Detailed YieldStreet Review 2020: crowdfunding real estate investment with YieldStreet
Our YieldStreet Review - Updated 30th June 2020
Crowdfunding platform YieldStreet provides 8-20 percent expected returns on asset-based lending investments. Asset-based loans can have an extra margin of collateral default security that unsecured loans (like LendingClub and FundingCircle) don't provide.
YieldStreet has the usual real estate/hard money loans, as well as certain forms of alternative lending loans, such as litigation finance and marine finance, which are difficult to find. Most of the deals claim an unusual or innovative risks reduction. It is also one of the only sites that pays interest on spent cash which is a good bonus.
The website, on the other hand, is small in volume, and the few offers available appear to fill up incredibly quickly (some are gone in minutes or seconds). For some this can be thrilling and for others it can be a turnoff.
Conservative investors who need rigorous due diligence for any transaction will almost definitely conclude that the platform is not worth the effort (because there is a fair risk of not getting into the deal after all the work has been put into it). A deal-breaker for these is also that a true due diligence on deals might not be feasible.
Some investors say support is sluggish, materials for due diligence are sparse/insufficient and communication may be bad.
The site deals often will not have complete cover if the company goes into bankruptcy, which may jeopardize investor's assets. See "Pros & Cons" below for more details.
How does YieldStreet work?
YieldStreet sources deals from third party sponsors and makes them available on its website. They cover any deal in a legal framework that accounts for fees and costs to be paid to the investor and to YieldStreet. Currently the entities are either a Special Purpose Vehicle (SPV) or Buyer Payment Dependent Note (BPDN).
Their management fees vary from 1 to 3 percent per annum and an additional originator fee of 0.5 percent can apply on certain deals. There's also a first year expense fee ($150 for SPV and $100 for BPDN) and subsequent year expense charges ($70 for SPV per year and $30 for BPDN per year).
Unlike some other sites, Yield Street doesn't let the investor to communicate with the sponsor directly. And some investors have argued that insufficient information is being passed on (more on that in the "Pros and Cons" section below). There's also a chance in this set-up of a "telephone" game where the extra middleman doesn't correctly relay information. And there is a possibility that when it's urgent or things go wrong (which was another concern about the platform) it can be hard to get details about a contract. Platforms such as CrowdStreet and RealCrowd allow direct interaction and do not have this dynamic that discourages clients.
What Are Pros and Cons of YieldStreet?
- Advantages: Classes of collateral-backed lending assets (including those which are difficult to find such as litigation finance and marine finance). Every investment is pre-funded. Cash interest is paid via YieldStreet Wallet.
- Disadvantages: Small volume. Video-game-like subscription experience could be a turnoff for a lot of people. May be unsuitable for investors needing rigorous due diligence. Can't speak to sponsors directly. Investor concerns about insufficient resources for due diligence, inconsistent customer service and poor communication. Rates are often big (up to 3x more than the competitors). Doesn't have full insolvency insurance.
- Accolades: No.
YieldStreet has collateral-based lending offerings. It ensures that if things go wrong and a borrower defaults, the lender has the right to seize ownership of something (immovable property, company properties, etc.) and sell it to recover losses. This can offer an additional degree of security that is absent from un-collateralized lending sites such as the Lending Club and the Funding Circle.
Like PeerStreet, FundThatFlip and others, YieldStreet provides hard-money loans (loans for flipping houses and properties). It also provides occasional transactions in more difficult-to-access asset groups such as litigation finance and maritime finance. Investors have listed these deals as the biggest selling point of the network.
There is, in all cases, some kind of collateral that offers some default security. (Although this security is just as good as implementation and there have been instances of deals on YieldStreet where this protection has reportedly broken down. More on that below).
Investors keeping cash with the platform would appreciate the fact that, through YieldStreet Wallet, the platform charges them 2.2 percent interest. To my understanding, this is something that no other network does, so it's a very cool perk.
Compared to rivals like PeerStreet, YieldStreet suffers from low volume, and is more similar to low volume sites like FundThatFlip. Every month or so, maybe, they bring out a new contract. As such, any investor having to continually allocate loads of idle cash will not find this platform a one-stop shop.
On the other side, it can be difficult to find high-quality deal flows these days, because we are so late in the process. And some high quality sites are suffering a great deal from this problem. Low volume, therefore, is disappointing in my opinion, but is not necessarily a major negative in itself.
The low volume is related to one of the platform's other famous complaints: that offers sometimes fill up too quickly to get into them. Investors have said that certain deals fill up in minutes or seconds which is really insane.
I can't criticize a platform for being sought-after. On the other hand, others shared tales of the disappointment of losing several investments and choosing to take time out of their day to wait for the moment a new opportunity to open and sit by their computers. Even after doing so, and quickly clicking, some were still too slow to invest in popular offers.
Intentionally or not, YieldStreet has become the only platform often requiring videogame-like reflexes and investment luck. Which can appeal to some people who enjoy the atmosphere. And for those who don't have the time or energy to participate - it can even be a turnoff.
Another frenzied-bidding consequence is that it can make the platform unusable for traditional investors. To fully vet a contract it takes days or weeks of hard due diligence. And it's hard to do all that research if you can't get into the deal when there is a reasonable chance. For me personally, I vet about a hundred deals a month, and then invest in just five or six over the year. And my return on investment with YieldStreet would probably be negative after expenditures have been vetted.
More aggressive buyers, on the other hand, who do little or no due diligence, will not have a problem with this kind of environment. If you're not married to any a deal's specifics and have free time, you can afford to try again. You'll get into something you like in time.
Unlike other rivals, YieldStreet prohibits the investor from contacting the sponsor directly. This is part of the manner in which it defends its middleman fees. It also means however that the investor relies on second-hand information to invest their capital. If the knowledge is incorrect or incomplete, it may lead to problems and there really is no way to know so beforehand.
There have been numerous concerns that YieldStreet offers information that's incomplete and not adequate for maximum due diligence and/or practical stress tests. Some gave them credit for improving their documentation a little bit over the previous years. However, it is reported that YieldStreet still does not provide basic information such as the property address for real estate deals, the portfolio of litigation deals (type of defaulting legal cases, how they are underwritten), etc...
Investors complain that YieldStreet does not give investors much on sponsors (other than praising their alleged impeccable track record).
Another common criticism is that investor relations is incredibly slow in addressing even fundamental questions that can make it impossible to do proper due diligence before the transaction is concluded.
According to feedback from one investor who claims to have invested money in several on-site deals, YS investor relations is probably the worst they've dealt with compared to other crowdfunding sites and sponsors. Not only is there usually a delay with responses (which makes vetting deals challenging since you're only given a few days prior to deals going live), the depth of answers is insufficient and incredibly shallow. Many times the IR person has to follow up with the investment team on very basic questions. The investor tried using LinkedIn to gauge the experience level of some of the IR folks and they appeared to be fresh college grads!
Here's my own personal experience with customer service at YieldStreet. In late 2018, I was interested in a litigation financing deal and asked for a full, comprehensive track record from the sponsor. On a top-tier platform such as CrowdStreet, this would be a very easy query and is usually answered within 24 to 48 hours.
The customer service person from YieldStreet said they should talk with the investment team in order to get the response and respond back. They didn't respond. I wrote back after waiting for 15 days, to remind them of my request. I didn't get a reply for another 8 days. When they eventually replied (without apology), the representative said they met with their investment team and this was not, in the end, information that they could provide. As a conservative investor, a dealbreaker for me was their inability to understand simple facts and the painfully slow process. And the deal had already closed at that point, anyway.
Another criticism about YieldStreet is that the communication is very bad when a deal runs into difficulties or goes wrong. One investor has given an example of a claimed status report, where it was stated that some legal cases have resulted in unfavorable result and the higher than expected result from larger cases will overall result in the targeted yield. He said he could not get more details than this, and so he had no idea what the impact could or might not have been on his investment.
The annual fees range from deal to deal - from 1 to 3 percent. When they are 2-3 percent, they are higher than the industry average, or more exactly, they are up to 3 times higher than the 1-1.5 percent average.
YieldStreet bankruptcy insurance is also inadequate and if they go bankrupt, the investor will be vulnerable to losses. YieldStreet customer service never answered my last email question about it (no response after more than a month). Previously, they told me that all the companies are bankruptcy remote, held in a bankruptcy separate from the business.
I assume, however, that they may not have understood my query because my later work found risk disclosures in the legal documents of YieldStreet, warning that investors in the Buyer Dependent Notes could lose their money in bankruptcy to creditors.
Also, customer service never asked if a backup administrator exists or if investors can vote for a new administrator if they go bankrupt. It is essential to protect investors against bankruptcy. With iFunding, RealtyShares and several other companies going bankrupt or leaving the industry, this is not a hypothetical problem and something an investor interested in the company may want to try to get them to respond.
Those communication problems make it difficult to recommend YieldStreet to sophisticated investors.
The minimum is $10,000+ and can be within the industry average (minimums are usually from $5,000 to $10,000).
Is Investing In YieldStreet Legal?
YieldStreet markets to investors under 506C, which means that only accredited investors can use it. Because it does not use 506B, new investors are able to quickly access investments, so there is no waiting period of 30 days. Because it is 506c, it also needs investors to show (and update periodically) their approved status.
What does a YieldStreet deal look like?
Below is my step-by-step due diligence on a random investment on YieldStreet. So this can be a normal investment, or not. I'm a really conservative investor, and something that's too risky for me might be the perfect match for someone. Finally, I am not a financial advisor, attorney or accountant. So this is just my personal opinion - please consult with your own financial pros before any financial decisions are made.
This is a $7.5 million construction bridge loan (sometimes called a hard money loan) on a residential property in Los Angeles. It pays the investor an average interest of 8.49 percent for a nine-month period and has a minimum investment of $10,000.
The first step is to make sure that my portfolio actually makes sense for the asset class and the strategy. Let's say it does, and move ahead.
I'm worried about a potential downturn at this point of the cycle, and don't like taking a chance on an inexperienced sponsor who might learn costly lessons with my money. Construction bridge loans are not a mainstream asset class, unlike multifamily investments, and finding a sponsor that has gone full cycle is hard. So I relax my normal real estate period experience criteria for these, with no money wasted.
In this scenario, YieldStreet says that 80 loans totaling more than $730 million have originated from the sponsor. There were 2 defaults (which I think were foreclosures), and they say there was no big loss. This comes out to an uncured default rate of 2.5 percent. By contrast, construction loan funds with the best-of-breed usually have an uncured default rate of 1 to 2 percent. And that's better than competing choices and that is a warning flag for me. A more aggressive investor not as concerned about default may not have a problem with this.
YieldStreet does not provide information on how long the lender has been in business. I would really like to see at least five or six years. I should contact YieldStreet if I were involved in this offer to find out exactly how long it is. If it is five or more then I'd say that's perfect. I would consider something less a yellow to a red flag, and would possibly pass on the deal. An investor who is more aggressive may be okay with less track record than I am.
Structure of the Debt:
Again, at this point of the process, as a conservative investor, I want to keep my leverage conservative and not go over 65 percent LTV. The leverage here is 66 percent. This is a tad bit higher than I would normally require, but not significantly so. And if I were all right with the rest of this deal, I'd be cool with that.
I want to be in first position loan as well, because anything lower has a chance not to get paid if things go wrong. This is also a first position loan which is a clear positive for this deal to me.
I want to change the flexibility at this point of the process if the economic situation deteriorates and I don't want to be locked into long-term debt. This loan is short term (under one year and nine months). So I regard it as a plus.
Judicial vs. nonjudicial:
If things go wrong, the condition in which a loan is made will make a big difference. If the state has a judicial-only foreclosure procedure, and things go wrong, having the property back can take a year or more and it may be destructively costly to do so in court. On the other hand, states with a non-judicial mechanism usually only take a few months to complete, and are very inexpensive. So personally, I only lend in non-judicial-process states. The loan is being made in Los Angeles, California, which has a non-judicial mechanism in this case. So, I see that is a positive sign.
Single investment risk:
First of all, I don't like to invest in individual notes because any single property may have unforeseen problems (e.g. more permits required, construction doesn't work, environmental problems). This will result in the investment using up its equity buffer and taking a loss.
In comparison, a fund of notes diversifies my investment through hundreds of assets. And when the inevitable happens it is unlikely that it will affect me a lot at all.
This offer is not a personal match for me due to that reason. Someone, however, who is not as concerned about the danger (or willing to build a broad portfolio of single notes) can be okay with it.
This yields 8.49 percent. Broadmark has a first-position construction bridge loan fund to lend in the Pacific Northwest, by contrast. It is diversified through hundreds of loans, LTV never reaches 65 percent and the investor owns the notes directly (which is not the case here, as discussed below). This returns between 10 and 11 percent. So choosing this deal at 8.49 percent would be hard for me over an option like that. An investor who really likes this deal for other reasons might feel different though.
"Borrower Payment Dependent Notes":
Whether an investor buys a note directly or through a fund, the note is usually arranged in such a way that the property is direct collateral, should anything go wrong. But these are known as "borrower payment dependent notes" and are not explicitly linked to the collateral/property. What this means is that these notes might be pulled into bankruptcy if YieldStreet were to go bankrupt and creditors may not get paid. So this is an extra risk, which is not worth taking when there are other choices for me. Yet an investor who really likes this offer might be cool with this.
The legal agreement from YieldStreet states that in the event of the bankruptcy of the company, noteholders can receive less than the principal amount of their investment. The Notes reflect the Company's debt obligations, and as such would pose risks for the Noteholders that are customary for creditors, including (without limitation) default risk and/or non-payment by borrowers. In the event of any liquidation or bankruptcy of the Company or similar occurrence, the Noteholders may earn less than the principal sum of their investment. Noteholders usually have no or limited power of the Company's management and finances and its decisions. Other people and constituencies (such as the Company's shareholders) may have greater power and privileges (including, without limitation, approval or blocking privileges in relation to the Company's business decisions) than the Noteholders possess. Noteholders should know that other Company members may have interests that are significantly different from, and directly adverse to, the Noteholders' interests.
As a conservative investor, I am worried about the potential for significant downturn. So, I like some of the features of risk reduction that YieldStreet put into this contract. At the same time, other features are not really appealing to me.
For example, the borrower receives a full personal recourse guarantee for $17.6 million excluding the property and $3.3 million in liquid cash. That sounds greatly impressive on paper. If the loan defaults it sounds as though the borrower has plenty of cash to ease the blow at least.
However, the pitch says the borrower self-reported those figures, so they were not independently checked. In certain cases, people often overdo and/or even make up properties that don't exist. There is a chance for that here.
In addition to that, various loans in the Great Recession weren't saved by personal guarantees. In a serious recession situation, developers would usually have a lot of projects going on at once and would easily deplete all their assets. Also, many developers discovered that by declaring bankruptcy and/or using other tricks they could delay the payment indefinitely or permanently. And for that reason, a personal assurance is not something that I would really hold on to if things were going south. On the other hand, an investor who isn't as worried about a serious recession scenario may be all right with this.
If all my initial checks for the investment were okay by me, I would have dived in further to check out the sponsor, the property itself, the projections etc.
Yieldstreet main features and highlights
- Commercial Real Estate,
- Exotic Assets,
- Fine Art,