Dec 232019
 

Learning from my past mistakes

As a peer to peer investor, when no one else is around I would find myself a loan. 😀

I’ve been investing with Lending Loop (LL) for over 3 years now. My first year in 2017 ended with a 10% return net of expenses. Then last year I made 11%. But in the meantime I was accumulating an unhealthy amount of delinquent loans in my portfolio. This hidden risk was not good.

So at the start of 2019 I decided to adopt a more strategic approach to choosing loans. I came up with the 10 Rules for Choosing Better Loans, which you can find here. New defaults have been in decline since I started using this more selective method. 🙂

In today’s post I’ll dive into my portfolio’s 2019 performance and explain my plans moving forward with this platform, including withdrawing my money.

LL as a platform has come a long way over the years. It hit a major milestone in 2017 when it helped fund over $10 million in total loans. By the summer of 2018 it had surpassed $20 million. And by the end of this year, over $60 million. Tighter lending restriction at traditional banks is pushing businesses to find alternative lending sources.

But with Canadian delinquencies on the rise, and higher expected inflation in 2020, it remains to be seen how LL lenders will do in the foreseeable future. There are also internal issues with the platform which I’ve blogged about in the past that have not been fixed.

In today’s post I’ll be going over the following:

  • Breakdown of my 2019 return.
  • My increasing number of loans in default.
  • Recent changes to the platform.
  • What I liked and didn’t like.
  • My plans for Lending Loop in 2020.

For a general overview of how Lending Loop works, its pros and cons, and whether it’s right for you, please see my original review.

Liquid’s 2019 Portfolio Performance 

Assuming all the scheduled payments over the next week are made on time, I will earn a total of $4,135 of interest in 2019. Luckily there were no loans written off this year.

2019 Earnings

  • Interest earned   $4,135
  • Servicing fees       -$443
  • Bonuses                    $87
  • —————————-
  • Net earnings    $3,779

Altogether my income for 2019 is $3,779 net of fees. By comparison last year I earned $3,369 net. So things are going in the right direction.

I began 2019 with $33,563 in my account. By the end of the year I’ll have $37,205. So my annual return is 11%. 🙂 Not too shabby. Despite using a more conservative approach choosing loans this year, the return ended up being about the same as in 2018. The new companies I’ve been lending to appear to be more diligent paying on time. 🙂 Here’s a snapshot of my current dashboard.

And here is my total earnings summary.

I’ve contributed a total of $28,000 into this platform, and it has made me over $9,100 of profit so far. 🙂 In the graph below, the difference between the purple and grey lines is my net earnings. It’s really satisfying to see a portfolio growing by itself. 😀

On the surface everything looks pretty rosy. But the devils are in the details. Behind the headline 11% annual return hides a slough of bad loans. Since there is no secondary market for Lending Loop loans, investors are often left holding toxic debt that are still marked at their original value, but are actually worth much less.

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Jan 152018
 

How to Prepare for Higher Borrowing Costs

My debt to income ratio is about 500% while the national average is around 173%. Readers sometimes email me and ask what I will do when interest rates rise. My answer is simple.

I tell them I will pay down my debts in an accelerated manner prioritizing the highest interest loan first. I will limit my monthly interest expense to no more than $1,500. Doing this will adequately protect myself from interest rate risk. Sounds like a solid plan, right? 😉

But I know not everyone will agree. :/ Back in 2014 I noticed some people were concerned that I had taken on excessive risk because my debt level was too high. This sentiment echoed around various internet forums. Here are some examples I’ve saved.

The last commentator wanted to know how I’m doing now. That’s what I’ll be discussing in today’s post. 🙂

But first, here’s a look at my debt summary in 2014. The numbers are taken from my net worth update 4 yrs ago.

Liquid’s 2014 Debts Balance Interest Rate Annual Interest Cost
Mortgage$200,0002.95%$5,900
Farmloans$208,3003.40%$7,082
Margin Loans$52,9004.25%$2,248
HELOC$17,9003.60%$644
TD Line of Credit$33,7005.25%$1,769
CIBC Line of Credit$14,0004.50%$630
RRSP Loan$5,0004.00%$200
Total Debt Balance$531,800  
Average Weighted Interest Rate 3.47% 
Total Cost of Debts$18,474

 

Back then I had nearly $532K of debt, charging me an average interest rate of 3.47% per year.

I was paying $1,540 per month in interest. But I was cash flow positive and saving about $1,000 per month. I felt like I had everything under control. So I didn’t understand why people claimed I was overly leveraged. I thought maybe I was missing something. But as Bobby McFerrin would say, “don’t worry, be happy.” 😀 So that’s what I did.

And here’s what my debt looks like today, 4 years later. 🙂

Liquid’s 2018 DebtsBalance Interest Rate Annual Interest Cost
Mortgage$180,3002.80%$5,048
Farmloans$185,3004.30%$7,968
Margin Loans$57,0002.40%$1,368
HELOC$14,9003.70%$551
TD Line of Credit$5,0005.45%$273
CIBC Line of Credit$17,5005.00%$875
Total Debt Balance$459,000  
Average Weighted Interest Rate 3.49% 
Total Cost of Debts$16,083

 

So my debt costs me $16,083/yr or $1,340 per month right now. This is actually $200 per month lower than in 2014, despite interest rates being higher today.

Yay. Bobby was right. There was no need to be worried. 😀

Nearly every asset class I hold long positions in has produced decent returns since 2014. Had I not borrowed and used other people’s money to invest I would have missed out on all the investment gains.

 

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Jul 292014
 

[Edit] The following post was written in July 2014. I’ve posted an update in October about my purchased Sherritt Bonds. It’s not doing so well. [/edit]

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Investing in High Yield Bonds

Last year I blogged about wanting to invest in bonds as one of my goals because I’ve heard smart people invest in stocks, but smarter people invest in bonds 😉 Then earlier this month I wrote about taking out a loan and have dedicated some money to buy bonds with.

Well I have finally taken the plunge into bonds. Yesterday morning I purchased $5,000 face value of the Sherritt International Corporation 8% bonds, maturing on Nov 15, 2018, for the price of $104.475. I will explain the jargon in a moment, but essentially what this means is I have made an investment of roughly $5,200. And by the end of 2018 that investment will turn into $6,800. That represents a 6.8% annual return 😀 It’s not the best investment ever, but it sure beats the low returns on 5-year CDs and GICs.

14-07-sherritt-bond1

Bonds are generally safer investments than stocks because if a business goes bankrupt bond holders have priority over shareholders 😛 muahaha. I’m not 100% sure on this so maybe Chuck the bond trader can weigh in, but I assume this means my 6.8% bond return is pretty much guaranteed as long as Sherritt stays in business until my bonds mature. Considering how the company’s stock is part of the S&P/TSX Composite index and it hasn’t missed a quarterly dividend payment in almost a decade, I think my 6.8% return is pretty safe 🙂

I will discuss three topics in today’s post: Why I’ve decided to buy these bonds. How to buy bonds. And what are the risks and expected returns of my new bonds.

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Feb 082014
 

A dedicated reader recently emailed me about how I’ve managed to reach my financial position today without making a large income. So I thought I’d reveal one of my best kept secrets to becoming rich: Taking money from the government 😉

I’ve blogged about my various income streams in the past, but there is one income source that I have never talked about, until now. This income provides me with thousands of dollars every year! (゜o゜) It’s undeclared income so I pay no taxes on it, which is perfectly legal 😀 It’s also not disclosed in the list of incomes on my take home pay vs expenses graph because it’s not technically a legitimate income 😕 But it is 100% passive, and gets automagically deposited into my bank account 🙂

In many countries like Canada and the U.S., the interest we pay on loans for investment purposes is tax deductible, as long as the investment is expected to produce an income, like with dividend paying stocks or rental properties. So if we pay $1,000 of interest this year on an investment loan, and our marginal tax bracket is 30% (like mine is,) then the tax man will give us back $300.

14-02-taxcat, tax deductible interest, passive income

Here’s a look at all my tax deductible debts taken from my latest net worth update 🙂 I’ve left out my mortgage and RRSP loan because those do not qualify for interest tax deductions.

  • Farm Loans: $208,300 @ 3.89% annual interest rate = $8,100 of interest /yr
  • Margin Loan CDN: $27,900 @ 4.25% = $1,200 interest /yr
  • Margin Loan US: $25,000 @ 4.50% = $1,200 (converted to $CAD)
  • TD Line of Credit: $33,700 @5.25% = $1,800
  • CIBC Line of Credit: $14,000 @ 5.5% = $700
  • HELOC: $17,900 @ 3.5%= $600
  • Total Tax Deductible Interest = $13,600

So after paying $13,600 of tax deductible interest this year I’ll be getting 30% of that, or roughly $4,000, back from the government 😀 This refund has zero risk since I’m guaranteed to receive the $4K regardless of my investment’s performance. Thank goodness I have debt 😀 Otherwise I wouldn’t be getting any of this money 😉

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Mar 212013
 

The term on my mortgage is up for renewal in a couple of months. I have to decide between fixed or variable. The good news is that interest rates are lower today than when I bought my condo almost 4 years ago so no matter what I choose my monthly payments should become lower. My strategy is to try and prolong the life of my mortgage for as long as I can or until interest rates are much higher. I believe making extra payments to a mortgage in a low interest environment likely won’t be as financially beneficial as putting that extra money to work in a diverse investment portfolio instead.

13_03_ratesprices

Part of the reason why real estate prices are higher today than several years ago is because we had higher interest rates back then. When I bought my condo in 2009 a 5 year fixed rate was about 4%. But today the same mortgage can be found for 3%. Manulife even played around with a 2.89% 5 year fixed recently but decided to cut the promotion short. My current interest rate is 3.4%. If I can lower my rate to 3% when I renew then I would be saving around $70 a month. Enough to buy almost 30 ounces of silver a year 🙂 I just have to shop around for a good mortgage rate. Some people aren’t aware but banks and mortgage brokers aren’t the only places to find a lender for real estate. As mentioned earlier insurance firms like Manulife and Great West Life offer mortgage products to their clients too.  Home buyers can also go through a mutual bank service such as the Heritage Home Loan, or even a private mortgage broker who deals directly with investors looking to lend people money for interest income 🙂

How does interest rates affect home prices? When interest rates are low it doesn’t cost as much to borrow so people can afford to take on larger mortgages. This drives real estate prices higher because everyone can afford to take on more debt. When rates increase however, the opposite is true and house prices fall to match the demand of the buyers ability to finance them. For example Vancouver is well known for our million dollar bungalows (one story houses.) That’s because on a $800,000 mortgage amortized for 25 years at today’s low rate of just 3% the monthly mortgage payment is about $3,800. Seems kind of expensive, but I bet there are thousands of couples in the greater Vancouver area who can easily afford that. It’s basically $1,900 per person, so not ridiculously unaffordable yet. But if the mortgage rate was at 7%, like in the US before the housing bubble deflated, then the monthly payment would be $7000 a month on a $800,000 mortgage. Since there are less people in the market of paying $7000 a month on housing the market automatically adjusts and prices drop overall :0)