate of interest and "term" represents the estimated term of the investment. Such target returns and estimated term are projections of the returns or term and may ultimately not be achieved. Actual returns and term may be materially different from such projections. These targeted returns and estimated term are based on the underlying agreement between the SPV and borrower or originator, as applicable.
4 Reflects the initial quarterly distribution declared by the board of directors on February 6, 2020, which will be payable to stockholders of record as of June 10, 2020, and the initial offering price of $10 per share.
5 The Fund will cease investing and seek to liquidate the Fund's remaining portfolio no later than 48 months after the Fund's initial closing. It may take up to twelve months thereafter to fully monetize any remaining illiquid investments in the Fund's portfolio.
6 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.
No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.
Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefor.
Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.
Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.
Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.
Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.
Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and willing and able to accept the high risks associated with private investments.
Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.
Banking services are provided by Evolve Bank & Trust, Member FDIC.
Investment advisory services are provided by YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission.