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.

Help Explain This Asset Allocation Chart To Me?

The Vanguard Blog for Advisors has a recent post about how we’re now in the 3rd biggest bull market since 1929, which followed the 2008 financial crisis, also known as the 3rd biggest bear market since 1929. The takeaway is that none of us know the future, so advisors need to convince their clients to rebalance their portfolios both in good times and bad.

Remember, rebalancing is not about maximizing returns, reversion to the mean, or market forecasts—it is about maintaining the risk-and-return characteristics of the portfolio an investor selected based on his or her unique time horizon, risk tolerance, and financial goals. In contrast to market predictions, rebalancing is within your clients’ control.

That’s all well and good, but included was this curious chart with the title “Rebalancing: Asset allocations show trend following”:


This chart confuses me. I assume it is supposed to show that when stocks go up, people buy more stocks and when stocks go down, people sell off their stock allocations. But if for every trade there is both a buyer and a seller, then who is taking the other side of all these trades? For instance, if everyone is buying stocks now, who are they buying it from? Is this only retail investors and the other buyers are institutional investors? Or is this chart mostly just showing changes in overall market-cap?

Target Date Retirement Funds: Beating The Behavior Gap

The general consensus behind target-date retirement funds is often “They’re okay… but here’s something better!”. Any all-in-one product will be imperfect. But I still like them on the whole and have written previously about how Vanguard’s target-date retirement funds are underrated. If you’re invested in them, this Bloomberg article and Morningstar data should make you feel even better about it.

Most mutual fund investors actually do worse than market returns due to poor behavior, termed the “behavior gap“:

But target-date funds have one big advantage over other kinds of mutual funds, the data show. The average mutual fund has a flaw, which is that the average investor hardly ever does as well as his or her funds. Investors tend to jump in and out of funds at the wrong time. They buy high, choosing funds only after they’ve done well. And they sell low, dumping underperforming funds just as they’re about to take off.

However, owners of target-date fund actually did better:


On average, target-date fund investors are doing 1.1 percent better per year than their funds. Investors in almost every other fund category lagged their funds over the past decade, including a -0.98 percent underperformance for U.S. equity funds and -1.3 percent for municipal bond funds.

The outperformance may be a temporary anomaly, but I do think there are unique features of these all-in-one funds (and their investors) that will persist:

  1. Self-selection. If you buy a target-date fund, you desire simplicity. You have a degree of humility. You don’t overestimate your skills as an investor, otherwise you’d buy something else.
  2. Optical illusions. If you own an all-in-one fund that holds both stocks and bonds together, you don’t have the problem of seeing one investment drop while the other rises. It’s all mixed together in one pot, so the impact is usually dulled. This is the benefit of buying a “balanced” fund.
  3. Automatic rebalancing. Anything that makes you look at your investments is an opportunity to make an emotionally-driven choice. Since these funds even rebalance their holdings for you automatically, you’re not even required to rebalance, which can be hard to do. Right now, a portfolio would probably have to sell stocks and buy some bonds while the media keeps talking about rising rates.
  4. Tweaking is difficult. If you have one stock fund and one bond fund, it’s very easy to buy little more of one or a little less of the other. With an all-in-one fund, it’s harder to tweak your mix.

So you don’t have to do anything, and if you want to do something besides just buy more, it’s a pain. All this means less trading, which over the long run is a good thing.

So don’t be ashamed of buying a diversified, low-cost Target Date fund like Vanguard 20XX or Fidelity Freedom *Index* 20XX funds. The article ends with a good reminder that costs still matter. Don’t overpay for one of these funds either, and maybe even raise a little stink if you are being asked to.

Expected Returns by Asset Class Tool by Research Affiliates

In the current environment of historically-high US stock valuations and historically-low interest rates, there is a lot of discussion about what investors should expect in regards to future returns. Predictions are a dime a dozen, but some are better supported than others. Research Affiliates has interactive Expected Returns tool where they freely share both their forecasts and detailed methodology. For example, here is a PDF of their equities methodology.

1st Quarter 2015 Equities 10-Year Forecast. Currently, their forecast for equities predicts that US Large-Cap and US Small-Cap stocks will have expected real (inflation-adjusted) returns of below 1% annually. Developed European and Asian Country stocks (MSCI EAFE) have significantly higher numbers, while Emerging Markets as a whole offer the best risk/return ratio (Sharpe ratio). I’m not into single-country bets, but it appears Russia is the one to take if you have a high appetite for risk.


1st Quarter 2015 Fixed Income 10-Year Forecast. Currently, their forecast for fixed income predicts that both long and short US Treasuries will have expected real (inflation-adjusted) returns of basically zero. You might get under 1% real with a broad US bond fund like AGG or BND, or reach for a little more return with a high-yield junk bond fund but with roughly the same Sharpe ratio. The gambler’s choice appears to be Emerging Markets currencies (EM money market funds), which they predict will appreciate relative to the US dollar in the next decade. This is followed by Emerging Market bonds issued in local currency.


I like reading the theories and fundamental arguments for these forecasts, and consider the numbers as part of the big picture but not necessarily something to act on directly. I also keep track of other forecasts, including the follow which were previously mentioned on this blog – Jeremy Grantham / GMO 7-Year Forecasts (free registration required) and the Rick Ferri / Portfolio Solutions 30-Year Forecasts. The most recent GMO numbers also give the expected-returns edge to Emerging Markets in both the stocks and bond worlds (risk is not directly assessed).

Real Estate Crowdfunding Experiment #1 – Background and Introduction


After I took out roughly $7,500 out of my P2P lending experiment, I started looking for another place to put my money at risk. :) I decided on trying out real-estate crowdfunding, which tries to make real estate investing (either through equity or debt financing) more accessible to individual investors. Right now, all of the major sites require you to be an accredited investor as defined by the SEC. Keep in mind that these investments can be quite risky and that this is an experiment with a small portion of my portfolio set aside specifically for such purposes.

I’m going to be upfront; I didn’t spend an enormous time vetting each and every website out there. I swapped a few quick e-mail questions with a few sites and signed up with some of them (you have to sign up for a free account in order to view the investment opportunities). Due to my analytical tendencies, I missed a bunch of them because the good ones were often fully funded within 24 hours. Other times, I had time to do more research and simply never got back around to it. I finally set some simple criteria and decided that I would jump on the next one that fit the bill. The criteria:

  • Try out one of these new crowdfunding real estate websites – Realty Mogul, Fundrise, Realty Shares, Patch of Land, and others.
  • Single or multi-family residential property.
  • I wanted to be a lender, and the loan must be secured by the property, in the first position.
  • Short-term financing deal with 1 year term or less.
  • Loan-to-value of under 80%, based on my own rough numbers.
  • At least 10% annualized return (10% APR interest).
  • Invest only $5,000 per property.

I found an investment that fit, electronically signed the required documents, and the deal appears to have completed funding. Here are the results:

  • Patch of Land
  • Single-family home in West Sacramento, California
  • Loan is secured by the property, in the first position. Also have personal guarantee from borrower.
  • 6-month term (roughly April 15th to October 15th), with the goal of a quick rehab and reselling of the property.
  • LTV is 78% per my rough numbers.
  • 11% APR interest, paid monthly.
  • $5,000 invested.

pollogoI’m not sure exactly what details of this investment I am allowed to share, so I’ll save that part for later. It will be good for you guys to pick apart, but it doesn’t really matter for other investors as the project is already 100% funded. I’m just waiting on my first interest payment in May, and hope to be done by October. At the end of the year I will get a 1099-INT.

Here’s part of the pitch for Patch of Land:

Patch of Land is a curated real estate debt crowdfunding platform that sources, originates, and underwrites loans to professional, experienced real estate developers. Patch of Land is one of the first real estate crowdfunding platforms. We have been building a strong track record of funded projects and investor returns since 2013. We are considered one of the top 5 real estate platforms by leading crowdfunding publications.

Loan proceeds are used to rehabilitate residential and commercial real estate properties across the country. Loans are secured by the underlying property and personal guarantees from the borrowers. Patch of Land then matches those loans with accredited and institutional investors for funding. Loans are issued for terms of 12 months at rates ranging from 10 to 18% APR, paid monthly to investors.

What I liked about Patch of Land is their stated commitment to individuals provide significant funding and also that many of their borrowers are experienced individual real estate investors. In that way, it’s almost a peer-to-peer feel, as opposed to institutional investors providing the cash to large real estate organizations.

Along those lines, Patch of Land recently completed a $23.6 million round of funding, and $3.6 million of that came from SeedInvest, a crowdfunded start-up investing firm. So technically, I could have also been a part-owner of this start-up as well. For now, I’ll stick with being a “real estate lender” and maybe I’ll add the “venture capitalist” title later. I would like to invest another $5,000 into partial ownership of a commercial property via another crowdfunding site.

LendingClub Realistic Return Expectations Chart

Thinking about investing in P2P loans? Even though I still believe that decent returns are possible, I think it is important to have realistic expectations. I’ve given out the following warnings since they started:

  • You won’t get the stated interest rates on your loans. Let’s say the loans you invested in are charging 12% interest to the borrowers. First, there are fees to pay. Second, these are unsecured loans to faceless individuals on the internet. You don’t get to repossess a house or even a car. All you can do is hurt their credit score. They could empty their bank account and walk away the next day. Defaults are gonna happen; you should expect it.
  • Your reported return will decline over time. I see many people who have loans being very happy about their 10% reported returns after a year or so. Well, expect it to drop 1 to 3% or possibly more by the time the loans actually finish their full terms. If you keep rolling over your interest into new 3 year loans, that means your average loan age will likely remain around 1.5 years (often even younger due to high prepayment rates).

Recently, LendingClub started showing this on their performance and statistics pages:

This chart illustrates how returns typically decline over the life of an investment. If your account is relatively new, it is likely that your returns will decline over time as some of your Notes become past-due and charge off. This chart is not a prediction of how your portfolio will perform and actual results may vary.

Here’s the chart with a focus on the beginning (3-9 months = 9.8% median return):


Here’s the chart with a focus on the end (24-30 months = 7.2% median return):


That’s a performance drop of 2.6% over 21 months if you take the average loan ages (6 months to 27 months). I can see why the chart starts at 3 months, as no loan can be charged off until the payments are at least 90 days late. I’m not quite sure why the chart ends only at 30 months though, not 36 months, as I think the numbers would drop even further. (As an aside, I know than some investors basically try to sell their loans on the secondary market at full expected value after 12 months or so to maximize returns. If you could find buyers at that price, that might not be a bad strategy.)

A historical 7.2% median annualized return is still pretty solid. For a rough approximation, here are the returns of some corporate junk bond funds, probably the closest publicly-traded asset class available. Per Morningstar as of 4/14/2015, the 3-year trailing total return of the Barclays High Yield Bond ETF (JNK) was 6.67%. As of 4/14/2015, the 3-year trailing total return of the Vanguard High-Yield Corporate Bond Fund (VWEHX) was 7.21%. Given that the timeframes don’t match up perfectly, I would only go as far as saying that the return figures are in the same ballpark.

It is worth noting though that the mutual funds offer the same broad diversification for everyone, whereas an individual investor at LendingClub has more scatter in returns (either higher or lower than average). As for me, apparently I’m below the 10th percentile myself with my 4.3% annualized returns. Arrgh!