Starting out in the exciting world of alternative property financing and investment can be daunting, but have no fear, our guide will explain everything.
LTV, diversification, loan types, collateral, interest rates, manual investing, auto investing and many other terms can seem confusing and scary to those who are at the beginning of their investment journey. The truth is, they’re all fairly simple concepts and building a secure, diversified and profitable portfolio is possible even for the complete novice. In this guide, we’ll take you through the key steps to building a successful investment portfolio on the EstateGuru platform.
It’s all about diversification
Ask any successful and seasoned investor what the single most important element to success is and you’ll get the same answer – diversification.
In layman’s terms, it’s as simple as the old saying to not put all your eggs in one basket.
Investopedia defines the term as: “Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.”
As a general rule, the more diverse an investment portfolio is, the more secure it is. EstateGuru offers investors a really easy way to invest in multiple projects, using relatively small amounts per investment. Let’s take a practical look at how you can build a well-diversified portfolio on EstateGuru.
Building your portfolio
Let’s say you have €1250 to invest. You may be tempted to take the easy route and put it all into one loan that looks attractive and has a good interest rate. This may save you time and effort, but would be completely ignoring the rules of diversification. In fact, we recommend a portfolio containing at least 25 projects, even for beginner investors. We also suggest that you hold off on activating Auto Invest until you have gotten to know the platform well. This will ensure that you are able to set it up in a way that works for you and meets your investment needs.
So, even with just €1250 to invest, at a minimum investment amount of €50, you can build a great portfolio. You also don’t need that amount right from the get-go but can work towards it over several weeks or even months. But where to start? We offer four different ways to diversify. Let’s look at them one by one.
The businesses who borrow through the EstateGuru platform are traditionally small and medium-sized companies. As of October 2020, there have been 508 total unique borrowers, of whom 204 had only a single loan and 304 had two or more loans on the platform. Each project has full details on the borrower, their company name and registration number, and an overview of their previous projects with EstateGuru as well whether these are open or have been repaid. By investing in projects with as many different borrowers as possible, you reduce the risk of your portfolio. Of course, in time you will get to know certain borrowers who you trust and can back more of their projects.
Diversification by property type
The majority of loans offered on the platform are backed by a first-rank mortgage with a property as collateral and feature several kinds of different real estate types. Spreading your investments across different types of property classes will really boost your diversification level, and also protects your portfolio against industry-specific downturns. Look to spread across commercial, industrial and residential property.
Diversification of loan type
Our borrowers are active in many different business areas and thus need a variety of financing solutions. Currently, 37% of loans financed have supported real estate development projects, 33% have been used as bridging loans(short-term loans used until the company secures permanent financing). The other 29% of our loan portfolio consists of different kinds of business loans like manufacturing, logistics, hotels, car repair etc.
Geographic diversification – EstateGuru currently offers investments in eight different countries: Estonia, Latvia, Lithuania, Finland, Spain, Portugal, Germany, and Sweden.
So if we start with geographic diversification, this would mean selecting three loans in each country and four in your favourite country.
Let’s use Estonia as an example. Your first investment could be in a development loan using a residential property as collateral, your second a bridging loan with commercial real estate as collateral and your third a business loan with an industrial property as the collateral.
Follow these principles for each country and you’ll see your diversification score shoot up. You can check yours at any time on your portfolio page.
Of course, you won’t be able to build this portfolio in one day, as you may need to wait for the right loan types to be published on the platform, but this is also a good thing. The more time you spend investigating projects and familiarizing yourself with how EstateGuru works, the better informed and empowered you’ll be.
Advanced portfolio building
When you feel comfortable with your manually created portfolio and understand how to successfully diversify your investments, it is time to graduate to Auto Invest (AI). To take full advantage of all the features offered by AI, you’ll need to increase your minimum amount per investment to €250, but even at just €50 per investment, you will have enough options to maintain a diversified portfolio with ease.
You can also start investing in loans on the Secondary Market, using the knowledge you’ve gained while building your portfolio to spot good opportunities.
Key terms explained
Development loan is a loan used to finance the project’s planning phase or the development/construction of the property itself.
Bridge loan is a short-term loan used to meet current obligations before securing a permanent financing option, enhancing the value of the property or selling the underlying asset.
Business loan is a loan used to raise capital for supporting the day-to-day activities of the firm, business expansion, acquisition of equipment or goods, and covering pending obligations (taxes, etc.). All loan types are secured with a mortgage!
Loan-to-Value (LTV) ratio is an indicator representing the size of a loan compared to the value of the assets securing the loan. So if, for example, the loan amount is €300,000 and the property value is €400,000, LTV would be 75%. Maximum LTV EstateGuru accepts is 75%.
Projected LTV represents an LTV figure that EstateGuru’s team is willing to offer for this particular project as a maximum. This indicates that within the next upcoming stages of the loan the LTV of the loan might increase up to the projected LTV figure.
Bullet loan – represents a payment schedule where only interest is paid for the duration of the loan; principal amount is paid at the end of the loan period as one lump sum payment.
Full bullet loan is a payment schedule type where both principal loan amount and the accumulated interest are paid back at the end of the loan period.
Annuity loan is paid back in instalments of the same size consisting of a loan repayment portion and an interest portion.
Stage loan – Many developers face the challenge in which the current value of their development object does not enable them to raise the capital that is needed to complete the development object entirely. As EstateGuru only lends against the current value of the collateral not the future value, then for development loans we often make use of the stage financing method. This means that when the first investment round of an object enables the borrower to increase the collateral value of the property by developing the object further, then in the context of the given LTV the investment amount can increase via next stages of the loan. The precondition for every stage is a new updated valuation report of the collateral.
Mortgage Amount – mortgage amount represents the legal maximum limit which can be claimed from the borrower in case of a default. At EstateGuru, we benefit from a 1.5 mortgage multiplier, meaning that for a €100,000 loan the mortgage amount is €150,000.
Collateral value – collateral value represents the price of the collateral asset. The valuation is established by an independent accredited valuation company and a valuation report is the main precondition for each loan.
All investments, including real estate, are speculative in nature and involve substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that we publish.