Many investors find themselves wondering how to evaluate a real estate investing opportunity. What are some helpful metrics and aspects you can dig into as an investor?
When evaluating a real estate portfolio, Yieldstreet aims to maximize capital preservation for investors while generating attractive returns. Prior to such an offering, we evaluate the borrower, the property at issue, and the expected uses of the financing, among other factors. Please refer to your offering documents for specific information regarding the potential returns and attendant risks of these investment opportunities.
While it is easy to be lured by the aesthetic value of a property, we feel that the more critical component is determining how the property will perform as an investment, which relies on the underlying value of the property. This is why we are not particularly concerned with disclosing photos and addresses of the listing, as long as we can share that it is located in an urban area.
One of the first things you can look at when evaluating a real estate investing opportunity is the LTV, or the Loan-to-Value Ratio of the property. The LTV is the ratio of the loan amount to the property value, and it represents the amount of protection the collateral offers in case of a loan default. This value is determined by taking both a third party appraisal and the loan originator’s valuation of the collateral, then using the smaller valuation of the two. Yieldstreet uses conservative estimates and strives to achieve an LTV of 65% or lower on all its loans. A low LTV is generally associated with lower overall risk in the investment, as it is an indication that the borrower will be able to repay all of the principal on the loan in the case of a default.
The next thing you can consider is the Debt Service Coverage Ratio (DSCR), which is the ratio of the net operating income of the property against the scheduled interest and principal payments on the loan. One of the ways net operating income of a property can be determined is by looking at the cap rate any tenants of the property, such as if it is a commercial office building with active tenants paying monthly rent.
One of Yieldstreet’s originators, TBG Funding, often requires borrowers to fund an interest reserve at the loan’s closing, which is an upfront payment of a portion or the entire amount of interest owed over the loan duration. Any funds in an interest reserve are added to the net operating income of the property to arrive at the final DSCR.
Yieldstreet looks for a DSCR around 1.0x to help validate that the borrower has the means necessary to support the loan throughout its duration. If the property is under renovation and is not generating any cash flow, Yieldstreet will look for other means of repayment, such as using other cash flow generating properties that the borrower owns as additional collateral.
To round out your due diligence, you can also look into metrics and details associated with the borrower. When Yieldstreet evaluates a real estate investment, we look at the associated hard money lender in detail, starting with their creditworthiness, looking at metrics like their credit score and track record. Yieldstreet will often publish this value and will not accept borrowers who are not creditworthy because of their unsuccessful track record and because it is unlikely that those borrowers would be able to find refinancing, should they seek it, to repay the loan.
Yieldstreet will also evaluate and share the overall real estate holdings and net worth of the borrower, including the amount of assets and income that the borrower is generating. In addition to the net worth of the borrower, things like other liquid properties and other income generating businesses will all count as a means for the borrower to generate enough cash flow to service the real estate loan. This is important for debt service, especially if it’s not 1.0x or better, as in these situations there is often a personal guarantee from the borrowers attached to the loans.
With a greater understanding of some of the metrics commonly disclosed in our real estate investing memorandums, we feel investors can better evaluate these offerings on their own. If you’re considering investing in one of the real estate investing portfolios on our platform, download the investment memorandum, and look through the metrics we’ve mentioned to start your personal due-diligence.
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