Early Retirement Portfolio Income Update, Mid 2015

The closer I get to the reality of living off of my portfolio, the more I like the idea of living off dividend and interest income. However, you can’t just buy stocks with the highest dividend yields and junk bonds with the highest interest rates without giving up something in return. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. My goal is to live off my portfolio income while not reaching too far for yield.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (1/5/14) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.79% 0.42%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.78% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.75% 0.81%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 2.81% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.76% 0.22%
Intermediate-Term High Quality Bonds
Vanguard Limited-Term Tax-Exempt Fund (VMLUX)
20% 1.63% 0.34%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 2.18% 0.45%
Totals 100% 2.24%


The total weighted 12-month yield was 2.24%. This number is lower than the last three updates: 2.41%, 2.49%, and 2.31%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $22,400 in interest and dividends over the last 12 months. Now, 2.24% is significantly lower than the 4% withdrawal rate often recommended for 65-year-old retirees with 30-year spending horizons, and is also lower than the 3% withdrawal that I prefer as a rough benchmark for early retirement. I should note that the muni bond interest in my portfolio is exempt from federal income taxes.

As noted previously, a simple benchmark for this portfolio is Vanguard LifeStrategy Growth Fund (VASGX) which is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.01%. (Last update, it was 2.09%.)

So how am I doing? Using the 2.24% income yield, the combination of ongoing savings and recent market gains have us at 72% of the way to matching our annual household spending target. If I switch to a 3% benchmark, we are 96% there. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems like a very conservative lower bound.

Sadly, some valuation models predict exactly that: 0% real returns over a long time. My portfolio has certainly gone up a ton in value due to the ongoing bull market. Bottom line is that we are getting closer but not quite where we want to be.

Early Retirement Portfolio Asset Allocation Update, Mid 2015

Here’s a mid-year update on my investment portfolio holdings for 2015. This includes tax-deferred accounts like 401(k)s and taxable brokerage holdings, but excludes things like physical property and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover all of our household expenses.

Target Asset Allocation


I try to pick asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (i.e. don’t buy what you don’t can’t stick with).

Our current ratio is roughly 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-directed portfolio of low-cost funds and low turnover, we minimize management fees, commissions, and taxes.

Actual Asset Allocation and Holdings


Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Notes and Benchmark Comparison

There has been very little portfolio activity over the last 6 months. No major market movements (the S&P 500 hasn’t moved more than 2% in day so far in 2015). No mutual funds added or removed. I continued to invest in the same funds through 401k auto-contributions and the occasional fund purchase from saved income. Things are little off, but I’ll just wait and rebalance with new money. Some of my usual savings has been diverted to college savings. Mostly, just keeping my head down and moving forward. :)

A simple benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund (VASGX) and Vanguard LifeStrategy Moderate Growth Fund (VSMGX), one is 60/40 and one is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have returned about 3.5% YTD for 2015. I haven’t bothered to calculate my exact portfolio return, but it should be roughly around this number.

I like tracking my dividend and interest income more than overall market movements. In a separate post, I will update the amount of income that I am deriving from this portfolio along with how that compares to my expenses.

The Most Important Factor To Maximize In Your Portfolio

wrenchWhen it comes to constructing an investment portfolio for yourself, there are many things you could tweak and maximize. Obviously, you can look back at historical data and maximum past annual returns while minimizing volatility. For some, this means more stocks and less bonds. Or buying small companies over huge companies. Or buying “value” stocks with low price-to-book ratios over those with high price-to-book ratios. Or buying stocks with high dividend yields. Or buying asset classes with momentum. Or often, a big mishmash of all of the above.

But really, do most folks invest in these “optimized” portfolios really understand them? What if we worked to maximize something else instead?

From Patrick O’Shaughnessy of Investor Field Guide:

I believe the most pertinent question to ask about any systematic/quantitative strategy is not “how hard would this be to replicate” but rather “how hard would this be to stick with.”

From Tadas Viskanta of Abnormal Returns:

The best thing investors can do is put their time, effort and energies in finding a strategy they can stick with. The same goes for those who provide financial advice to a broad audience. This may not sell as well but at least it has some grounding in reality.

If you don’t understand why you’re buying something, then it may be better just to stay away until you do. For example, I don’t understand commodities futures or oil prices. I don’t understand gold at all. If their prices fall, I have no idea if, when, or why they will rebound. (But you might.) In contrast, if buy all the US companies weighted by their market value, then I feel confident that eventually those companies as a group will work things out and come back. (But you might not.) I also hold a big slug of government and municipal bonds as I think they have very low credit risk. (You might disagree.)

This need for understanding can be either a positive or negative when making the case for financial advisors. A good financial advisor will explain things in a manner you understand, and keep you on track during times of stress. A bad financial advisor will simply sell you an “advanced” portfolio vetted by super-skilled geniuses, leaving you even more scared during a market crisis (“if even the smart guys didn’t see this coming, then is the sky falling?!?”).

Bottom line: Think carefully about how likely are you to stick with your portfolio during both boom times and panic. 

Liquidating My LendingClub Loans Using Folio Investing

I recently finished liquidating the remaining loans in my $5,000 LendingClub P2P portfolio, but due to a unfortunate crash I lost many of my notes and screenshots. I can still share the most important parts like my final results and selling recommendations.


As when liquidating my $5k Prosper P2P portfolio,
I used the “Trading Account” option – run by outside brokerage firm Folio Investing – which allows me to sell my notes to other individuals which . For residents of many states, the only way to buy LendingClub P2P loans is on this secondary market as they are not allowed buy them directly. In my opinion, this makes the pricing of the notes more competitive than with Prosper.

Prospers allows an auction format for selling notes, but LendingClub does not. Instead, you must set a price and either someone volunteers to buy it or not. Folio Investing charges a 1% transaction fee to the seller of the note after a completed transaction. If the note does not sell, then you simply keep your note and pay no fees. It’s hard to know the market value of each note, as there is no real-time data based on past sales of similar notes available.


Due to the constraints of this setup, if you want to optimize your selling price and don’t care about your time spent, you should initially list all of your loans at a significant premium of say 5% above principal. If they sell, they sell. Usually there is a large enough group of bidders that if they don’t sell within a day, they probably won’t ever sell. If they don’t sell, then you lose nothing but time. Next, reprice your notes after 24 hours and lower the markup to say 4%. Rinse and repeat at 3% premium, 2% premium, 1% premium, par, 1% discount, 2% discount, and so on until nearly all your notes should be sold within a week.

After that, you’ll probably be left with loans that have a previous late payment or two somewhere in there, which note buyers seem to avoid like the plague even if the loans revert to current. If you really want to sell those last few loans, you may have to put them up at significant discount of 10% or more.

(LendingClub does not allow the sale of loans that are currently late or in default. This can be annoying when a loan become late after you list it for sale, and thus gets pulled. So close!)

However, I was impatient and I just wanted to sell my notes with minimal time spent. I basically put up all of my notes at par (no markup or discount) and the vast majority of them sold within a few hours. In retrospect, I could have definitely listed them at a higher price. Then I started discounting the remaining loans heavily so they would also sell quickly. I reasoned that missing out of 1% of my entire $1,400 portfolio was just $14. In then end, I got back 98.8% of my principal before the 1% fee, or 97.8% of my principal after the 1% fee.

Once the trade clears, transfers from LendingClub to my bank account were very, very quick. I initiated the transfer during a weekday during work hours and at midnight my bank alerted me that an electronic deposit had been made.

So now the only thing left in my portfolio is a single 30+ days late loan that I can’t sell, with a remaining principal of $6.09. I doubt I’ll ever see that money anyway, so I consider my account completely liquidated. The good news is that it should be fully charged-off by the end of 2015, so I won’t have any more tax concerns past the 2015 tax year.

Recap. In my experience, you should be able to liquidate your current LendingClub loans within a week while still roughly maximizing your the market value of your notes. You should have the money in your bank account by the end of the second week. For current notes, you should be able to average a gross sale price very close to or even higher than the current face value (principal + accrued interest) of your loans. Keep in mind the 1% transaction fee paid by seller. You may have some “leftover” late loans that will take a few more months to fully charge-off and realize losses.

The True Value of a Real, Human Financial Advisor


The hot buzzword right now is “FinTech”, where technology will help us manage our finances more and efficiently than before. But I’ve also been tracking the reasons why working with a human advisor can be worth the money and time spent. As I’ve mentioned, the strength of the book The One-Page Financial Plan by Carl Richards is that you’re hearing the voice of an experienced financial planner who also has the skill of distilling his experiences down to a sketch. Here’s how he puts it:


Takeaway: A good financial advisor keeps you from making The Big Mistake that derails your plans.

The big institution Vanguard says that a good financial advisor should be able to improve the performance of a “average” client’s portfolio by about three percentage points in the following ways. Take note of which one factor makes up half of that 3%:


Takeaway: The biggest “value add” from good advisors is their “behavioral coaching”.

Here’s more incisive commentary by Josh Brown of The Reformed Broker, called When the flood comes:

When the flood comes, all of the bullshit arguments among the financial commentariat will come to an end. This will be my third time through. Believe me. We will not be arguing about how many basis points an advisor charges versus another advisor or a software program.

The people who are there for their clients and keep a cool head in public will come through okay. More than okay – they’ll actually raise assets from new and existing households who realize what a mistake they’ve made with their previous advisor or solution.

Takeaway: A good client advisor will help you keep your cool when the next disaster comes.

I’m sure you’ve caught onto the theme by now.

The value in a financial advisor arrives when they help you maintain your plan through both the good times and bad. They will prevent you from participating in the mania during the next bubble, and they will keep you from bailing out during the next crisis.

The problem is, how do you find this “good” financial advisor amongst a sea of average to downright dangerous ones? Here’s some advice from The One-Page Financial Plan:

To a certain extent, the process of finding a real financial advisor is a qualitative experience. It boils down to the question “Can I see this person getting to know me well enough so that I can trust him to help me behave for the next twenty years of my life?” Yes, you should verify that they’re properly registered. Do a Google search of their regulatory record. I’m not talking about blind trust here— the kind that would allow someone to steal your money. I’m talking about finding someone who’s willing to get to know your goals and values well enough to help you stick with your plan. Remember, your financial advisor is the only one standing between you and the Big Mistake of buying high and selling low. You’re hiring them to do what you can’t: make unemotional decisions about your portfolio. If they can’t do that, why pay them?

Now, I still don’t see myself hiring an outside advisor. But I do keep my portfolio conservative enough that my portfolio “boat” stays relatively stable even in rough weather. We’ll see if I can remain unemotional during the next flood, as it is not a matter of “if” but “when” the next one comes along.

Dynamic Withdrawal Rates: Increase Spending Flexibility, Improve Portfolio Sustainability

The WSJ has a nice introduction to dynamic withdrawal methods and managing your portfolio in retirement. They outline a few of the more popular variations – Adjusted 4%, Floor-and-Ceiling, and Guardrail. I like learning about dynamic strategies because I think they are more applicable to the real world and involve good ole’ common sense. When my portfolio is crashing and my dividends are getting cut, I think I’ll be fine with pulling back a bit as everyone else will likely be doing the same. If your investments have a good run and your income stream grows, and then you can spend a bit more.

Here’s an infographic they put together to help visualize one type of dynamic strategy called “floor-to-ceiling” (click to enlarge):


Vanguard’s Managed Payout Funds are also designed to aid in portfolio withdrawals, using dynamic methods but adding in a smoothing component so that your income won’t swing as wildly from year-to-year. I don’t plan to buy those funds, but I might use their smoothing idea.

I am a conservative investor, so I don’t know about using dynamic withdrawals to justify a 5% average withdrawal strategy, though. It would just make 4% for 30 years less scary. In my case, I’m considering 3% dynamic for 50 years.

Vanguard’s Low-Cost Funds Winning, Low-Cost Portfolio Management Next?

Catching up on articles, I saw that Financial Times has an intriguing profile of Vanguard. If you’re not a hardcore Boglehead, you will likely discover some new bits about this company started by Jack Bogle and pioneered index fund investing. (I’d like to eat in their “galley” one day.) Everyone seems to be commenting on Vanguard’s growing popularity, and this chart supports the idea that lower fees have led to greater assets under management.


I wanted to highlight a portion that aligns with my own investment philosophy (yup, confirmation bias):

Vanguard stresses it is not solely an index fund shop. It runs actively managed bond funds, too, and equity funds whose stockpicking it outsources to a roster of sub-managers such as Wellington Management Company. These active managers are charged with delivering “alpha”, returns in excess of the market.

“We’re not an indexing shop or an active shop, we’re a low-cost shop,” says Mr Buckley. “We believe that there is alpha, just that it is fragile and if you have high expenses you will destroy it.”

Costs matter, especially management fees and taxes. Beating the market (alpha) is possible but probably much harder than you think. Vanguard’s low-cost funds, both active and passive, have won the money of investors.

Will Vanguard’s dominance grow to include low-cost portfolio management? While I am definitely tracking all the new start-ups like Betterment and Wealthfront, you could technically say that Vanguard’s Target Retirement 20XX Funds were the first low-cost “robo-advisor” solution with no additional markup over the underlying fund expenses. With the official launch of the Vanguard Personal Advisor Services product, you can now have a human advisor to talk to for just 0.30% annually.

The best part of any low-cost portfolio management service is that you can focus on your savings rate, which is really more important than Betterment vs. Vanguard vs. iShares vs. whatever.

Vanguard Merged Brokerage Account Review: Pros and Cons

When you open an account with Vanguard, there are two different account options. First is a mutual fund account which only holds Vanguard mutual funds. Second is a brokerage account that can hold individual stocks, ETFs, individual bonds, and non-Vanguard mutual funds. Over the past couple of years, Vanguard has been slowly rolling out a merged option where everything is moved inside the brokerage account. This for both IRAs and taxable accounts.


Eligibility. If you are an existing Vanguard customer, you can see if you are automatically eligible for this “upgrade” via Vanguard.com/accountupgrade. If you only have Vanguard mutual funds, you will be required to open a new brokerage account. If your accounts are not listed, you can also contact Vanguard customer service and request to be upgraded manually. I am not sure how they decide whether to grant this request, but I just asked last week and was approved the next business day.

Process. The upgrade process was fast and painless, at least for me. You have to e-sign some documents approving the change and acknowledging the loss of certain features (noted below). By the next business day, all of your Vanguard mutual funds will be transferred “in-kind” into the brokerage account. Nothing is sold and there will be no tax consequences. As far as I can tell, all of my cost basis and other historical information transferred over smoothly. The cost basis calculation method should also carry over (but you may want to double-check). They’ve been merging accounts since 2013, so it appears most of the kinks have been ironed out.

Each merged brokerage account has one money market settlement fund, for example the Vanguard Prime Money Market fund. This is where you will receive the proceeds from transactions like ETF or stocks sales.

Vanguard says that for “most people” there won’t be any change in features. But there are some important changes to note, and I’ve tried to separate them into pros and cons.


  • Simplification at no additional cost. Your online account view is simplified. Your statements are simplified. There is no cost to switch. There is no change in your commission structure.
  • Less tax paperwork. For the tax year of your upgrade, you’ll receive separate tax forms for your mutual fund accounts and brokerage accounts. Starting the first full tax year after you upgrade, you’ll receive a single tax form for each brokerage account. One less 1099-B and 1099-DIV sounds good to me.
  • Possibly quicker funds availability. After the merge, you will be able to sell a brokerage asset (i.e. ETF) and then use the proceeds to buy a Vanguard mutual fund on the same day. Previously, you had to wait 4 days for the brokerage funds to settle first to be available for use in the mutual fund account.
  • SIPC coverage of Vanguard mutual funds. Vanguard mutual funds were previously not held in a brokerage account, so no SIPC coverage. (It technically wasn’t necessary for mutual funds.) Now everything is inside a brokerage account, so everything is covered by SIPC. Vanguard also has separate insurance that exceeds the SIPC maximums.

Cons / Concerns

  • Less flexible checkwriting. With the mutual fund accounts, you could get a separate checkbook for each of your eligible mutual fund accounts. I could get checks that withdrew directly from my Vanguard Limited-Term Muni Bond fund, or Vanguard Total US Bond fund, or any money market fund. But now, you will only get a single checkbook for each brokerage account, and it will only pull from your settlement account (plus another fund as backup).
    Vanguard will “do our best to honor any outstanding checks written on a Vanguard mutual fund that are presented for payment within 45 days after you’ve transferred your Vanguard funds into a brokerage account.”
  • Less flexible dividend and capital gains distributions. With a merged account, your only options for fund distributions are either automatic reinvestment into the same fund, or cash into your settlement fund. You’ll no longer be able to receive Vanguard fund distributions directly by check, by automatic transfer to your bank account, or by automatic reinvestment into another Vanguard fund.
  • Direct deposit not available. You can no longer have your paycheck direct deposited into your Vanguard brokerage account. You can still set up a manual or recurring transfer from your linked bank account to Vanguard. It just can’t come directly from your employer, so that can be a loss of convenience.

    I believe you can regain this feature if you sign up for a VanguardAdvantage account (their cash management option that include a debit card and online billpay). However, this is only available to clients with at least $500,000 of assets with Vanguard.

If any of these “cons” affect your current settings, Vanguard should alert you during the upgrade process. However, I think it’s good to know this stuff even if you aren’t using those features at the moment. I also tried opening a new Vanguard account from scratch, and it appears that new clients are still having two separate accounts opened for them (mutual fund and brokerage). I wonder why?


Charlie Munger On Leverage and Paying Your Mortgage Off Before Retirement

housemoneyWhile reading back through various transcript notes from the 2015 Berkshire Hathaway Annual Meeting, I recalled the following quote from the Q&A session. A shareholder had asked why Berkshire had never borrowed money to buy stocks (i.e. leverage). Charlie Munger replied:

It’s obviously true. If we’d used the leverage that some others did, Berkshire would have been much bigger … but we would have been sweating at night. And it’s crazy to sweat at night.

This is an important point, as many other similar investors have used leverage to boost their returns (not always, but some with success). Buffett and Munger certainly could have justified such an action, especially given their excellent investment track record.

Munger did not make this jump, but I believe but an individual investor could also apply this quote to paying off their mortgage early. Even I enjoy discussing the details of mortgage payoff vs. retirement savings, and acknowledge that mortgage interest rates are low while stock returns are historically higher. Why use your money to pay off your mortgage when you could invest in stocks instead?

The problem is that if you are putting off paying off your mortgage just so you can invest in stocks, you are using leverage! That is, you are taking borrowed money and then putting it at risk. That may increase your overall returns, but it will also increase your exposure to bad outcomes. For most people – not everyone, but most – paying off your mortgage debt will help you sleep better at night. Based on his biography, Warren Buffett himself bought a house in cash when he got married. Even though he was confident he would have made more money by putting those funds toward his investment partnership, he chose not to have a mortgage.

In addition, many financial advisors are incentivized to maximize the amount of your money that they manage, as they can’t earn any fees off your home equity. Wes Moss, a fee-only advisor and Money Matters radio show host, ignores that and gives blunt advice in his book You Can Retire Sooner Than You Think:

Sooner or later, every homeowner asks the simple question, “Should I pay off my mortgage?” and immediately gets bombarded with a variety of complicated, hedged responses. Here is the simplest possible answer: Yes. If you are anywhere near retirement and can afford to pay off your mortgage, you should.

I view this as an example of how real-world, experience-based advice can differ from theoretical, academic-based advice. Humans are not perfectly rational. I have never regretted paying off my mortgage early, although I do agree with the qualification that mortgage payoff should roughly coincide with retirement date.

* Of course, Warren Buffett quickly added: “…over financial things.” Ba-dum-bum-ching!

Real Estate Crowdfunding Experiment #1: Property Details and Numbers Breakdown


Woohoo, I just received my first interest payment on my real estate crowdfunding experiment #1. I put in $5,000 at 11% APR, which should work out about $46 a month but the first partial payment was an underwhelming $16.81. I e-mailed Patch of Land and they said I could share the details of my loan, so here they are. If you are a SEC accredited investor and a (free) registered member, you can view it on their site.

Financial details. Here is the summary and breakdown from the Patch of Land listing:

The developer is requesting a loan of $179,000 in order to purchase and renovate the underlying property. The property was purchased for a total of $155,000 in April of 2015. There is minor renovation needed for the underlying property, totaling $55,000. The borrower will receive 2 draw(s) totaling $175,420 over the course of the loan. The initial draw in the amount of $120,420 occurs when the loan closes. The second draw of $55,000 will be disbursed when renovation is completed. The borrower plans to sell in 1 year or under.


Loan is secured by the property, in the first position. Also have personal guarantee from borrower (not worth much). 6-month term (roughly April 15th to October 15th). 11% APR interest, paid monthly.

So the developer is contributing roughly $40,000 and the loan is roughly $180,000. So a total of $220,000 is being put into this house. Considering that the loan will charge roughly $10,000 in interest over 6 months, plus a potential 6% brokers commission upon sale, this house would have to sell for around $245,000 for the developer to break even. The developer thinks the house can sell for $275,000 but it all depends on how well they spend that $55,000 in renovation costs and how the local market holds in the next 6 months. A 3rd-party appraisal gave a estimated after-repair value of roughly $240,000, which is probably a conservative number but suggests a potentially tight profit opportunity for the developer.

In the end, I do believe it likely that the loan amount of $179,000 can be recovered from this property in a liquidation scenario (see below). It is important to note that the developer doesn’t actually get the final $55k until the renovations are completed and thus the home will be worth more.

Property details. Single-family home in West Sacramento, California. The address is 508 Laurel Lane. You can look up details from public records using sites like Zillow or Trulia. Built in 1954, 3 bedrooms, 1 bath, 1,675 sf living area, 7,000 sf lot. The pictures provided suggest a house that is definitely in need of a kitchen remodel and light repairs, but it wasn’t destroyed inside. The house is about the same size and appearance of other houses in the neighborhood.

I am not familiar with the Sacramento area. The zip code of 95691 appears to have slightly above-average selling prices compared to West Sacramento overall. According to Google Maps, the neighborhood is relatively close to freeway access and downtown Sacramento. I also looked at Google Street View and I liked that the neighboring houses all appeared to have well-maintained houses and manicured lawns. That suggests pride of ownership and/or a certain level of peer pressure to keep your house looking nice. Based on a quick Craiglist search of comparable rentals, this house should support roughly $1,400 to $1,500 in monthly rent, which is not bad compared to the ~$245,000 that I’d like this house to sell for once fixed up.

In the end, there are a number of risks in this deal, but otherwise it wouldn’t pay an 11% annualized interest rate. From my vague understanding of hard money loans, I was hoping for much lower LTVs in the 50% range instead of the 80% range. Perhaps the lessening of loan standards from new money flooding this new asset class is already happening. It would be educational to see how they handle a liquidation… but I should just sit back and quietly cash my interest checks.

Hard Money Loans: The Next “New” Asset Class?

paperbillsBloomberg has a new article about how hard money loans to house flippers are the next asset class to be both crowdfunded and taken over by institutions. Like peer-to-peer loans and LendingClub, it may have started out with individuals lending to other individuals, but there is still a lot of money looking for higher yields and that means Wall Street is coming. The catchy title is now House Flippers Are Back Together With Wall St. What Could Possibly Go Wrong?.

First, a few quick terms and definitions:

Bridge loans, also known as hard-money or asset-based loans, give flippers cash for home purchases and construction with about a year to repay, and are backed by the real estate. […] Fix-and-flip investors have generally gotten funding from local private lenders as banks have shown reluctance to extend credit for speculative real estate deals. Borrowers are forced to pay high costs in exchange for the quick cash.

Next, some interesting stats:

[Hard money loans] represent an opportunity of about $30 billion in origination annually, according to LendingHome, an online mortgage marketplace that makes short-term loans and sells them to investment firms

The average gross profit for completed flips in the first quarter was $72,450, up from $61,684 a year earlier and the highest in records dating to 2011, according to a report Thursday from RealtyTrac, a real estate data firm. Markets with the highest average gross return on investment included Baltimore, central Florida and Detroit.

I’m assuming gross profit is just the difference between the buy and sell prices, which is easy to find and calculate. Those numbers don’t include any fix-up costs (repairs, remodeling, or construction) or carrying costs (loan fees, interest, and taxes).

Finally, the risks:

The hard-money market is getting crowded, which may lead companies to loosen their standards, said Mark Filler, CEO of Jordan Capital Finance, a lender acquired by credit investor Garrison Investment Group about six months ago. His business has more than 300 approved borrowers with credit lines.

“Everybody just jumped in,” said Filler. “The risk is people start to relax underwriting guidelines to chase loans. As this becomes more competitive, there will be more pressure to do that.”

I just received the first payment on my crowdfunded real estate loan experiment, but I’m already concerned with all the money flowing into this newly-accessible asset class.

Liquidating My Prosper Loans Using Folio Investing

As stated in my last P2P loan experiment update, I am liquidating all of my notes from Prosper Lending and Lending Club. When you own more traditional investments like ETFs or individuals stocks that trade on a major exchange, you can sell your holdings in literally under a minute and have the trade settled just a few days later. A P2P loan portfolio is less liquid, with the process taking a few more steps, a bit more time, and with additional transactional costs (although there is a potential for profit). Here’s a rundown of how I sold off my remaining Prosper notes (with lots of screenshots), including some potential mistakes and the total timeframe. Skip to the end if you want the short version.

1. Create a separate Folio Investing account. In order to trade your Prosper notes, you need to open a new brokerage account at a company called Folio Investing. To start the process, go to “Invest” at the top dropdown menu and look for the “Trade Notes” link (click on any screenshot to enlarge):


To qualify, you must already have a Prosper lending account and reside in one of the approved states for Prosper lending:

Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.

You must also provide them your name, address, Social Security number, and all the other details any new brokerage account will require. Here’s a screenshot of the application page:


I was approved online instantly, with no paperwork to mail in or anything.

2. Put your notes up for sale in either auction or fixed price format. You will be able to pick through any of your current notes and put them up for sale either at a fixed price of your choice, or via a 7-day auction where you can set the initial bid. You cannot sell any notes that are late or worse. If the listed loans become late while on the marketplace, they will be removed. (If they become current again, you can re-list them.)


You can set the price at the remaining principal balance at settlement, or you can have it be at a premium or discount. For example, a high-interest loan with a consistent payment history and improving borrower credit score may sell at a premium. Meanwhile, a lower-interest loan with a few missed payment and a dropping borrower credit score would likely sell at discount. There is a 1% transaction fee charged upon sale (1% of the note’s face value).


How to set your price? Since your loans are little unique things and there aren’t a million buyers out there all the time, there are a few ways to go here. If you want to maximize your sale price with no regard to time spent, you could go the fixed price route and set a very high price like a 10% premium, wait a bit to see if anyone bites, and then manually re-list it at progressively lower prices until it sells. Alternatively, if you are desperate, you could list everything at a fixed price and 10% discount and everything will most likely sell in 24 hours.

Given that I am lazy but not desperate, I just chose the 7-day auction. I did a very basic screen and set all my loans with improved credit scores to a 1% premium (meaning after the 1% transaction fee I’d break even), and set all my loans with lower credit scores to a 0% premium. Here’s a screenshot of some notes with a 1% premium (some are rounded off):


3. Either re-list or collect your money. After that first week, all my higher-quality 1% premium notes sold but only a few of the lower-quality 0% premium notes sold. Many notes had multiple bids, which made me more confident that there was a least a semi-healthy buyer’s market. Since I didn’t want to waste any more time, I set everything to a 5% discount and just let the auction handle itself. Everything sold! In the end, 105 notes sold from between a 5% discount to 5.6% premium, with most somewhere in between. On average, it looks like I just about broke even on the gross sale price but fell behind about 1% net due to the 1% commission.

After the sale, I needed wait another 3 calendar days for settlement. I could the request a cash withdrawal to my linked bank account, which takes 3 business days.

I am still left with 6 notes worth about $100 in remaining principal that have past-due payments and thus can’t be sold on the secondary market. I’m pretty sure that they’ll be charged off by the end of 2015. If the go current again, I’ll just re-list them and expect them to be sold in a week.

Recap. If I had started my auction prices at a steeper discount initially, I would have been able to liquidate the vast majority of my loans within a week, and then add roughly another week for settlement and funds transfer into my bank account. I lost roughly 1% on my remaining principal upon sale (mostly due to the 1% transaction fee). There are still a few remaining late loans (5% of original number of notes) to be charged-off over time or become current again, so I’ll still have to monitor the account occassionally. Given that my primary goal was to generate all my taxable events in 2015 and thus be done with everything by tax filing in April 2016, I think that will be an achievable goal.