Aussie Firebug

Financial Independence Retire Early

Vanguard Diversified Index ETFs

Vanguard Diversified Index ETFs

*Nothing written below is financial advice. Always consult a professional when dealing with your finances

One ETF to rule them all?

OneETF

The majority of the Australian FIRE community roughly subscribes to one of the three combos when it comes to ETFs:

  1.  40% Oz shares (VAS or AFI) 60% international (VGS or equivalent)
    • Pros
      • Great exposure to the entire world with enough Australian shares to take advantage of franking credits
      • Don’t have to fill out a W-8BEN form every couple of years
      • Hedged against the Australian dollar
      • DRP option available
    • Cons
      • Highest management fees (0.164% assuming the above weightings) out of all the three options (more on this later).
      • Have to manually rebalance
  2. 40% Oz shares (VAS or AFI) 60% international (VTS+VEU)
    • Pros
      • Great exposure to the entire world with enough Australian shares to take advantage of franking credits
      • Low management fees (0.101% assuming the above weightings)
      • Greater diversification than the other two options
      • exposure to emerging markets
    • Cons
      • Extra admin to fill out W-8BEN form (less than one hour every few years)
      • DRP option only available for VAS, not VTS or VEU
      • Potential estate issues when you die for VTS and VEU units
      • Have to manually rebalance
  3.  100% Oz shares – Dividend focussed (VAS or AFI) (Thornhill approach)
    • Pros
      • Take full advantage of our unique franking credit systems in Australia
      • Dividends are less likely to be affected during a downturn
      • Hedged against the Australian dollar
      • Don’t have to fill out a W-8BEN form every couple of years
      • Low management fees (~0.14%)
    • Cons
      • Not diversified outside of Australia
      • Miss out on international market gains
      • Capital gains traditional low for this strategy
      • Home bias

All three strategies have their merits but they all require rebalancing with the exception of an all Australian ETF. The issue with that strategy is, of course, you don’t have much diversification as Australia is only roughly 2 percent of the world economy. And with how much private debt Australians have right now… if Australia went through a recession the all Australian portfolio would not fare well.

The point is that each one of these strategies is missing something and require manual intervention whether it be rebalancing, extra admin work or more diversification.

Wouldn’t it be good if there was an ETF that took care of all this for you?

 

Vanguard Diversified ETFs

 

Vanguard Diversified ETFs

So what are they exactly and what’s the difference between buying this ETF vs one of the three options mentions above?

To put it simply, any of the four diversified index ETFs above offer a complete one stop shop solution for anyone looking to invest.

They solve a few problems that our three options above had

  • Diversification – Exposure to over 10,000 securities—in just one ETF.
  • Auto Rebalancing
  • DRP option
  • Hedged against the Australian dollar*
  • It wasn’t listed above as a con, but all four diversified index ETFs are actively managed using Vanguard Capital Markets Model (VCMM)

The two big ones that stand out are of course the auto-rebalancing but also maybe surprisingly the active management component.

Rebalancing is not hard to do, but it’s something that if left unattended can most certainly affect the performance of your portfolio over the long term. As for the active management component. You may be wondering why there is any management at all? I thought Vanguard is all about minimal management to keep fees low and it’s really hard to beat the index anyway??? I’m not sure about this part beating the market either but I guess we will have to wait and see how it performs. It uses a modeling system called VCMM to simulate potential outcomes and pick the correct balance for your desired portfolio out of the four options above.

VCMM

*As pointed out by Chris in the comments. The diversified ETFs are not 100% hedged. Please check the PDS for each ETF to find the amount of hedging

Who Is This Suited For?

To be honest, it’s a bloody good product for 99% of people. What they are offering here is as close to the perfect ETF as I’ve ever seen given the management fees and what it offers.

The best thing about this ETF is how idiot proof it is. A completely n00b could buy one of the four diversified ETFs (depending on their investor profile) for the rest of their life and get respectable returns with minimal effort.

People avoid things that appear confusing and hard. That’s why robo investment companies like Acorns and Stockspot are in business. They essentially are providing what this ETF is providing at additional costs because they make investing super easy and friendly. With the other three options listed above, it can be daunting to explain to a complete n00b how to rebalance. As soon as they don’t understand something, the majority of the time they can get spooked and give up altogether.

That’s why this ETF is so special. You can confidently recommend this product to anyone and be sure that they can’t stuff it up or get confused.

  1. Set up a broker account
  2. Buy this ETF when you have the money to do so
  3. Turn on DRP if you want
  4. Do tax when it comes around
  5. Repeat forever

So if this ETF is suited for 99% of people, who is the 1%?

 

Why I Won’t Be Switching To These ETFs

This is something I have been wanting to bring up for a while now.

Has the Australian FIRE community forgotten just how important management fees are?

I have been seeing a lot of people recommend VDHG, which as I have mentioned above is a fantastic product. No doubt about it.

The only issue I have is that at a MER of 0.27%, it’s more than double that of what my MER currently is (0.101% or option 2 above).  They are both very low fees, but I plan to have a portfolio of a million+ within the next 5 years and hope to live for another 50 years at least! Now even though the management fees are very low, over a long period of time it does add up!

I have actually been working on a web app recently (so close to being published) that works out lost investment potential from management fees which gives you a visual of what I’m talking about.

combo1

Management fees are unavoidble, but how much you pay is your choice to an extent. I have calculated my current investment potential loss from management fees to be $48K over 50 years at $1M invested.

If I change the management fees to be 0.27% we get the following

combo2

Holy shit!

We went from paying under $50K over 50 years in investment potential loss from management fees to over 5 times that amount at over $250K!

Ok, I need to clear a few things up about the above graphs because it’s a big deal.

What am I actually talking about when I say investment potential loss? I’m referring to how much management fees are costing the investor when you factor in that the money paid to management could have been invested and compounded at 8% return (that’s what the graph is using as a return rate).

If I had $1M in my portfolio with my current weightings I would be paying Vanguard $505 a year. If I had $1M with any of the diversified index ETFs, I would be paying Vanguard $2,700 a year.

The difference between $505 and $2,700 a year over a lifetime adds up!

 

Conclusion

If you’re reading this blog, odds are you’re somewhat interested in personal finance and investing. The question you need to ask yourself is whether or not you are willing to learn, educate yourself and do the extra things required for the lower MER ETF options. Or if you think that the higher MER for the diversified index ETFs are justified. I personally choose to keep my MER as low as possible because paying less in management fees is a guaranteed return. You could argue that the diversified index ETFs will outperform my ETF combo but that is unknown without a crystal ball.

If you don’t know what half of the words in this article are even about, then the diversified index ETFs are most likely the best ETF for you. Just pick your investor profile and off you go. And don’t sweat the extra management fees. If the simplicity of the diversified ETF gets you into investing, you’ve more than made up the difference.

Filling Out A W-8BEN-E Form

Filling Out A W-8BEN-E Form

*Please consult a professional if you’re confused or not sure about anything when filling out a W-8BEN-E form 

Do you own a US domiciled ETF or share?  I own 2. VTS and VEU.

If an investment derives its income from the US, it has to pay tax to Uncle Sam. But What happens when I get the dividend from my US ETF or share? The company has already paid tax to the US and now I’m expected to pay full tax on the dividend?

Oh Hell Naw!

This is the purpose of the W-8BEN-E form. It stops double taxation so you don’t pay tax twice in two countries. You need to fill this form out for every ETF (or investment) that is domiciled in the US. If you don’t fill it out, you will get tax twice!

Here is a video of me recently filling out my W-8BEN-E form. I had to fill it out again because I switched my broker account from Commsec to Selfwealth and created a new HIN.


SIDENOTE

I’m sometimes asked why I own these two instead of just buying VGS (or VDHG but that will be covered in an upcoming post).

In a nutshell, I go with VTS+VEU because it offers:

– Lower management fees
– Greater diversification
– Exposure to emerging markets
– Unhedged against the Australia dollar (I think the AUD is high at the moment)

Don’t be put off investments because you need to fill out a very simple form every 3 years! I understand that it’s a little bit of extra work but seriously, we are trying to reach financial independence here! What’s a couple hour extra filling out a form and doing a little more come tax time for a superior investment.

The FIRE community is constantly recommending putting in a little bit of extra work and taking things to the extreme where others won’t, to enjoy a life other can’t!

 

 

Property vs Shares: The Ultimate Guide

Property vs Shares: The Ultimate Guide

Preface: When I talk about shares in this article, I really mean ETFs. I don’t buy individual shares or day trade.


Collingwood vs Carlton

Sydney vs Melbourne

Magic vs Bird

 

Magic vs bird

Just some of the biggest rivalries the world’s ever seen.

 

But in the investing world, there is not a more hotly debated topic among avid investors. Property vs shares is a topic that everyone seems to have an opinion on, no matter how ill-informed they are.

 

Owning 3 investment properties and nearly $90K worth of ETFs (shares), I feel I have tasted the best of both worlds (and the worst) and can give you perspective to what I’ve learned over the last 5+ years of investing in these two asset classes. Both are great when used right, with pros and cons for various financial situations/types of investors.

 

But which one is right for you?…

 

Contestant 1: Property

house

The hometown favorite. This guy has been around longer than the stock market has existed!

 

You can touch and feel him, and your mum most likely loves the idea of you being with him. He has a strong track record in Australia and there is a firm belief that his value never goes down.

 

Now for realz:

 

Property is a great investment class but you need to be the right type of investor and have the financial stability for it to be used correctly. It’s an active investment. You’re going to have to do some sort of work to keep this investment running. You can minimize the work needed by hiring people but there are still headaches trust me.

 

However! Property has BY FAR the most potential to accelerate your wealth compared to shares for three reasons.

  1. Cheap leverage
  2. Ability to physically add value to your asset
  3. Skill and experience actually mean something (more on this below)

 

Cheap leverage is often misunderstood. Too often an article is published with statistics on how shares have outperformed property by comparing the % of capital growth and rental/dividend returns.

 

This is a dumb way to compare the two because I don’t know any property investors that buy real estate outright. It’s almost always bought with a loan. Which means the asset is leverage.

 

But what does this have to do with returns you might ask?

 

Here’s an example (for simplicity we are ignoring buying and selling costs and tax):

 

Property 1 is brought in 2016 for $500K with a 20% deposit of $100K. That same investor also buys $100K of shares in 2016 too.

 

Fast forward 1 year and the house is now worth $600K and the shares worth $150K

 

Let’s make it simple and say that the shares have no dividends and that the house had $0 net gain/loss factoring in everything.

 

The shares made a whopping 50% return in one year. The property on the other hand only made a 20% return.

 

Which investment did better?

 

Going percent wise the shares beat the pants of the house. More than doubled its return. But hold on.

 

If we actually compare how much money each investment made, it tells a different story.

 

It cost the investor both $100K to buy each asset. Property made a total of $100K in a year whereas the shares only made $50K.

 

 

thinkingmeme

 

This is because of the power of leverage. You technically can leverage with shares but not for the same cheap rate and you get nasty margin calls which you don’t get with property.

 

The ability to physically add value to your asset is where I would say active investors have a clear choice with which investment they choose.

Sweat equity is a proven wealth building technique that’s been around for centuries. You would have to be extremely unlucky to physically add value to your property and not have it go up in value.

 

Experience and skill is a very interesting point to look at when comparing shares and real state.

 

The entire premise of index-style investing goes something along the lines of:

 

“It’s impossible to beat the market over a long period of time unless your names Warren Buffett. Even if you do manage to do so, it’s almost always luck. People spend all day every day studying stocks and graphs and still get it wrong. So what hope do you have as an ordinary Joe Blow? Don’t even try to become a master of the stock market because there is only such a very very small percent of humans alive that seems to be able to get it right the majority of the time”

 

 

Now, here’s the difference. Skill and experience actually matter in real estate.

 

A skilled and experienced property investor has a very good chance of repeating his/her success over and over again. In fact, they most likely get better at it as times goes on. The same cannot be said for the stock market (except for those very rare people like Buffett). A skilled and experienced property investor will beat the pants off a skilled and experienced stock trader over a 7-10 year period 9 times out 10.

 

You can’t really be skillful in picking stocks. You definitely can’t be skillful in picking ETFs either. Sure, you can be smart about your allocations to reduce risk. But it’s not like an ETF investor of 30 years is going to blow out a brand new ETF investor in terms of returns. In fact, they should get relatively the same return. And that’s not a bad thing either.

 

 

Contestant 2: Shares

3 things.

  1. Diversification
  2. Low buy in and selling costs
  3. Easy peasy with hardly any management required

 

Have you ever heard the phrase ‘don’t keep all your eggs in one basket’?

 

The stock market gives you the ability to buy things called ETFs which is a slice of a lot (>200) of companies bundled up into one very convenient share. So instead of buying 200 individual shares. You can just buy things like ETFs and you get that vast diversification in one transaction. Couldn’t be any easier.

 

And the good thing about the stock market is the low buy in and sell costs. I pay $20 for around $5K of ETFs. Times that by 40 and I would have paid $800 for $200K worth of shares.

 

Think about how much it would cost you to buy a unit for $200K. Probably around $10K if we use the 5% rule.

 

And then you would have to sell it for anywhere between 2-3%.

 

When you want to sell shares there is another brokerage cost of around $20 per sell (depending on how much you sell).

 

This low buy in and sell costs are very convenient when compared to real estate.

 

And the last point I want to make is also one of the most important points. How little of your time and effort you have to put in for it to make you money.

 

 

You buy some shares, ETFs of course and turn on DRP (dividend reinvestment plan) .

 

You sit back.

Walk the dog.

Go on a holiday.

Get married.

Have a child.

 

And check up on your shares after about 7-10 years and get a pleasant surprise that on average, they have increased by around 9%

 

They only thing required during these 7-10 years is declaring the income earned through dividends on your tax returns which you can download electronically. No need to keep your own records.

 

THAT’S IT.

 

You didn’t have to manage anything and your investments returned a respectable 9% over 7-10 years. This extremely low management style is a phenomenal advantage.

 

 

 

Pros and Cons

 

Property

 

 Pros  Cons
  • Leverage on low-interest rate
  • Ability to physically add value to investment
  • Skill and experience can be leveraged
  • High return potential for an active investor
  • Tax advantages such as neg gearing, depreciation and PPOR capital gains exclusion
  • Good protection against inflation
  • Less volatile than other asset classes
  • Active investment.
  • Requires a lot of capital to get started
  • Big buy in (5%) and exist (2-3%) costs
  • Not diversified. One asset class in one location
  • Loan stress
  • Potential for things to go wrong. Leaking pipes, dog pees on carpet, house burns down etc.
  • Not very liquid. May take you 6-12 months to cash out of this investment
  • Cash flow dependent. Needs a big buffer for incidents
  • If somethings goes horribly wrong. It can ruin you financially

 

 

Shares (ETFs)

 

 Pros  Cons
  • Passive investment. Very little time and effort involved (less than one day a year)
  • Extremely diversified
  • Low entry and exit fees
  • Very liquid. Can break up shares and sell only a few units if that’s what you need
  • Easy peasy to do a tax return. No bookkeeping required
  • Franked dividends
  • At worst you can only lose what you have invested
  • Can’t physically improve investment or add value to asset
  • No influence on how your investment performs. If the market is down there’s not much you can do
  • Can’t leverage at the same low-interest rate as property
  • If you do leverage (which I wouldn’t recommend), you may get margin calls
  • More volatile
  • Fewer tax advantages than property

 

 

 

So Which Ones Right For Me?

It all comes down to what type of investor you are. Are you an active or defensive (passive) investor?

 

To quote The Intelligent Investor by Ben Graham:

 

‘The defensive investor is unwilling, or unable, to put in the time and effort required to be an enterprising investor. Instead of an active approach, the defensive investor seeks a portfolio that requires minimal effort, research, and monitoring.’

 

My rough guess is around 95% of people are passive investors.

 

That’s because the majority of everyday people don’t really care for finance in general and would rather be doing others things they find interesting.

 

But since you’re on this blog, it means you find finance stuff interesting. What a sad bunch we are ?!

 

If you’re a passive investor I think the answer is clear.

 

Shares are clearly suited for the passive investing style while still giving the investor a great return.

 

Coupled with great diversification, low buy-in and selling costs, no loan stress, liquid asset (can get your money out in 2-3 days), it makes for the ultimate passive style investment!

 

But if you’re in that very small group of investors that want to take an active approach, you’ve gotta ask yourself.

 

Are you REALLY an active investor? Do you REALLY want to manage your investments for potentially the next 10-15 years? Will your circumstances change? What happens if you have a few kids? Do you still want to be managing your investments on 4 hours sleep?

 

Do you have a lot of capital lying around for a deposit?

 

How’s your cash flow position? Could you afford to pay an extra $1,400 a month when you don’t have a tenant in?

 

Is your job stable?

 

Do you have a big cash buffer in case anything goes wrong?

 

If you answered yes to all the above then maybe you are suited for investing in property.

 

 

I have made money using both investment classes. They each have their own merits and downfalls.

 

Whichever one you choose to invest in, just make sure you educate yourself before taking the plunge.

 

Good luck!

 

How to buy ETFs

How to buy ETFs

If you’re on the path to financial independence and follow a few bloggers as they save and invest their way to freedom. You no doubt have come across an investment vehicle that just keeps on popping up everywhere you look.

 

Exchanged Traded Funds (ETFs)!

 

ETF meme

 

The holy grail of investing, according to most in this space. I’m more open to other types of investment classes such as real estate (I can almost hear the boos and hisses) and believe that each asset class has its strengths and weaknesses. But honestly, ETFs are recommended by so many people (Warren Buffett included) for very good reason:

  • Extremely low management costs (one of my ETFs charge 0.04%)
  • Great diversification
  • Low buy in and exit fees ($20 a pop depending on how much you buy/sell)
  • Can start investing with little capital (investment properties, on the other hand, require considerable start-up costs)

And there’s more but you get the idea.

 

So ETFs are awesome right! But how does one actually go about purchasing these little bundles of investment goodness?

 

Thinking

 

 

 

 

 

 

Directly through Vanguard vs Buying ETFs

This is the most confusing part of the whole thing. So you decide that you want to buy Vanguard ETFs because you’ve been hearing how awesome they are so you naturally do what any computer literate person would do.

 

You go to Google.

 

You punch in Vanguard, head to their site expecting it to be awesome and have them basically walk you through buying their product.

 

Errrrrr not so fast muchacho’s!

 

Vanguard’s site is crap. Yes, it has all the information you need on there in the form of whitepapers. But they have absolutely no funnel for a user to purchase their product. You sorta have to figure it out on your own. And to be honest, Vanguard doesn’t really need to rely on a fancy website or app (they don’t even have an app ffs). Their product is so good they don’t waste time and money on advertising and marketing.

 

Back to the point. You have two choices when it comes to buying a Vanguard product. You can either buy it directly from them (called managed funds) or you can purchase an ETF through a broker.

 

In a nutshell:

ETFs
  • Good if you make large or irregular investments
  • Requires trading flexibility
Managed Funds
  • Good if you make ongoing, small contributions
  • Does not require trading flexibility

 

The biggest factor is probably cost. Because depending on how often you’re going to make contributions, will dictate which method is right for you. There is a really good article that goes into detail about the costings of investing directly through a mutual fund vs ETFs on the Betterment website.

 

I have never purchased Vanguard products directly from them becuase it works out better for me to buy ETFs, so I can’t comment. But I have seen videos and it’s basically a signup, get your details, pick your fund type deal. If you have experience please comment below.

 

I do have experience buying Vanguard products through a broker though (see the video below to see me literally buying some).

 

Buying ETFs Walkthrough

  1. Log into your broker (I use Commbank) and head to trading
  2. Select your account that you want to buy (or sell) for
  3. Select the ASX (Australian Stock Exchange) code that you want to purchase (a list of all Vanguard listed ETFs can be found here)
  4. Enter in how many units you wish to purchase
  5. Select at market value or list a price you’re happy with
  6. Set an expiry for the transation
  7. Review your order and hit submit

This is what mine looked like yesterday

Commsec

 

It’s that simple. Proceed to the next screen and confirm the order and you’re done. It will take a few days to process and the money will then come out of your nominated account and boom. You have now bought some ETFs.

 

If you have any specific questions please let me know and I’ll answer them to the best of my abilities.

 

Now go forth and fear not the simple process of purchasing ETFs!

 

 

 

P2P Lending

P2P Lending

 

P2P lending is a topic I have been wanting to do for a long time but I never had the experience or expertise to write about it. I’m the kinda guy that actually likes to do something before I claim any knowledge on the subject. There are people out there believe it or not, that actually give seminars and speeches about how to become master in topic X without ever actually have been a expert in the first place.

 

Anyway, peer to peer (P2P) lending has been an interest topic of mine for about 2 years now. And when a reader emailed me with their experience with P2P lending I thought it would be a good opportunity for a guest post. 

Chris has been investing in P2P lending platforms for over 2 years and he was kind enough to share his experience with us. 

So without further adieu, here is the post. Enjoy 🙂

 

 

 

P2P Lending Guest Post

 Several years into my FIRE journey I was seeking more diversification, more yield, and more interesting ways I could take control of my investments. Already I had delved into the share market, given managed funds a second chance (a story for another day). Then, one dark & stormy night, while searching across the digital internet on my electric computing device, I came across something called Peer-to-peer (P2P) lending.

 

Reddit and Whirlpool, where all the cool kids hang out, wasn’t much help in terms of details – just a few mentions here and there about UK company, RateSetter, entering the Australian market.

 

Magnets, How Do They Work?

I was able to discern that P2P lending, broadly, involves lenders/investors, being able to choose where their money is invested using online platforms. This is in contrast to a Real Estate Investment Trust, or index fund, where the investor’s money is managed by someone else. ASIC has a nice little write-up here (https://www.moneysmart.gov.au/investing/managed-funds/peer-to-peer-lending).

 

Each P2P provider does things in their own way, but it seems common across all platforms that these investments are very risky, often uninsured, unsecured, and can have a very delicious return.

At the time (December of 2015) the major players were RateSetter and SocietyOne.

SocietyOne is only open for the “sophisticated” investor – with a hefty minimum investment of $500,000, while RateSetter had a minimum

investment of $10… So, ugh, RateSetter it is!

 

My Experience With RateSetter

RateSetter operates both personal loans and business loans. Lenders elect what rate of return they want, what amount of money to lend at that rate, and for how long (1 month, 1 year, 3 years, 5 years). Then, they are matched to a borrower, who is seeking the lowest rate they can get. This makes the market a bit competitive as lenders undercut each other in order to get their money matched to a borrower.

In this competitive market borrowers can snag rates better than what a bank would offer them, if the bank would lend to them at all. I’m going to paste in two screenshots now. The first is from December 16th 2016, and the second is from January 12th 2017. You can see how competition and demand can affect the rates over the course of just one month.

1 – December 16th 2016.

P2P Lending

2 – January 12th 2017.

P2P Lending

After assessing the PDS and reading about the risks involved, I decided that $5k was appropriate for me to start lending. I watched the 1-year market, selected a 5.9% rate (which was slightly above the last match) and I got matched in a few days.

This turned out to be a good rate, as competition pushed the rates down a full 1% a few months later.

Given the Peer-to-peer nature of the platform, I was expecting a little more involvement on my behalf in the matching process, and later I’ll discuss MarketLend which has exactly the level of control I was expecting. Then again, I can see how some people might prefer the ease of RateSetter’s automatic matching.

The 1-month and 1-year markets in RateSetter are structured very straight forward. Your returns are paid once per month at the rate you were matched and at the end you get your principal back.

In the 3-year and 5-year markets, however, both the interest and part of your principal are returned each month.

None of RateSetter’s loans are secured but there is a “provisional fund” from which they can compensate lenders for losses at their own discretion. Information on how often this happens is hard to come by (my Google-fu failed me).

Over the course of the investment, here are my interest payments:

 

Jan/2016 26.73
Feb/2016 23.49
Mar/2016 23.49
Apr/2016 26.73
May/2016 22.68
Jun/2016 25.11
Jul/2016 25.92
Aug/2016 23.49
Sep/2016 25.11
Oct/2016 25.11
Nov/2016 24.30
Dec/2016 23.49

 

So… what to do now that’s finished?

Well, I delved straight back in again and got matched in the 5-year market at 9.5% 🙂

And RateSetter provide a nice little schedule of payments for the life of the investment.

P2P Lending

As you can see, this time, in the 5-year market, a portion of my principal (“Capital” column) will be returned each month, and my interest earned is reduced accordingly.

When these payments start rolling in, I will give the “auto-bid” feature a crack. With the auto-bid, payments made to your holding account can automatically be reinvested in the market and rate you specify – either a set rate, or the current market rate. Very handy!

 

My Experience With MarketLend

My good experience with Ratesetter made me a little braver when I decided to try out MarketLend. I threw $10k at it in August 2016 and payments started in September.

This is a platform which focuses on business loans.

Some loans are insured, some are uninsured. Some loans are for supply chain financing – where MarketLend will own the supplies – and some are simply a line of credit. One of the more interesting loans I’ve seen was for a short-term money lender. I was an investor, lending money to a business to lend money to a business to lend money to people… Hold on while I go watch “Inception” again….

 

MarketLend advertises these loans to investors in the form of units, each valued at $100. I.e. if i want to lend $1000, I would bid on 10 units at the rate I want. At any time another investor can undercut my bids, introducing a competitive element here as well.

P2P_Lending

Those high percentages might look amazing but hold on… because I should tell you about utilised versus unutilised parts of the loans – which will affect your return.

In these loans, the borrower might not access all of the capital which is on loan. The money which HAS been accessed, is the “utilised” amount. The rest is “unutilised”. This is important because your return (of say 18%) only applies to the utilised amount. So, even though you might be lending out your money at an amazing 18%, your gross return will be much less. Then MarketLend takes out their fee and your pre-tax return might be %8 (this is my actual average return so far across all my units).

Borrowers could also back the loan early. In which case you get your principal back early, the loan ends, and you are free to carry on your merry way – maybe withdraw the money, maybe invest in more units.

What I really like about MarketLend, is that credit checks and financial statements from the borrowers are available, so you can get very acquainted with them before deciding to bid.

This is the level of control and information I was looking for in a Peer-to-peer lending platform.

In the interest of diversification, I spread my $10k around many different borrowers at many different rates and levels of risk. Here’s a sample:

P2P Lending

And here’s my returns so far:

Month Amt Real Return
Sep/2016 34.60 4.15%
Oct/2016 74.87 8.98%
Nov/2016 81.55 9.69%
Dec/2016 76.56 9.10%
Jan/2017 83.53 9.83%

 

I have used my returns to buy additional units, so I currently have $10,300 invested.

P2P Lending

Finally, MarketLend features a secondary market where lenders can sell off their units to other lenders. This is useful if you no longer wish to carry the investment, or just need some liquidity.

I’ve picked up a few discounted units here – it’s definitely worth a look if you decide to go down this path.

 

Conclusions

P2P lending is cool. It’s high yield. And comes with high risk (so read those PDSs).

I like how MarketLend lets me choose who to lend to and the ability to make an informed decision – but RateSetter is also nice so I will continue to use both.

Ratesetter MarketLend
Pros’s

Website looks and feels more professional.

Predictable returns.

Provisional fund may reduce risk of loss.

More information and more control and over lending.

Easier to diversify investments.

Secondary market allows selling/buying units.

Australian owned & operated.

Con’s

Little control over matching process.

Did not notify me when my investment ended.

The queue-like structure delays matching.

Utilised/unutilised was confusing at first.

No Bpay facility.

Did not notify me when one of my investments was repaid early.

 

What’s Next?

Another P2P platform caught my eye recently; Brickx. These guys break down a house mortgage into 10,000 units, which investors can bid on, buy, and trade with each other.

Returns come from cash-positive rental income, or capital gains in a sale. I have a bit of saving to do, and a couple of impending financial commitments to get past, before I’m ready, though.

For now, my P2P returns will continue to be reinvested. Due to the nature of the investment, I should expect some losses over time, as borrowers default or make late payments, but that’s why we manage our risk.

-Chris

 

Wow, what a quality insight into the world of P2P lending. I would like to thank Chris again for putting that amazing post together. If you have any questions about it please feel free to comment on this article. Chris has agreed to answer your questions in the comment section below.

Show Notes:

Rentvesting

Rentvesting


 
What a horrible mash-up of words. Rentvesting? Rent-Investing? Rentvestor?

Yuck!

While the term itself doesn’t sit well with me, the underlying principles defiantly do and I think a ton of millennials could benefit from it, so listen up muchacho’s!

What The Hell Is Rentvesting?

Put simply ‘rent where you want to live, while you invest where it makes sense’

If you’re a citizen of Sydney or Melbourne, you may know about the incredible median house prices.

The stock standard formula for buying a house used to be:

  1. Get a good job
  2. Save enough money for the deposit
  3. Buy house
  4. Pay off the loan
  5. Live happily ever after

But as the great Bob Dylan once said

bobdylan

The new formula is now this:

  1. Get Arts degree
  2. Skip smashed avocado for 6,363 days
  3. Pay your deposit
  4. Spend the rest of your life paying off your loan
  5. Enter death blissfully knowing your financial situation will not follow you to the afterlife

I kid I kid.

But the point I’m trying to make is that the old school conventional way of buying a house in our two biggest cities doesn’t work anymore for the majority of people without financial help from their parents or inheritance.
This is because the game has changed! It ain’t what it used to be when ma and pop were hunting for a house.

Can Rentvesting Help?

Absolutely!

As I have already explained with my Rent vs Buy article, renting is cheaper 90% of the time.

And if you live in either inner Melbourne or Sydney, this becomes 110% of the time.

So instead of taking on a mortgage in either of these two cities, why don’t you rent for a few years and invest where it makes sense to do so.

Rentvesting can get you into the housing market without the financial stress when buying in inner Melbourne and Sydney.

How Does It Work?

homer-rubix

One rentvesting example might be ‘Harry Hipster’ from inner city Melbourne complaining that the housing market is rising faster than he can save for a deposit.

Harry desperately wants to enter the property market but cannot save enough for the deposit and is unsure if he will be able to make mortgage repayments without at least a 20% deposit. Caution Harry is also extremely hesitant about the Melbourne market being in a bubble and is worried that prices could come crashing down just after he has bought.

He has been very cautious of a potential crash for more than a decade now and year after year he has seen friends and family around him buy real estate and increase their wealth. He’s sick of being on the side lines but can’t afford to buy in inner Melbourne.

Harry discovers rentvesting and decides to take his savings and invest interstate where the property market is more affordable. The collected rent would cover the majority of costs associated with the investment with plenty of upside for capital growth.

Rentvesting has allowed Harry to get into the property market without the mortgage stress he would have had if he had bought in inner Melbourne. Furthermore, if Harry’s financial situation changes he can adapt quickly.

If Harry gets a raise, he can move into some place more luxurious. Maybe he loses his job? No worries, he can move somewhere more affordable until he finds his feet again. None of these luxury can be had once you lock yourself into a mortgage that you’re paying for. The investment property is an asset not a liability. The mortgage on the IP is not paid for by Harry, he has tenants that are paying that loan off for him.

After a few years Harry may decide to sell the IP getting back his savings plus whatever capital growth occurred during the years and use this money as a down payment for an inner Melbourne house. The entire time, Harry was in the property market and benefiting from whatever gains occurred instead of missing out on the sidelines. Harry was also not under financial stress and had the flexibility to live wherever he wanted to based on the circumstances he was in that year.

 

PROS CONS
thumbs-up No mortgage stress thumbs-down You won’t be paying off your home to live in. There is a psychological connection to be paying off something that’s yours. Renting can feel like dead money
thumbs-up Ability to save and invest more thumbs-down No security in renting. Can get kicked out anytime
thumbs-up Exposure to the property market sooner thumbs-down Rentvesting is for the disciplined! A mortgage can act as a forced savings mechanism. Rentvesting relies on you having the discipline to stick to a budget and not blow the extra cash.
thumbs-up Flexibility to change your biggest expense (living costs) when it suits you.
thumbs-up Start building your wealth now not later
thumbs-up Invest on your terms. 9/10 the place you want to live in is not the best investment. Rentvesting allows you to live where you want and invest where it makes sense.
thumbs-up Frees up cash flow for more smashed avocado on toast ??

Conclusion

With the two biggest cities in Australia being more expensive than ever, more and more Australians are struggling to get their foot into the property market. Rentvesting can be used to get into the market without having the stress of paying a mortgage yourself.

Rent where you want to live, invest where it make sense.

My partner and I are rentvestors and have no plans to buy a house to live in anytime soon. This gives us the flexibility and freedom that we want this time in our lives. When circumstances change, we have the flexibility to adapt.

Are you currently rentvesting? Why? Why not?

Thoughts and feelings in the comment section below.

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