Sunday, February 03, 2013

Screen Shot Reflecting Performance of my LendingClub Peer-2-Peer Lending Account and General Attributes to Lending Success

I have been lending at this site since late 2008.  My year-over-year statistics include:

  Balance Jan 1st Balance Dec 31st Account APY Notes Sold
2009 $125.72 $1,516.71 7.70% 4
2010 $1,516.71 $2,729.71 9.49% 16
2011 $2,729.71 $5,964.22 10.98% 41
2012 $5,964.22 $9,044.87 11.45% 172

You may wonder why there is a large difference between what LendingClub advertises as "Net Annualized Return" and my self calculated account APY.  I believe the principal reason for difference between these two is that LendingClub's calculations do not factor in FolioFn fees and loan losses incurred when selling loans at FolioFn.

I attribute my success at LendingClub to:

1.  Multiple years of lending at Prosper before opening my LendingClub account.  I lent about $5500 over several preceding years at Prosper and had a net loss of $50.  Over my time at Prosper, I learned a few lessons about risk-return.  I no longer use Prosper.

2.  Over 90% of loans originated are to borrowers whose projected revolving debt balance (after loan) is no more than three times their income.  This requires one to trust the marketed loan purpose at face value... (e.g. debt consolidation loans end up being used 100% for debt consolidation).

3.  Most of my loans are to borrowers reporting over $3000 per month for income.  I feel that the these borrowers have a greater latitude for paying basic living expenses and then having room in their budget for debt payback.

4.  I have ALWAYS sold non-performing notes.  Over 90% of the time, I sold notes that were no more than 15 days late in payment.  Most of the time between 2009 and Nov 2012, I sold notes in the hours between the time I discovered their monthly payment was was late and the time at which the note changed to an "in grace period" status.

5.  In November 2012, I noticed that the FolioFn trading platform was performing poorly and not displaying notes very well when users attempt to sort notes by Yield to Maturity.  Because of this, a number of my notes "in grace period" did not sell very well.  While I experienced some short term disgust with the FolioFn platform, it did prompt me to start selling notes well prior to them entering "in grace period" status.  Now, a majority of the notes I sell are those notes that have had a greater than a 35 point credit score drop since the loan was originated.  I typically sell these notes for around 0.99 to 0.995 cents on the dollar and eat the additional 1% FolioFn fee.  I would rather sell loans prior to a delinquency than have them age to an "in grace period" status and have to deal with the inadequacies of the FolioFn note trading platform.  If FolioFn is acting up (as it has in the past), it could cause notes that would normally sell to age and result in delinquency statuses of 17+ or 31+ days.  Notes that age to delinquency statuses of 17+ and 31+ days have required me to discount them 25-75% in order to get them sold.

Monday, January 21, 2013

Is My Retirement Goal Attainable? Under Current Assumptions, We Fall Short Unless We Invest More in LendingClub Peer-to-Peer Notes.

The banner on my website clearly states a goal of mine to retire in 2025 with passive income in the amount of $125k per year.  Since 2004, this goal has shifted from retiring at 47 years of age to 51 years old.  I made this shift on my banner around 2010.  My earlier aggressive goal was likely based on a confidence in the real estate market in 2004.  That confidence in real estate remains, but now to a smaller extent.

To retire at 51 years of age, I assume that I serve 29 yrs in the military and retire as an O6.  This is a big assumption in that this would require a promotion from O5 and my wife to tolerate another 12 and a half years of my service.  I believe the is not that much of a stretch since we are getting to the point where she will homestead and most of my follow on assignments are likely possible in the DC beltway (where wife wants to homestead until I retire).

Assuming I make it to 29 yrs of service and retire as an O6, I should net $64,109 per year after taxes and survivor benefit premium payments.

The wife is civil service and if she homesteads after our next assignment and stays in her current line of work, we're looking at an additional $7,023 per year for her pension after taxes and survivor benefit premium.

We have three investment properties now, two of which are paid off and another one that will be paid off within the next 20 months.  In 20 months, these properties will be bringing in a net of $15,463 a year after taxes, insurance, maintenance and management fees.

Totaling these three items gives us a net of $86,595

$64,109     29 yr military pension
 $7,023      17 yr civil service pension
$15,463     Investment Property Income
$86,595     Projected Net Income in Retirement

Now, this leaves a passive income shortfall of $38,405.

A retirement at 51 yrs of age does not permit including distributions from 401Ks and IRAs.  We do not save a lot into these investment vehicles because we have been focusing on paying off real estate and generating free cash flow.  At the age of 51, we should have about $290k or more in these retirement investment vehicles assuming a conservative 4% annual return rate.  

Now, what other assumptions are we making and where do we think we'll end up in meeting our goal of $125k in passive income?

We are saving $600/month in our dividend reinvestment plans.  Assuming a 8.4% annual return, we are projected to accrue $233,387.  Assuming our current portfolio dividend rate of 2.6% remains the same, this would bring in about $5,158 per year after taxes.

We are also projected to invest $4k this year and $2k in each subsequent year in LendingClub peer-2-peer notes.  Over the past four years, we have netted a 45.85% return before taxes at LendingClub.  In our first year, we netted 7.7%.  In 2012, we netted 10.98%.  Assuming an optimistic 12% annual return, we should end up with about $103,637 in this account.  In 2025, this should give us about $8,208 per year after taxes.

Between our dividend reinvestment plans and LendingClub, our projected net income in retirement grows to:

$86,595     Income from Pensions and Investment Property
 $5,158      Dividend Reinvestment Plan Income
 $8,208      LendingClub Note Income
$99,961     Projected Net Income from Pensions, Investment Property, DRIPs and LendingClub

This leaves a shortfall of $25,039 per year.  We project that we'll have the ability to accrue an additional $529,227 in savings by May 2025.  Assuming we spend $400k on a condo in Northern Virginia and later convert it to an investment property, this should net us about $12k per year in income after management, home ownership association fees and taxes.

$99,961     Projected Net Income from Pensions, Existing Rental Property, DRIPs and LendingClub
$12,000     Income from additional investment property

This leaves about $129,227 left over in accrued cash that can be invested.  Looking at three different courses of action:

1.) Investing in stocks at 2.6% brings our retirement income to:  $114,817

2.) Investing in real estate at 6% rental yield (current yield on our three properties) brings our retirement income to:  $117,544

3.) Investing in more LendingClub notes at 11% note yield brings our retirement income to:  $122,195

If we retire in May 2025, we will fall short of our goal, somewhere between $2,800 to $10,813 per year.

How will we make up this goal?  

If we execute course of action #3 and work an additional four months investing those earnings in additional LendingClub notes, we could meet our goal and retire in September 2025.

If we execute course of action #1, it would take an additional three years of work to accrue a 2.6% dividend paying portfolio large enough to fill the income gap.  I'm only assured an additional year of service since O6s are required to retire at 30 years of service.

If we execute course of action #2, we could likely attain our goal but it would require us to retire one year later in 2026 and roll all subsequent earnings into a combination of LendingClub notes and stocks. 

Thursday, October 25, 2012

Lending Club Peer to Peer Lending Account Performance

I have been on Lending Club since Dec 2008.

Since 2008, I have had the following net account performance (after loan sales and transaction fees):

2009:  7.7% return.  One month with a losing record.
2010:  9.5% return.  Zero months with a loss.
2011:  11.0% return.  Zero months with a loss.
2012 thru 30 Sep:  9.6% return.  Zero months with a loss.

I personally believe that I have not lost money in Lending Club because I do not hold loans until default.  Instead, I sell the loans at a discount in the first two weeks of loan delinquencies.

Monday, February 20, 2012

What is My Military Pension Worth? Posting Also Useful to Potential Civil Service Pensioners or Others Trying to Monetize Passive Income Stream(s)

Many of you may want to know what your civil service or military pension is worth today. Some may even want to try and monetize other passive income streams. Determining the value of a pension or other income stream is either a two step or one step process. It's one step if you're in (or near) day one of retirement or just established a passive income stream. It's a two step problem if you still have a number of years to work.

Well, I want to know what my military pension would be worth today if I enjoyed a successful career and retired as a Captain / Colonel after 30 yrs of military service. This situation would give me $7763 / month which would be 75% of my base pay (ref: 2012 pay table, O-6 over 26yrs).

Here’s two methods to determine the value of my pension (Method #1 using a basic calculator, Method #2 using a finance calculator).

Assuming a personal discount rate / IRR of 0.3% per month (equal to 3.66% APY) and a life expectancy of 30 years (360 months) past my retirement date.

1. Using a simple calculator with an exponential “^” function (minimum requirement)

(a) First find the present value of an "immediate annuity." Using the formula

PV immediate annuity = [ 1 – (1 + R)^-n] (P/R)
R = interest rate in decimal form
P = payment
N = number of periods

Filling in numbers you get:

PV immediate annuity = [ 1 – (1 + 0.003)^-360] (7763/0.003)
PV immediate annuity = [ 1 – 0.3401] (2,587,667)
PV immediate annuity = $1,707,601

This is the present value of the stream of pension payments the day I retire. This equation alone may suffice if you're at retirement or very close to retirement age.

However, I have 14 more years to work till retirement. To get the Present Value today, you have to discount the value determined above ($1,707,601) over the time I have left till retirement (14 yrs or N = 168 periods).

Present Value With Zero Payments Formula:

PV = FV (1+R)^-N
PV = $1,707,601 * (1+.003)^-168
PV = $1,707,601 * 0.6046
PV = $1,032,356

$1,032,356 is what my retirement is worth to me today assuming a discount rate of 0.3% per month or 3.66% APY.

2. Using a financial calculator like a Texas Instruments BAII, you get a two step problem.

Step 1:

a) Assuming a 3.66% discount rate (~ 0.3%/month)
b) Assuming 30yr life expectancy once I hit retirement

N = 360 months
I/Y = 0.3%/month
PV = $0
PMT = $7763/month
FV = ?

Plugging into a financial calculator, you get a future value of $5,019,873. Now working backwards in step 2:

N= 528 (360 months for length of retirement + 168 months left till I retire)
I/Y = 0.3%/month
PV = ?
PMT = $0/month
FV = $5,019,873

Solving for PV you get $1,032,286

The difference between the financial calculator method and the basic calculator method is simply due to round-off error. The biggest determinant in figuring the present value of any stream of income is what interest rate you use for your "discount rate." Your present value (PV) will be smaller if you use a discount rate higher than 3.66% APY or 0.3% per month. I figured that 0.3% per month is reasonable and close to what one can get on medium to long term bonds.

Keywords / phrases: how much is an annuity worth

Sunday, February 19, 2012

My Net Annual Return on Lending Club Account Up from 9.5% in 2010 to 11.0% in 2011

I have been originating (peer-2-peer) loans at Lending Club since Dec 2008. Since starting, I have issued 371 loans, of which:

56 loans fully paid off
0 loans late, default or charged off

In 2009, I made a net 7.7% return on my investment (after fees and note sales). During 2009, I only had one losing month where I had a monthly annualized return of negative 5.24%.

In 2010, I made a net 9.5%. My worst month had a monthly annualized return of 0.89%.

In 2011, I made a net 11.0%. My worst month had a monthly annualized return of

Lending Club says my account has a net annualized return of 13.87% and total interest earned of $905.74. Each of these are way off my actual return. My net earnings are actually some $200.65 less than what Lending Club advertises. The problem with Lending Club is that it doesn't fully factor in all fees and losses incurred in the sale of notes.

Overall, with exception to Lending Club not having "net earnings" and "net annual yield" displayed on its account dashboard, I am satisfied with Lending Club.

I attribute my greater success in 2011 to increasing my risk tolerance in notes that i'm willing to fund. Since 2009, I have been aggressive to sell notes before they hit 16 days late. By doing this, I book small monthly losses on some notes vice periodic large losses on defaults. Additionally, it is best to do small loans of
$25 since more people have funds available and are willing to risk buying small late loans. I will continue to execute this strategy and pursue lending club notes above 14%.

My note filter is:
Interest rate: Excludes A and B rated notes
Term: 36 and 60 month
Funding progress: 10% or more
Max loan amount: $25k
Exclude loans invested in: Yes
Max debt-to-income: 20%
Months since last delinquency: 12 months or more
Inquiries in the last 6 months: 3 max
Min length of employment: 1

In addition to this, I am reluctant to fund notes where the monthly income is less than 1/3 of total revolving credit balance. I exceed this sometimes when I believe that the individual is truly going to use the money for debt consolidation.

Friday, February 17, 2012

Spoiler: American Idol Top 24 Leaked (Audition Videos Included)

Non traditional post for this site, but i'm a fan of American Idol. This is supposedly the top 24 for American Idol 2012. I rank them based on their google search popularity. I have to agree. Of the performances shown by American Idol, Reed Grimm appears to be the clear front runner.

1. Reed Grimm

2. Phillip Phillips (scroll to 0:25)

3. Jessica Sanchez

4. Colton Dixon (scroll to 0:50)

5. Erika Van Pelt (scroll to 0:40)

6. Heejun Han (scroll to 1:00)

7. Shannon Magrane (scroll to 1:19)

8. Skylar Laine (scroll to 1:10)

9. Creighton Fraker (scroll to 39)

10. Adam Brock (scroll to 50)

11. Brielle Von Hugel
12. Elise Testone

13. Hallie Day (Ranked too low in my opinion; scroll to 2:22)

14. Baylie Brown (scroll to 0:49)

15. Jeremy Rosado

16. Eben Franckewitz (scroll to 1:00)

17. Hollie Cavanaugh
18. Jen Hirsh

19. Deandre Brackensick
20. Chase Likens

21. Joshua Ledet

22. Chelsea Sorell (unrelated video of her singing)

23. Aaron Sanders

24. Haley Johnsen

Thursday, December 01, 2011

CNBC Million Dollar Portfolio Challenge - Bonus Bucks

Bonus bucks answers for 12/2

1. According to Ilian Mihov, a professor of Economics at the INSEAD business school, Italy will have to refinance what percentage of its total debt in 2012.


2. What major government official told a news conference on Thursday that the United Kingdom is preparing itself for a wide range of European financial crises?

ANSWER: Bank of England Governor Mervyn King

3. According to a new report, how many days delinquent is the average housing loan in foreclosure?

Answer: 631 days