Search Results for: lendingclub

LendingClub Offers No-Fee IRA

Speaking of LendingClub, I saw that they now offer a IRA with no opening fees and no annual maintenance fees. Previously, there was a $250 annual fee. However, it does now require an increased $15,000 minimum opening balance, which essentially restricts it to a 401k rollover or the transfer of existing IRA funds.

Since P2P loan interest is taxed at ordinary income rates like interest from savings accounts, the ability to place them in a tax-deferred account is attractive. But since person-to-person lending is such a new asset class, I would hesitate to make it larger than say 5% of my portfolio, which would require a total portfolio size of $300,000. So, I’m out.

It is interesting that the custodian EntrustCAMA allows a lot of options in their Self-Directed IRAs like holding physical precious metals, investing in private small businesses, and investing directly in real estate. I’m not sure if you can only hold LC notes in this free IRA.

P2P Lending Update: LendingClub Loan Performance (+$25 Bonus)

Here’s an update for my person-to-person (P2P) lending activity at LendingClub, which are unsecured loans between U.S. residents. It could be to help people pay off credit card debt, home improvements, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges much higher rates to borrowers.

LendingClub Portfolio
I now have made 62 active loans with $1,680.08 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Although they do have an automated service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine. Here is a screenshot from my account page:

Performance & Commentary
The good news is that out of my two previous late loans, one of them is now current again and the other one is on a “payment plan”. I am not sure if that means they lowered the amount due, or that they are just allowing a slower payback temporarily, but it is again showing regular payments (and contact) from the borrower. Much better than reading “left voicemail. left voicemail. we haven’t heard from them in 4 months…”. I have no defaults to date.

According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.14%. As an investor, I would not expect this rate to be my actual rate to maturity, but so far so good. While my goal is to get a substantially higher yield than from a online savings account, it also comes with a healthy dose of risk. Don’t put your emergency fund here!

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

P2P Lending Update: LendingClub Loan Performance

Here’s an update for my person-to-person (P2P) lending activity, which for me are unsecured loans between U.S. residents. It could be for credit card debt consolidation, car financing, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges high interest to borrowers.

LendingClub Portfolio
I do my P2P Lending at LendingClub, where you can loan as little as $25. You can read more background in my previous update. Although they do have a service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine.

I now have a total of 49 active loans with $1,548.42 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Here is a screenshot from my account page:

Performance & Commentary
According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.06%. The bad news is that I now have two late loans in my portfolio. One has negotiated a temporary reduced payment plan, while the other seems to be dodging phone calls. Also, one loan was paid off early. But I suppose this is par for the course, you get late payments and defaults. If your interest rate is high enough and you have enough diversification in loans, you’ll still end up ahead. We’ll see what happens, even with a default my rate of return so far is still higher than what I’d have gotten with an online savings account. But the risk is still certainly there for more downside.

What really baffles me is that both of my late loans are A-rated. According to the LC stats page, out of all the A loans issued so far, there are only 12 late loans out of 943 still active. That’s a tiny 1.3% late rate with zero defaults for LendingClub in general, and yet I managed to invest in 2 out of the 12 late ones. So either I’m very unlucky or I stink at picking loans, or… both. 😛

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

LendingClub: My P2P Loan Portfolio Update (+Bonus)

I’ve been meaning to post some smaller updates about my ongoing experiences with person-to-person lending at LendingClub, but I decided to wait and roll them up into one larger post.

Current Portfolio
I now have a total of 32 active loans with $1,122.21 in outstanding principal. Most are A grade, with a few Bs. Here is a screenshot from my account page:

These are the loans that originated after LendingClub completed their SEC registration, which means I can sell these loans on the open market. I also have $91.91 in 4 notes that were pre-SEC registration (these are accounted for separately), all A grade.

All 32 loans are current, with no late or defaulted loans. I don’t think any have even gone temporarily late. According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 8.80%. This is net of all fees. The oldest loans are about 16 months old now, almost halfway through the 3-year term. So far so good.

You can view the statistics for all LC loans here. This study states that as of the end of November 2008, lenders earned an average rate of 9.05%. If you are familiar with Prosper, you’ll note that this is significantly better than their stats. There are several reasons for this, in my opinion. For one, an A grade loan on LendingClub is a lot better quality than an A loan on Prosper. You need to have a 660 credit score as well as other additional requirements just to make their lowest G grade. Also, LC is much more stringent on approving loans. Only about 10% of loan applications are accepted. Their data verification system seems to be more comprehensive and weeds out a lot more questionable and/or fraudulent loans.

Loan Filters / Methodology
For the most part, I only lend to borrowers with a nearly perfect credit profile. I don’t use their PortfolioMatch tool, I handpick each of my loans. It doesn’t take very long; Here’s my basic search filter: A/B grade only, 714+ credit score, debt-to-income ratio < 10%, zero delinquencies, and 50% funding status. The high funding status usually means that the loan has already been approved, with LendingClub verifying enough application information. I check whenever I remember to, probably once every two weeks or so, and if I see something I like, I throw either $25 or $50 at it. My ideal borrower has a 10+ year clean credit history, a stable government job, and is just looking to consolidate debt into a lower rate. Paying 8% APR from LendingClub is a lot better than 10-20% from even the best prime credit cards, and new credit is harder to get now. I like the idea that they can clear out their consumer debt in 3 years or less. Open Market
You can now buy and sell loans, so there is no longer a fixed 3-year commitment. I’m happy with my returns so far, and have not yet tried to sell any of my loans on the open market. I do see that loans with a good payment history of 6 months or so are asking a 4-6% premium to outstanding principal, so it might be a feasible strategy to repeatedly find good loans and sell them after 6 months. You might be able to limit your exposure and still maintain a decent return. (Sellers pay a 1% transaction fee.)

Self-Directed IRA Option
In March, LendingClub announced that you can now hold their P2P loans in a Self-Directed IRA and get the tax benefits. The main downside to this is that you are subject to a $250 annual account maintenance fee. Unless you have a very large amount of IRA funds that you wish to commit to this, $250 is a big drag on performance (1% of $25,000, 5% of $5,000). However, you can also hold other things like real estate or physical gold bullion in this Self-Directed IRA, so it does offer additional flexibility.

Safety of Principal
With the new post-SEC setup, you are now technically buying notes from LendingClub. This brings up the question of what would happen if they went bankrupt. This was previously addressed in my Q&A with Rob Garcia, Director of Product Strategy. In addition to that, I saw on TechCrunch a couple months ago that LendingClub secured another $12 million in Series B venture funding.

$25 New Lender Bonus
If you are interested in lending, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, my advice remains the same. Send in your information, and see what interest rate they offer you. If you like it, try and get a loan. If your full amount is not funded, you can either accept partial funding or walk away with no obligation.

Prosper Review for Investors: Understanding Risks and Returns

lcreview_logo200I lent out my first $25 to a stranger on Prosper nearly 8 years ago, in October 2007. Since then, the peer-to-peer (P2P) lending environment has undergone a variety of changes. I’ve made hundreds of P2P loans both hand-picked and algorithm-driven, sold them on the secondary market, and experienced the effect of defaults on my returns.

I’ve written several posts along the way, but here is my condensed (but still detailed) overview. Many of the other Prosper reviews tend to focus on the positives. While Prosper certainly has potential, I’d rather go deeper into the possible risks to an investor’s hard-earned money.

The attraction: Be the bank. Earn high interest rates. We’ve all seen the big banks charge mountains of interest, while us regular folks pay it. The average interest rate on credit card loans remains around 15% APR. The basic model for P2P loans is that anyone can become that bank and invest in loans to other individuals. Prosper will take a little cut for helping out, but the bulk of the interest (and risk) goes to the investor.

The reality: Higher net returns than other alternatives, but the risks hide in the details.

Detail #1: Significant loan defaults occur over time. The good news now that P2P loans have been around for a while is that you have more historical performance numbers to consider. Prosper lets you see this historical data in great detail, but you have to look carefully. Here’s a snapshot of what you’d see now at, labeled “Seasoned Returns*”.


Here’s what that asterisk means:

*Seasoned Return calculations represent historical performance data for the Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculations, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through May 31, 2012. Our research shows that Prosper Note returns historically have shown increased stability after they’ve reached ten months of age. For that reason, we provide “Seasoned Returns”, defined as the Return for Notes aged 10 months or more.

The initial interest rate on your notes is only a theoretical maximum return. For example, for the last quarter of 2015, the average interest rate was 11.06% for 36-months 15.47% for 60-month loans. Every time a borrower defaults – and trust me, if you buy any meaningful amount of notes, some will default on you – your return will go down. With loans as little as 10 months old, their quoted “increased” stability is not the same as stability.

Here’s a chart from competitor LendingClub showing how net annualized return has decreased with loan age (for different vintages of past loans). Note that the net return numbers still keep going down after 10 months.


If anything, I would prefer to use this alternative table provided by Prosper. These estimated net numbers are more realistic. The table also includes a daily snapshot of their current inventory, which may give you an idea of relative availability by rating. Note that there are much fewer of the highest-risk, highest-expected return loans available.


Finally, don’t forget that not everyone gets the average. You can’t buy a “Prosper index fund”. You may be above average, but be prepared for below-average returns as well.

Detail #2: Liquidity concerns. When you buy traditional mutual fund that holds investment-grade bonds, with just a few clicks, you can sell that investment on any given trading day. You will get a fair market price, and you will find a buyer for all of your shares.

If you invest in a Prosper note and you need to cash out before maturity, you will have to sell on the secondary market. Now, if you have pristine loans with a perfect payment history, today you’ll probably be able to sell your notes at near or even slightly above face value. But here are the possible haircuts:

First, you will have to pay a transaction fee of 1% of face value on all sales. Second, if you have loans that have ever been late or has a borrower whose credit score has decreased since loan origination (they track that), you will have a harder time finding a buyer and the price will probably be lower than face value. Finally, for Prosper if your loan is currently late, you can’t sell it on the secondary market for any price. You can’t even offload it for a penny.

In my experience, I liquidated ~85% of my loans at about a 0% net haircut, ~10% were sold at a slight loss due to their imperfect history, and ~5% could not be sold at all. While this is certainly better than having no liquidity at all (like a lot of real-estate crowdfunded debt), it also takes a few hours of work at least to maximize your selling prices on 100 or 200 loans.

All of these haircuts taken together can take a significant hit against your total returns. Also, just because you have buyers today doesn’t mean there will be buyers tomorrow. Therefore, I would not invest if you don’t expect to hold the loan until maturity. Some people try to arbitrage things by buying notes and selling them quickly on the secondary market to residents of states that can only buy notes on the secondary market.

Detail #3. Diversification is critical. A defaulted loan wipes out both principal and interest, resulting in a big hit on your overall return. Therefore, your best bet is to never put any more than the $25 minimum into any one note. Remember this statistic: For Notes purchased since July 2009, every Prosper investor with 100 or more Notes has experienced positive returns. In other words, no investor has lost money overall if they held at least 100 notes! 100 times $25 = $2,500 which I think is the minimum you should invest with.

Detail #4. Taxes. P2P notes are a somewhat different animal, and at year-end you’ll receive some tax forms that will be unfamiliar to most people. These may include:

  • 1099-OID
  • 1099-B (Recoveries for Charge-offs)
  • 1099-B (Folio secondary market)
  • 1099-MISC

If you file your income taxes yourself, it is not impossible to figure out but it will take some extra research and effort. Here is my Prosper tax guide that offers some guidance. If you pay a tax professional, they may charge extra for the added complication.

For the most part, the interest you receive will be taxed as ordinary income, the same rate as interest from bank savings accounts. This can be quite high depending on your income, so you may want to consider holding your Prosper notes inside a tax-sheltered IRA. Looking back, I wish I put my Prosper notes inside an IRA.

Detail #5. Automatic investing. The days of hand-picking loans are pretty much over. I recommend using the Quick Invest feature that Prosper offers in order to automatically filter through and buy the notes that fit your criteria. Loan supply is often limited, and this way you can actually get those loans before someone else buys them.

You can let Prosper pick the loans for you, or you can spend your time looking for “better” filters. There are some free tools out there that help sift through the past performance data. There are even paid services out there that do this for you, but I am uncertain how the cost/benefit would shake out.

Detail #6. Past performance vs. future possibilities. Although past returns are great, another economic recession may have a severe impact on your future loan returns. In the end, these are unsecured loans like credit card debt. If people lose their jobs, they will stop paying. Just because nobody has lost money in the past with 100+ loans, that doesn’t guarantee that you won’t lose money in the future. Unlikely does not mean impossible.

Traditionally, high-quality bonds are a diversifier to stocks. But Prosper notes are more like low-quality bonds. If the economy tanks, defaults will rise and your returns will drop. But if the economy tanks, your stocks will drop too. Are you ready for both to suffer significant drops during times of financial stress?

Detail #7. What if Prosper goes bankrupt? As a company, Prosper Marketplace Inc. (PMI) has historically had a hard time actually making a steady profit themselves. In 2013, Prosper started structuring their notes so that they are held in a new legal entity called Prosper Funding LLC (PFL). This remote entity is designed to stand alone and be protected from any creditor claims in the event that Prosper Marketplace, Inc. goes bankrupt. PFL can keep on running and servicing loans. This is a good move in my opinion, but it is still unknown how well this legal strategy will work, or if future lawsuits can put the assets of PFL at risk.

In other words, don’t put all your eggs in one basket. Due to #6 and #7, Prosper notes should only be a portion of your fixed income assets.

Summary. P2P loans are becoming a legitimate asset class, gathering billions of dollars from Wall Street and other institutional investors. Interest rates remain low, and thus the high yields and competitive past returns from these Prosper notes are still very attractive. Let’s face it, even a tempered expectation of 8% net annual return is hard to ignore! But before you make the jump, make sure you fully understand the risks and how to best mitigate them.

  • Understand that your final returns will be significantly less than your starting yield. Look at historical numbers for guidance.
  • Don’t invest money you will need before the loan ends (3-5 years).
  • Diversify across as many loans a possible (100+ notes).
  • P2P notes should only be a portion of your fixed income assets.
  • Expect to spend extra time to acquire notes and prepare taxes.
  • Consider holding notes inside a tax-sheltered IRA.

I hope that this information helps you decide whether investing in Prosper loans is right for you.

Realty Mogul Review: Fractional Investment Property Ownership, Hard Money Lending


Added bonus for new sign-ups. I’ve been a registered member of RealtyMogul for a while, and they recently emailed me that if I referred a friend, we’d both get a $150 Amazon gift card just for completing the registration process (i.e. zero investment required). Here is a screenshot. The restriction is that you must be an accredited investor, which means either a single income of $200,000, joint income of $300,000, or net worth of $1 million excluding primary residence. I’ve registered at a few of these sites, and you may need to send in a scanned W-2 (was allowed to remove SSN) or brokerage statements for verification.

This is a nice carrot if you are already interested in hard money lending or fractional real estate ownership. You must either use this special sign-up link or use the promo code JONATHANP7 during registration. Offer expires 12/31/15.

*The referrer and the referred will each receive a $150 gift card (redeemable at upon successful completion of the investor registration process at by the referred party. Gift cards will be mailed within 30 business days to the address on file. This promotion is limited to 6 referrals per referral code and is only valid until December 31, 2015.

Original post from mid-2013 below:

Realty Mogul is a new “crowdfunding” start-up that lets you invest in residential investment property for as little as $5,000. You either take a partial ownership position in a property, or you become a lender to (experienced) house flippers. The new thing here is that you can do it completely online with a few mouse clicks (no mortgage brokers, real estate agents, or tenants) and again that low minimum $5,000 investment. (Thanks to reader Johnson for the tip.)

Taking an equity ownership position means that you own a little slice of a single-family home or multi-unit complex while a professional does the buying, fixing up, renting out, and eventual selling. Realty Mogul only has done one deal like this so far (fully funded) and the intended timeframe is 5-7 years. You earn rent while the house hopefully appreciates in value, and cash out when the house sells.

Being a lender looks very similar to the age-old practice of hard money lending, just with smaller chunks. You lend the money to a house flipper who needs a short-term loan (3 months to a year) and doesn’t want to deal with traditional mortgage lenders and their closing costs and long underwriting delays. The loan is backed by a personal guarantee (not too special, you can try to sue and/or hurt their credit score) and more importantly you usually have a first position lien on the property (if they don’t pay, the lender gets the title to the house). Most of the previously funded loans have an annualized interest rate of 8%.


Realty Mogul states that they differentiate themselves from other similar startups like FundRise and Prodigy Network by (1) outsourcing the real estate expertise to vetted professionals and (2) keeping a focus on cashflow, either via rent or interest payments. Right now they’ve only had about 7 investments, but they seem to open a new one up after the last one fully funds.

Currently, the SEC limits this type of investment to accredited investors, which means either a single income of $200,000, joint income of $300,000, or net worth of $1 million excluding primary residence. When I tried the application, the only screening process was to check a few boxes and state that you qualify. Supposedly, the recently passed JOBS Act will allow them to drop this requirement later this year.

If given the option, should I drop $5,000 into this to try it out just like with person-to-person lending? $5,000 is still a lot of money to put into an investment where you are not able to do much due diligence. Getting good returns on a single investment project is all about the skill of that particular rehab team. Will the teams that sign up for capital via Realty Mogul always be the good ones, or those that are having a hard time getting funding from elsewhere? I thought that hard money lending rates were more in the 10%+ range; I don’t know if I’d be happy with 8% but maybe that’s the going rate now. Even if you have collateral, recouping your principal in case of a bad loan can get complicated and time-consuming. At least with P2P lending I can spread $5k over 200 different loans such that even though I am certain to get some defaults, it is unlikely I will get a negative return overall.

More: TechCrunch, LendAcademy, BizJournals, The Verge

My Financial Account Tidying Up Checklist

kondoI suppose it’s not a good sign that in the middle of reading a #1 NYT bestselling book on organizing your stuff… you lose the book in all your stuff. In case you haven’t heard of it yet, The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing by Marie Kondo. In my defense, it is a rather small book. I hope I don’t have to buy another one.

Instead of spending more time looking for it, I decided to make a list of all my financial items that could use some decluttering. As someone who loves to try out new financial products, I tend to accumulate accounts in during bouts of enthusiasm. Part of the “Kondo-ing” process is going through things by categories (i.e. clothing) and not moving onto another category until you’re done. Most importantly, you should only keep things that “bring you joy”. Hmm… how about “bring me profit”?

Bank accounts

  • Close out inactive bank accounts which are unlikely to offer good interest rates or other benefits in the future.
  • Re-examine all automated transfers (direct deposit, 401k contributions, 529 contributions, auto billpay, etc).

Investment accounts

  • Close out idle brokerage accounts.
  • Merge all speculative activity into one brokerage account.
  • Consider liquidating all positions smaller than a certain size.
  • Merge smaller 529 plan accounts and/or change beneficiaries.
  • Check up on LendingClub and Prosper P2P lending accounts. These should be nearly wound down.
  • Check up on Patch of Land crowdfunded hard money lending account.

Credit card accounts

  • Close out accounts which will not justify the annual fee based on my planned activities for the next year. Decide ahead of time which ones to keep if they offer to waive the annual fee for another year.
  • Mark on calendar any special perks or benefits which still need to be used.

Gift cards

  • Redeem Visa/Mastercard/AmEx prepaid cards into Amazon gift card credit.
  • Think of ways to use up retail gift cards; add to calendar to be finished next two weeks.
  • Decide what to do with unused retail gift card. Sell at loss? Wait until year-end 2015 and use for gifts?

Not-going-to-do list

  • I still haven’t gone paperless and have no immediate plans to do so, but I already have a pretty good system for organizing my paper statements.
  • The same system already has me examining all expenses on a monthly basis.
  • I’m happy with my core investment portfolio. Relatively clean and simple.
  • I don’t have any old 401k or IRA balances floating around. We have an active 401(k) at Schwab PCRA, Solo 401(k) at Fidelity, and IRAs at Vanguard.
  • I’m happy with our core monthly cashflow setup. We combine finances and have one joint checking account where we deposit a set amount each month and pay all bills from that account. We make additional transfers if we have larger one-time expenses like a new roof or something.

I’ll try to update as I work through this list.

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.

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.

Reader Story: Early Retirement by Age 40 with Income-Focused Portfolio

The following is a guest post contributed by reader Bob, who started getting serious about financial freedom about 10 years ago and plans to reach early retirement next year at age 40. Thanks Bob for candidly sharing about your personal experiences and income-oriented portfolio.

monodiv_220I started following Jonathan’s blog about five years ago because I shared the same interest in personal finance and the goal of early retirement. I’ve made a lot of investing mistakes over the years, but with my 40th birthday coming up later this month I thought I’d share my approach which had the primary goal of income generation and capital preservation.

My initial goal was to cover my fixed expenses each month (housing, transportation, utilities, etc) from investment income. Once I had covered my fixed costs I expanded the goal to full income substitution for an extended period of unemployment (24 months), and later to full income substitution for 10-15 years. I’d like to say I was focused on a fixed target, but as with everything targets changed based on circumstances.

I started focusing on saving in the summer of 2005. I had graduated with an MBA and took a position at an Investment Bank in New York. I completed my MBA at the University of Texas at Austin largely because the tuition was low and I could graduate debt free. Looking back, this decision turned out be a very good one as I was able to secure a high paying job while investing relatively little in my education. In my view, maximizing revenue and minimizing costs is what personal finance is all about. However in life’s little ironies, I ended up paying through the nose for my wife’s graduate degree at UT in 2013-2014 but at this point we are far more capable of supporting this investment.

One thing I learned early on was that I did not want to be working in investment banking beyond ten years. The job takes a lot out of you and while the money is good and you learn a lot, it can be a very volatile business. Given the volatility in the markets and our annual bonus I decided I’d invest largely in fixed income and as a single guy in New York it made sense to look at tax-free munis. I don’t pretend that I had the foresight into the real-estate and financial crisis of 2008-2009 but I did witness a lot of risk taking and leverage deployed in the pursuit of returns.

I will not go into all details of my portfolio rather I’ll just go over the highlights.

$800,000 in taxable accounts which generate about 6.5% yield through investments in closed-end funds, utilities, and REITs. The vast majority is in muni bond funds as I’d prefer tax free income but qualified dividends also enjoy a lower tax rate. REIT income offers no tax advantage but I hold them as until recently we always rented our home. There is obviously a high degree of interest rate risk in my portfolio, but given I have deployed leverage in other part of my portfolio I’m comfortable with it. Overall I think taxes will go higher and so I’d much prefer munis to treasuries. I also hedge my bond holding by selling naked puts on the TBT (leveraged short treasury ETF). This has the positive impact of boosting my cash returns and hedging my long bond position.

$100,000 in LendingClub which generates a 7-8% return inclusive of defaults. I was hoping for a returns closer to 9% but given the institutional money chasing loans and tepid demand for loans it is not a surprise returns are lower than expected. Hopefully LendingClub does not relax underwriting standards in pursuit of loan growth. I still like this asset as the loans are short-term, payments include interest and principle, and you can invest as little as $25 at a time but I’ll moderate my contributions in the future.

$200,000 in direct real-estate investments through RealtyMogul and Fundrise. I only started investing nine months ago, but I have aggressively added to this asset class. I get geographic diversification across the country and by assets class (residential, commercial, debt, equity) and you essentially cut out the fees paid to fund managers and REITs so I see this as a win-win. It is still too early to estimate returns, but I’m hoping to generate 7.5% on a cash on cash basis and any capital appreciation would be a bonus. Most of the investment promise IRR’s north of 10% so I think the 7.5% is reasonable. I also think this asset class will prove to be better than LendingClub given these are secured investments and debt financing is cheap. On the downside there is zero liquidity, lead times are very long, and the minimum investments are very high.

Overall I’m generating about $6200/month in tax advantaged income and my goal is to eventually get this up to $7000. My savings suffered over the last 12 month as we incurred costs for my wife’s graduate degree, we relocated from Berkeley, CA to Austin, TX and we purchased our first house. I feel confident in ramping up savings over the next months and hitting full income substation before my 41st birthday next year.
I’m sure other will ask how I intend to offset the impact of inflation I also have $500K in tax deferred retirement (IRA, 401K) accounts but these are broadly diversified across domestics and international index funds so not much to say. I think continuing to invest in tax deferred accounts along with real estate investments will help offset the impact of inflation.

If you have constructive questions or feedback, please leave them in the comments. Please remember to be respectful! If you’d like to share your own story, please contact me.

Is P2P Lending So Successful That It Doesn’t Need You Anymore?

lcvsprBeing a peer-to-peer lender been a bumpy ride. Prosper Marketplace was first, but if you were an early investor/lender you’d have been lucky to have gotten back what you put in as most people had negative returns. Then came LendingClub with stricter credit standards and preset interest rates. Both companies operate with similar structures now and appear to have created a viable business model. In fact, LendingClub is planning an IPO with their last funding valuation at $3.8 billion. That’s pretty rosy considering they made just $7 million of profit in 2013, their first year of profitability in 7 years.

I’m not a big lender but I have invested over $15,000 of my own money into P2P loans. In the beginning, I would read every single loan listing as it usually included a story about what the borrower was going to do with the money (pay down debt, start a new business, buy a 200 sf tiny house). After a while, I started using automated software to match with loans, but it still felt like individuals lending money to other individuals. Today, a significant portion of loans are sold to institutional investors like hedge funds, pension funds, and even banks according to the New York Times article “Loans That Avoid Banks? Maybe Not“:

At Prosper, which has been courting institutional lenders over the past year, more than 80 percent of the loans issued in March went to those firms. More than a dozen investment funds have been formed with the sole purpose of investing in peer-to-peer loans. […] Santander Consumer USA, the United States arm of the Spanish bank, has an agreement to buy up to 25 percent of Lending Club’s loans.

I spoke to a LendingClub representative, and they stated that their investor base is currently “about 1/3 direct retail investors, 1/3 high-net-worth investors, and 1/3 institutional investors.”

Here’s a thought experiment: If somebody like Chase Bank goes to a P2P lender and buys a bunch of unsecured loans made to individuals, is that really much different than that same person just carrying a balance on a Chase credit card?

It used to be individuals who took the risk of lending and reaped any rewards of higher interest. The P2P company just cares about volume as it takes a fee from every loan. But if that volume comes from big financial firms that want first dibs, does that mean the individual investors will only get left with the scraps?

The loans not taken by these sophisticated investors go back to a fractional lending pool that is open to both individual investors and institutions. That doesn’t sit well with some. “The institutional investors are snapping up all the worthwhile loans,” one investor wrote on Prosper’s blog, echoing many comments. […] “By cherry-picking, almost by definition what they leave behind is not as good,” says Giles Andrews, founder and chief executive of Zopa, a British peer-to-peer lender that so far has dealt only with individual lenders.

Perhaps the best sign that P2P lending sites have become a legitimately good investment is that Wall Street and other professional investors are now crowding us out?