Archives for June 2018

Reminder: Don’t Put Too Much Employer Stock Into Your 401(k)

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Every time a large corporation stumbles, you will see something along these lines: Having Too Much Employer Stock in Your 401(k) Is Dangerous. That doesn’t prevent it from being solid advice. The best advice bears repeating.

Why? If your retirement savings are heavily concentrated in your employer stock, you human capital and your investment capital are directly linked. If your company falters, then you can lose both your job and your retirement security. Past examples include Enron, MCI Worldcom, and Tyco. Remember that any individual stock can go to zero.

In a large, multinational corporation, even a mid-level executive simply won’t affect the bottom line that much. You could be doing a great job, but what if the top brass commits fraud, takes on too much debt, or otherwise mismanages the company.

This time around, it is General Electric (GE). Per Morningstar data, $100,000 invested in GE stock on January 1st, 2017 would be about $47,000 today. Over the same period, $100,000 invested in a S&P 500 index fund would be about $124,000. That’s a gap of over $75,000 on a starting balance of $100,000. GE may recover eventually, but even that won’t help a retiree who needs the money now.

The Fortune article provides a list of other large company 401(k) plans that have heavy allocations to their own stock. Some of these are highly-respected companies, but then again so was GE.

  • Sherwin Williams (62%)
  • Colgate Palmolive (56%)
  • Exxon Mobil (54%)
  • Lowe’s Home Improvement (50%)
  • PACCAR (50%)
  • Dillard’s Department Stores (48%)
  • Chevron (44%)
  • McDonalds (39%)
  • Costco (38%)
  • Cerner (37%)

In my opinion, things are different if you are a majority owner of a small, private business. Yes, you also have a lot of eggs in one basket, but you directly control that basket! In addition, your upside could be much, much greater.

Consider that Vanguard charges money for financial advice through their Vanguard Managed Account Program (VMAP). When they analyzed the before-and-after results from actual participants, they found that their biggest impact was simply helping people reduce their exposure to company stock. They found that 12% of participants initially had a concentrated position of 20% or more in employer stock.

If you’re reading this, you can implement this advice for free! Do not invest more than 10% of your 401(k) plan in company stock. Consider reallocating funds into a low-cost, diversified index fund or other similar alternative. (Companies themselves are not allowed to exceed 10% in company stock for pension plans.)

Amazon Prime + Whole Foods Additional 10% Off Discounts Now Nationwide

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Amazon Prime members are now able to get an additional 10% off on “hundreds” of Whole Foods sale items at locations nationwide. Look for the yellow sign below. They had been rolling this out gradually, but it is now nationwide as of 6/27/18. There will also be other discounts marked as “Prime member deals” with a blue sign.

In order to get your discount, you must either show a barcode from your Whole Foods smartphone app at checkout (with your Prime info linked), or enter your phone after linking it at amazon.com/primesavings. Linking my phone number took me 10 seconds, so this option seems like a much more reliable method.

Stack with the 5% back at Whole Foods and Amazon.com with the Amazon Prime Rewards credit card.

Other perks? If you live in a major metro area, check if Whole Foods now offers free 2-hour food delivery to your house. Many locations have also installed special Amazon lockers to let you pick up packages. It will be interesting to see how this acquisition continues to evolve.

You can get a free 30-day trial of Amazon Prime here.

US Housing Market Breakdown Chart

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I don’t have any clever observations to share along with it, but the WSJ Daily Shot shared an interesting breakdown of the US housing market. Occupied or Vacant, Owned or Rented, Mortgage or Not, Negative Equity or Not, Foreclosure or Not, and so on.

There was also a chart of the historical rate of mortgage foreclosures.

Evicted: Low-Income Tenants and Landlord Economics in Milwaukee

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

evicted_coverEvicted: Poverty and Profit in the American City by Matthew Desmond follows eight different families who struggled to pay rent in poor areas of Milwaukee, Wisconsin. Around the time of the 2008 financial crisis, the author lived in the same units as the other tenants and rented from the same two landlords, whom he also profiles in vivid detail. Amongst many other major awards, this book won a 2017 Pulitzer Prize.

The eviction cycle. Imagine that you are either in a low-paying job or receive government benefits, but that income isn’t enough to pay for rent, utilities, and food. So in any given month, one of those bills doesn’t get paid. That means eventually you get behind on rent, and eventually you get evicted.

After you are evicted once, your housing options instantly shrink. (Not many landlords want to rent to someone who just got evicted.) Just as payday loans specifically target folks with no other borrowing options, there is a subset of housing units that target folks with evictions. You may be surprised that the units in the poorest neighborhoods can cost just as much as a nicer unit in a better neighborhood (that does background checks). As with payday loans, you could argue lenders need to charge higher interest rates to cover more frequent defaults. You could similarly argue that landlords in low-income areas need to charge higher rents to cover unpaid rent and higher turnover costs.

After some time in shelters or crashing with relatives, you scrape together enough to make first month’s rent and a deposit. But every month, rent again takes up 70% of your income (ex. $500 rent and $700 to $800 income), so eventually you fall behind again. The sink gets clogged. Now, the landlord doesn’t want to pay a plumber $100 an hour when you are already owe them two months of back rent. But if your landlord doesnt’t fix the sink, you’re not going to treat the apartment nicely either. You’re also not going to pay any more rent. Two wrongs don’t make a right, but they do save both sides money (in the short-term). Your next eviction is only a matter of time, and cycle repeats.

Stable housing forms the core of a good community. Forced moves can hurt your employment prospects as you miss work while searching for housing. Forced moves lead to increased student absences or having to move schools entirely. Forced moves cause people to lose valuable property like furniture, appliances, clothing, and other household items.

Landlord economics. I didn’t see that much landlord “profit” when my rough calculations showed they were basically two people working full-time in a highly-leveraged business. Yes, landlords Sherrena and her husband “owned” 36 units and brought in $120,000 in gross rent annually, but that is before paying the mortgage, taxes, maintenance, and the time spent as full-time property managers. There was a constant flow of finding new tenants, fixing up damaged units, collecting partial rent payments when possible, and evicting those who fell too far behind. Every missed rent check was $500 less out of their monthly income. An Amazon reviewer stated that he followed up on the properties and found that by 2016 Sherrena no longer owned any of them (many went into foreclosure). I happened to invest $2,000 into an investor loan backed by an 6-plex in Milwaukee and it also went into foreclosure. I’m sure there are landlords doing fine, but I wouldn’t describe it as “easy profits”.

The mobile home park was a bit different. This seems to be a weird loophole where technically you are only renting a plot of land and a utility connection. The “mobile” home (which never moves) on the concrete pad is simply given free to the tenant, who then assumes the responsibility of maintaining everything inside. The landlord doesn’t have to worry about plumbing, electrical, heat, roofing, and so on. If you get evicted, you can’t afford to move your “free” home, and it gets handed off to the next tenant.

Housing assistance statistics. In 2012, 1 in 9 occupied rental households in Cleveland and 1 in 14 in Chicago were summoned to eviction court. Having an eviction can subsequently disqualify you from future public housing assistance, which led the Pulitzer committee to call this book a “deeply researched exposé that showed how mass evictions after the 2008 economic crash were less a consequence than a cause of poverty.” Here are some statistics from the book:

  • 1% of poor renters live in rent-controlled units.
  • 15% of poor renters live in public housing.
  • 17% of poor renters receive a government subsidy (rent-reducing voucher).
  • 67% of poor renters receive no federal housing assistance.

In addition to the 2/3rd of poor renters with no federal housing assistance, another of the book’s arguments is that existing housing assistance programs simply don’t do enough to help people back on their feet. It’s like if you have a broken leg and you need eyeglasses. You need both fixed to get back to work, but you are only given enough money to solve one of the problems. Even if I give you a cast, you’re still blind. If I only give you eyeglasses, you still can’t walk. Money is being spent right now, but people are still stuck in the same place as before. Perhaps more money upfront would help people get back firmly on their feet.

The author’s proposed solution is to signficiantly expand the existing housing voucher program where every family below a certain income level would be eligible for a housing voucher. The voucher could be used to pay for rent on the open market (but not too luxurious or unsafe), similar to how food stamps work. He proposes a variety of sources for the money, for example getting rid of the mortgage interest deduction.

This book reminded me of Nickel and Dimed by Barbara Ehrenreich from over a decade ago. (Here is her NYT review of this book.) Yes, bad decisions can play a role but however you arrive, it is exceptionally hard to break out of the cycle of poverty. You are sensitive to any small setback (car repair, medical bill, theft). Many things actually end up being more expensive when you are broke. Hard work is necessary but not sufficient. You need either a big dose of help (family, friends) or a long streak of avoiding bad luck.

The storytelling in this book is what stays with you. Out of all the families profiled in the book, the only ones that eventually broke the cycle got help from family. That way, they could get everything together long enough to and either land a stable job or finish education/training. The author’s solution is essentially to have the government do that same thing, but the question is whether fellow Americans (strangers) want to help out in the same way (higher taxes). I don’t know about that.

Citi® / AAdvantage® Platinum Select® World Elite™ Mastercard® Review – 50,000 Bonus Miles

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Citi AAdvantage Platinum Select MasterCard Art

This offer is currently EXPIRED.

The Citi® / AAdvantage® Platinum Select® World Elite™ Mastercard®, from our partner Citi, has updated the offer on their co-branded American Airlines credit cards.  Here are the updated card highlights:

  • Earn 50,000 American Airlines AAdvantage® bonus miles after making $2,500 in purchases within the first 3 months of account opening*
  • New: Earn 2 AAdvantage® miles for every $1 spent at gas stations*
  • New: Earn 2 AAdvantage® miles for every $1 spent at restaurants*
  • Earn 2 AAdvantage® miles for every $1 spent on eligible American Airlines purchases*
  • New: Earn a $100 American Airlines Flight Discount after you spend $20,000 or more in purchases during your cardmembership year and renew your card*
  • No Foreign Transaction Fees*
  • First checked bag is free on domestic American Airlines itineraries for you and up to four companions traveling with you on the same reservation*
  • Enjoy preferred boarding on American Airlines flights*
  • Receive 25% savings on inflight food and beverage purchases when you use your card on American Airlines flights*

The annual fee is $99, waived for the first 12 months.

Bonus details. Note the following language for the personal card. Basically, to get the personal card bonus, you can’t have had the personal card opened or closed within the last 24 months. Having the business version is okay.

American Airlines AAdvantage® bonus miles are not available if you have had any Citi® / AAdvantage® card (other than a CitiBusiness® / AAdvantage® card) opened or closed in the past 24 months.

To clarify, you can have one of both the consumer version of this card and the CitiBusiness® version designed for businesses under your name. The bonuses are also separate. You can get one consumer bonus every 24 months, and you can also get one business bonus every 24 months.

Baggage fee value. Currently, American Airlines charges $25 one-way for the first checked bag and $35 one-way for the second checked bag in Economy. That’s $50 roundtrip for a single checked bag, per person. With this card, your first checked bag is free on domestic American Airlines itineraries for you and up to four companions traveling with you on the same reservation.

Redemption tips. American Airlines MileSAAver awards are still 25,000 miles for a round-trip ticket within the contiguous 48 states. Their online system is pretty good for looking for domestic AA awards. If the trip is less than 500 miles, then it is only 15,000 miles round-trip within the contiguous 48 states. Under-500 miles routes include Las Vegas to/from Los Angeles, Charleston to/from Miami, New York to/from Washington DC, Philadelphia to Boston, and many others.

This card also makes you eligible for Reduced Mileage Awards, where you save up to 7,500 miles on roundtrip MileSAAver® awards to select destinations on American Airlines operated flights.

Bottom-line.  The 50,000 bonus American miles is a good promotion when paired with the annual fee being waived for the first year. As with most of these co-branded cards, a lot of the ongoing value comes when you fly on American and utilize the free first checked bag benefit for you and up to 4 companions ($50 per person, round-trip) and also when you redeem miles for award flights. If you plan to fly American in the next 12 months, this offer can bring good value.

  • Citi® / AAdvantage® Platinum Select® World Elite™ Mastercard

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CitiBusiness® / AAdvantage® Platinum Select® World Mastercard® Review – 70,000 bonus miles

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citibusiness

The CitiBusiness® / AAdvantage® Platinum Select® World Mastercard®, is running a limited-time offer on their co-branded American Airlines credit cards. Here are the details:

  • Designed for businesses
  • For a limited time, earn 70,000 American Airlines AAdvantage® bonus miles after making $4,000 in purchases within the first 4 months of account opening*
  • First checked bag is free on domestic American Airlines itineraries to reduce travel costs and boost your bottom line*
  • New: 25% savings on American Airlines inflight Wi-Fi when you use your card*
  • Enjoy preferred boarding on American Airlines flights*
  • Earn 2 AAdvantage® miles per $1 spent on eligible American Airlines purchases
  • Earn 2 AAdvantage® miles per $1 spent on purchases at telecommunications merchants, cable and satellite providers, car rental merchants and at gas stations*
  • Earn 1 AAdvantage® mile per $1 spent on other purchases*
  • No Foreign Transaction Fees*

Note the following fine print:

American Airlines AAdvantage® bonus miles are not available if you have had any Citi® / AAdvantage® card (other than a CitiBusiness® / AAdvantage® card) opened or closed in the past 24 months.

To clarify, you can have one of both the consumer version of this card and this business version under your name. The bonuses are also separate. You can get one consumer bonus every 24 months, and you can also get one business bonus every 24 months.

Annual fee is $99, waived for the first 12 months.

American Airlines MileSAAver awards are still 25,000 miles for a round-trip ticket within the contiguous 48 states. If the trip is less than 500 miles, then it is only 15,000 miles roundtrip within the contiguous 48 states. Under-500 miles routes include Las Vegas to/from Los Angeles, Charleston to/from Miami, New York to/from Washington DC, Philadelphia to Boston, and many others.

There are some small differences between this and the consumer version of this card. This business card offers 2 AAdvantage® miles for every $1 spent on purchases at telecommunications, car rental merchants and at gas stations. The consumer version does not. I also do not see any mention of the ability to earn 10% of your redeemed AAdvantage® miles back on this business card.

However, this business card does make you eligible for Reduced Mileage Awards, where you save up to 7,500 miles on roundtrip MileSAAver® awards to select destinations on American Airlines operated flights.

Business card eligibility. Many people aren’t aware that they can apply for business credit cards, even if they are not a corporation or LLC. Any individual can be a small business. Perhaps you sell items on eBay, Craiglist, or Etsy. Maybe you do some graphic design, web design, freelancing and/or consulting. If you received a 1099-MISC tax form and filled out a Schedule C, that means you have business income, you pay self-employment taxes, and you’re a sole proprietorship. This is the simplest business entity, but it is fully legit and recognized by the IRS. On a business credit card application, you should use your own legal name as the business name, and your Social Security Number as the Tax ID.

Bottom-line. If you fly American a lot, get some miles for your business purchases. Due to the 24-month waiting periods, it is best to apply during a limited-time offer such as now. The annual fee is waived during the first year. As with most of these co-branded cards, a lot of the potential value comes when you fly on American and use the early boarding and free first checked bag benefit ($50 per person, roundtrip) and also when you redeem miles.

Please note this a business card, designed specifically for businesses. Click here for the consumer version.

“Disclaimer: This content is not provided or commissioned by the issuer. Opinions expressed here are author’s alone, not those of the issuer, and have not been reviewed, approved or otherwise endorsed by the issuer. This site may be compensated through the issuer’s Affiliate Program.”

Social Security Trust Fund: Income vs. Expenses

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You may have read recently that the Social Security Trust Fund is starting to shrink, and that it is projected to run out of money in 16 years. (Medicare’s trust fund is projected to run out in 8.) This is not the same thing as Social Security itself running out of money, as most Social Security payments to retirees come from the payroll taxes paid by current workers. As the NY Times points out:

…tax collections would be sufficient to pay about three-fourths of promised Social Security benefits for 75 years.

Of course, a 25% cut is still going to be extremely painful for a lot of people. However, I don’t expect any changes soon. As the WSJ Daily Shot points out, Social Security has had a cash deficit each year since 2009. (More was being paid out in benefits than was taken in by payroll taxes.) The deficit was simply masked by interest earned on the fund until recently:

“Fixing” this problem is going to hurt somebody in the pocketbook – either younger workers or retirees, probably both. That means no politician is going to do anything about it unless there is no other option. The following chart of income vs. expenses suggests that about 2030, the trust fund will be nearly depleted and the rate of depletion will be quite fast.

So that’s my prediction. All talk and no action until 2030.

Retirement Nest Egg Calculators: Running Out of Money vs. Running Out of Time

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If you have researched retirement at all (early or otherwise), you’ve probably ran across various retirement calculators online. You input how much money you have (or plan to have), your asset allocation, and it spits out some numbers. This Vanguard Retirement Nest Egg Calculator is a good example of a simple version.

Let’s try an example. If I am 40 years old and thus assume I have up to 50 years left in retirement, and I want to maintain a 4% withdrawal rate ($40,000 a year from a $1,000,000 portfolio that is 65% stocks/30% bonds/5% cash), the tool uses Monte Carlo simulations to calculate that I have an 80% chance of lasting 50 years.

There is effectively one output: the odds of not running out of money. Either you still have at least a dollar, or you don’t. In my example, I have an 80% chance of having $1 or more at age 90.

But what if you also considered the odds of running out of time? Yes, that’s a euphemism for dying. (Ever notice how many of those we have?) In another neat tool from Engaging-Data.com, Will Your Money Last If You Retire Early? adds some helpful nuance to this analysis. You input the same types of information, but now in any given year you are provided the overall odds of each of these things happening:

  • Red – You are alive, but ran out of money.
  • Light green – You are alive, with less money than you started with. (Kinda nervous?)
  • Green – You are alive, with between 100% and 200% of what you started with. (Nice and comfy.)
  • Dark green – You are alive, with over 200% of what you started with. (In hindsight, I didn’t need to save so much…)
  • Grey – You are pushing up daisies. (In hindsight, maybe should’ve retired earlier…)

Here are sample results for the early retirement scenario above at 4% withdrawal rate (age 40, retirement horizon 50 years, $40k from a $1m 65/35/5 portfolio). I picked the female mortality table – if you have a male/female couple, it’s safer to pick the person likely to live longer.

There’s an angry streak of red where I’m broke. Of course, there’s a bigger streak of grey where I’m not breathing.

Here’s the same scenario, except with a lower 3% withdrawal rate ($30,000 a year from a $1,000,000 initial portfolio):

That change got rid of the red, but there is a lot of dark green. (1% makes a big difference.)

Here are sample results for a more traditional retirement scenario: (age 65, retirement horizon 25 years, $40k from a $1m 65/35/5 portfolio)

As a financially conservative person, these charts help illustrate why I prefer working with a 3% safe withdrawal rate for early retirement (50 and under) and 4% safe withdrawal rate for traditional retirement (closer to 65).

My favorite part of this tool is that it makes you take into account your mortality. It’s not all about staying above $1 in the bank, but also about maximizing your years of freedom. If you’re 40, you have a 10% chance of dying before even reaching 65. (This is why most people know someone who died shortly after retirement.) Is it better to have zero chance of broke and be 70, or 5% chance of broke and 60 with 10 more years of retirement (and 10 fewer years of work)? It is better to live a little more luxuriously for shorter time, or a little more frugally for a longer time? Playing around with all the different input variables might help you weigh the options.

PeerStreet Review: Real Estate Backed Loan Investments, My 22-Month Experience

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

peerstreetlogo

Updated June 2018. I’ve now been investing in various real-estate crowdfunding platforms for over 3 years, with $30,000 currently invested. Over $25,000 of these funds are invested in real estate-backed loans at automated real-estate loans from PeerStreet (which recently passed $1 Billion in loans). For this type of lending, you have to be an accredited investor. Here’s my review after 22 months of being an investor.

The basic premise of PeerStreet is simple. Real estate equity investors want to take out short-term loans (6 to 24 months) and don’t fit the profile of a traditional mortgage borrower. They are professional investors with multiple properties, need bridge financing, or they are on a tight timeline. As a real-estate-backed loan investor, you lend them money at 6% to 12% and usually backed by a first lien on the property. The borrower stands to lose the equity in their property (I keep LTV under 70%), so they are highly incentivized to avoid default. In the worst case, you would foreclose and liquidate the property in order to get your money back. However, this is better than Prosper or LendingClub where it is an unsecured loan and your only recourse is to lower their credit score.

What are PeerStreet strengths? Here are the reasons that I decided to put more a higher amount of money into PeerStreet as compared to other worthwhile real estate marketplace sites:

  • Debt-only focus. Other real estate (RE) sites will offer both equity and debt (and things in between). PeerStreet only focuses on debt, and I also prefer the simplicity of debt. There is limited upside but also less downside. Traditionally, this might be called “hard money lending”.
  • Lower $1,000 investment minimum. Many RE investment sites have minimums of $10,000 or $25,000. A few will go down to $2,000 but there is not a steady supply. At PeerStreet, $25,000 will get me slices of loans from 25 different real estate properties.
  • Greater availability of investments. Amongst all the RE websites that I have joined, PeerStreet has the highest and most steady volume of loans that I’ve seen. I dislike having idle cash just sit there, waiting and not earning interest. They apparently have a unique process where they have a network of lenders that bring in loans for them. They don’t originate loans themselves, they basically buy loans from these partners if they fit their criteria. This steady volume allows the lower $1,000 minimums and more diversification, as well as easy reinvestment of matured loans.
  • Automated investing. The above two characteristics allow PeerStreet to run an automated investment program. You give them say $5,000 and they will invest it automatically amongst five $1,000 loans. You can set certain criteria (LTV ratio, term length, interest rate). When a loan matures, the software can automatically reinvest your available cash. I don’t even have to log in.
  • Consistent underwriting. You should perform your own due diligence in this area, as you can only feel comfortable with automated investing if you think every loan is underwritten fairly. The riskier loans get higher interest rates. The less-risky loans get lower interest rates. The shady borrowers are turned away. Otherwise, you’d want to pick and choose. After doing this for a year, I stopped wanting to pick and choose. I want to just sit back and let them choose for me. We’ll see if it works out.
  • Strong venture capital backing. PeerStreet just closed a $30 million Series B round in April 2018. Andreessen Horowitz did a $15 million Series A round in November 2016. Michael Burry was an early seed investor, using $6.1 million of his own money according to TechCrunch. You may recognize this name from The Big Short.

Here’s a screenshot of the automated investing customizer tool:

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(Tip: Even if you plan on investing only in $1,000 loans, once you are fully invested you might change later to a higher minimum like $1,250 in order to more quickly reinvest your idle cash. For example, if you have $78 in interest and then a $1,000 loan is paid off, then you could invest $1,078 automatically into your next loan.)

What is a potential PeerStreet drawback? In my opinion, slightly lower yields. This is just my limited understanding and I may be wrong, but PeerStreet has a network of lenders bringing in these deals and so the net yield to the investor feels lower than other sites. This “con” is also their secret sauce that brings in the high loan volume (and ideally the ability to be more selective), and so I am willing to earn lower interest rates for the added diversification and convenience of automated investing.

Here’s the 1-minute video pitch from PeerStreet:

How does PeerStreet make money? As with other real estate marketplace lenders, they charge a servicing fee. PeerStreet charges between 0.25% and 1%, taken out from the interest payments. This way, PeerStreet only gets paid when you get paid. When you invest, you see the fee and net interest rate that you’ll earn. In exchange, they help source the investments, set up all the required legal structures, service the loans, and coordinate the foreclosure process in case of default. In some cases, the originating lenders retains a partial interest in the loan (“skin in the game”). Here’s a partial screenshot:

peerstreet_fee

What if PeerStreet goes bankrupt? This is the same question posed to LendingClub and Prosper, and their solution is also the same. The loans are held in a bankruptcy-remote entity and will continue to be serviced by a third-party even in a bankruptcy event. From their FAQ:

PeerStreet also holds loans in a bankruptcy-remote entity that is separate from our primary corporate entity. In the event PeerStreet no longer remains in business, a third-party “special member” will step in to manage loan investments and ensure that investors continue to receive interest and principal payments. Additionally, investor funds are held in an Investors Trust Account with City National Bank and FDIC insured up to $250,000.

Tax forms? In general, unless you use a self-directed IRA, the interest earned will be taxed as ordinary income (like bank account interest). For tax years 2016 and 2017, I received 1099-INTs and filed it alongside my other 1099-INTs from bank interest. Here’s what PeerStreet says:

PeerStreet investors will be issued a consolidated Form 1099 for the income distributed from their investment positions. Investors may receive one or more of the following types of 1099 form:

1099-OID for notes with terms longer than one year (at the time of issue)
1099-INT for notes with terms less than one year (at the time of issue)
1099-MISC for incentives, late fees or other income, if more than $600.

My investment performance. I started with a $10,000 investment in August 2016, and then added another $15,000 in October 2017, for a total of $25,000. This way, each of my loans is less than 5% of the total portfolio. Everything is set for automatic reinvestment whenever a loan in paid back or the interest adds up to $1,000.

As of this writing 6/20/2018, my total account value is $27,138.26 invested across 24 different active loans ($1,000-$1,250 each). I have already had 26 loans paid off in full, with no loss in principal. A few had late payments, but they eventually all caught back up. Nothing has gone into foreclosure yet. My interest to date is $2,138.26, which works out to an internal rate of return (IRR) of 7.35% annualized net of all fees and taking into account the short periods where my cash was idle. Here are screenshots of my paid-off loans and a chart of cumulative interest earned.

Now, I don’t know what the default rate across all their loans, but I know that sooner or later I will experience one. (In October 2017, PeerStreet stated that they originated $500 million of loans with zero investor losses. They haven’t made the same claim when they reached $1 billion, so I’m assuming there have been some losses since.) This will require patience as it will take a while for the foreclosure process to play out. In my experience, this is a critical difference with private real estate loans. You can’t make a few clicks and get your money back. I may have to wait a year or longer if the loan requires a property takeover and sale. I try to counter this by diversifying across 25+ loans.

Bottom line. PeerStreet offers high-yield, short-term loans backed by private real estate. As compared to traditional “hard money lending”, accredited investors can diversify with $1,000 minimum investment per property, automated reinvestment, and steady nationwide loan volume.

If you are interested and are an accredited investor, you can sign-up for free and browse investments at PeerStreet before depositing any funds or making any investments. PeerStreet charges a servicing fee between 0.25% and 1%, taken out of the interest charged to the borrower. The returns you see in the listing are net of their fees.

RealtyShares Real Estate Investing: Default and Foreclosure Example – June 2018

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Updated June 2018. One of the new “marketplace” (aka “crowdfunding”) real estate investing sites that I have put my own money into is RealtyShares. Although I have invested over $30,000 across different RE sites over the last 3+ years, this is my first investment to go into foreclosure proceedings. There are risks in every investment, and my potential loss is your learning opportunity!

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Initial investment details.

  • Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
  • Interest rate: 9% APR.
  • Amount invested: $2,000.
  • Term: 12 months with 6-month extension option.
  • Total loan amount $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
  • Loan secured by the property in first position. Personal guarantee from borrower.
  • Stated goal to rehab, stabilize, and then either sell or refinance.

Subsequent summary of events.

  • January 2016. Funds committed. Loan closed.
  • July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
  • May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
  • June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
  • September 2017. Judgment granted in Wisconsin court. By law, there will be a 3-month redemption period where the borrower can still keep the house if they pay foreclosure judgment interest, taxes, and costs.
  • January 2018. The foreclosure sale was held and property ownership was reverted to RealtyShares. A judge still needs to confirm the sale.
  • February 2018. The judge confirmed the foreclosure sale, and RealtyShares is officially the owner of the property. Property can now be assessed and fixed up before sale.
  • April 2018. Property listed for $134,500 as per new BPO (Broker Opinion of Value).
  • June 2018. Property is under contract for sale. Price not disclosed yet.

Payment history. I invested $2,000 and got paid $210.84 of interest before the payments stopped. Based on the fact that the total loan amount was $168,000 and the property was only listed for $134,500, it looks like I will definitely lose some money on this deal. Including interest paid, I hope to exit with somewhere around 80% of my original investment.

Thoughts and takeaways. Well, I have made close to 50 different real estate-backed loans now, so it was only a matter of time before I got a full default. The question is how often that happens and the size of those losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections typically only got you pennies on the dollar.

Real-estate backed debt is backed by a hard asset, so in the end at least you get the property to sell off. Beforehand, RealtyShares told me that the foreclosure process in Wisconsin typically took about 12 months. That turned out to be a good estimate, as it was 12 months between foreclosure initiation and the property being under contract for sale.

One takeaway is to be careful about based your loan-to-value ratios on optimistic appraisals or BPOs (broker opinions of value). A broker thought this property was worth $238,000 in January 2016. Another broker thought the same property was worth only $134,500 in April 2018.

Another takeaway might be to be careful about investing in struggling local economies. I didn’t know this at the time, but the low-income rental market in Milwaukee, Wisconsin was profiled in the NYT Bestselling book Evicted: Poverty and Profit in the American City. Many of the properties mentioned in this book were literally down the street from this unit.

Finally, sometimes you just get bad luck. This is my only Realtyshares loan and it went into foreclosure. There are other folks with multiple loans and perfect payment histories. Realtyshares has since shifted their investment focus onto commercial properties and not residential ones, so perhaps they are stronger in that area. In turn, I have shifted my residential debt investing to PeerStreet as they have $1,000 minimums and a slightly different model. Strangely, I’ve done 50+ total active and paid-off loans with PeerStreet with zero foreclosures. Basically, when you read about my experience or someone else’s, your mileage may vary.

Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here are some sample updates:

October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.

September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expires—sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.

September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.

August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.

August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.

June 29, 2017 Due to the borrower’s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.

Bottom line. Investing in real-estate backed loans means that if the borrower doesn’t pay up, you can foreclose and take over the property. This post will hopefully serve as a useful example of the foreclosure process from a marketplace real-estate investment site. I haven’t seen any other similar resources. If you are an interested accredited investor, you can sign-up for free and browse investments at RealtyShares before depositing any funds or making any investments. Current opportunities include office buildings, retail space, and large apartment complexes.

I also have active investments in these other real-estate sites: PeerStreet ($1,000 minimums, accredited-only, debt-only) and Fundrise eREIT ($500 minimum, open to everyone, equity and debt). Closed investments include Patch of Land.

Northern Bank Direct Money Market Review – 2.26% APY Guaranteed Through June 2019

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Update: As of 6/20/18, the rate is now down to 1.50% APY. I hope everyone who was interested got the 2.26% APY rate, you definitely had time and they did give roughly a 24-hour notice.

Here comes another new “Direct” bank leapfrogging the current competition for some attention. The Northern Bank Direct Money Market account is offering 2.26% APY on average daily balances up to $250,000, and the rate is guaranteed through June 30, 2019. Of course, another bank could take the throne tomorrow, but at least this one comes with a rate guarantee. Other highlights:

  • $5,000 minimum to open.
  • Includes limited checkwriting and ATM debit card access.
  • No minimum balance requirements or monthly service charges.
  • Interest is compounded monthly and credited monthly. If you close your account before the interest is credited, you will not receive the accrued interest.
  • Read full review for notable quirks.

Northern Bank Direct is the online division of Northern Bank, a community bank in the New England area. You must open accounts online, but you can do transactions in their branches and use the NBTC Mobile Banking apps. They also offer various certificates of deposit, including currently a 30-month CD at 3.01% APY ($500 minimum to open, 12-month early withdrawal penalty). Their routing number is 011303097. You can them at 844-348-8996 EST Monday-Friday: 9a-6p, or via email to [email protected]

Money Market features. This is a money market account, which is similar to a savings account but adds limited checkwriting and an ATM debit card. You are still limited to 6 withdrawals per month, whether via online electronic funds transfer, check, wire, or ATM machine.

ACH limitations. Northern Bank Direct has a somewhat weird rule that if you initiate a electronic transfer from your Northern Bank Direct account, there is a maximum daily limit of $5,000.00 (or the available balance in your account, whichever is less) for Interbank (external) transfers per transaction; $5,000 in aggregate per day; and $25,000 in aggregate per calendar month. If you initiate the electronic transfer from an external financial institution, Northern Bank Direct does not impose a limit on the amount of the transfer.

Notable fees. According to their full Deposit Account Agreement, there are a few other fees that caught my eye:

  • Account closure (by mail): $10
  • Dormant Accounts fee (per month– starting in the 13th month for account balances less than $500.00): $4.00
  • External Transfer Fee (per transfer): $3
  • New account closure within 120 days: $25

It appears that not only do they limit your transactions to $5,000 per day ($25,000 per month), they will also charge you $3 if you initiate the transfer from your Northern Bank Direct account. There are some reports that they are removing the $3 fee, but I still see it on their online fee schedule. Hopefully, you already have a favorite “hub” bank account with free, fast transfers and high dollar limits (mine is Ally Bank).

These fees are notable as other online savings accounts have all of the following: no minimum opening balance, no minimum balance requirement, no early closure fee, and/or no inactivity fee.

Smartphone app. It’s amazing how much I bank from my phone these days, from checking balances to mobile check deposit. Based on the app store screenshots, it looks like Northern Bank also outsourced their back-end software to Fidelity National Information Services (subdomain ibanking-services.com). In my experience, the app is basic but functional. Mobile check deposit and Touch ID are supported.

Bottom line. The Northern Bank Direct Money Market account is offering 2.26% APY on average daily balances up to $250,000, with the rate guaranteed through June 30, 2019 ($5,000 minimum to open). In terms of liquid savings accounts, this is the highest rate currently available (with a few quirks noted above). There are a few short-term CDs with higher rates (and withdrawal penalties), but this is more like a no-penalty CD you can also add funds at any time. If you have a large cash balance and you want to preserve your liquidity options, this is something to consider. Act fast though, as previous similar accounts have closed to new applications after a few weeks.

Check out my Ultimate Rate-Chaser Calculator to estimate how much additional interest you’d earn if you switched over and make an informed decision.

How To Build A 4-Week Treasury Bill Ladder: A Visual Guide

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

For my magic trick today, I will be resurrecting a post from over 11 years ago! That’s the last time it there was any significant interest for an individual to buy Treasury Bills instead of using a top-yielding bank account. As of 6/18/18, a 4-week T-Bill rose to a 1.83% yield. Since T-Bill interest is exempt from state and local income taxes, your tax-equivalent yield could top 2% today.

This is a short visual guide on creating a Treasury Bill ladder, which maximizes your liquidity. If you use the TreasuryDirect website, it now includes an option for automatic reinvestment upon maturity, which makes things even easier after the initial setup.

Quick Facts

  1. Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay ~$99x dollars upon issue and receive $1000 upon maturity.
  2. You can either buy them at TreasuryDirect.gov, or from a brokerage firm that offers a bond desk like Fidelity, Vanguard, TD Ameritrade, etc.
  3. Rates are set by auction, so you will not know your exact interest rate before you commit to buy. You can look at historical rates to help get you a ballpark estimate.
  4. 4-week T-Bill auctions are normally held on Tuesdays, and the T-Bills both issue and mature on Thursdays. Here is a list of upcoming auctions.
  5. You must schedule your non-competitive bid before 11am Eastern time on the auction date (Tuesdays), otherwise you are pushed to next week. (TreasuryDirect now allows automatic reinvestment upon maturity for up to 2 years.)
  6. The transfer of money to/from your bank account upon purchase/maturity is well-synchronized. That is, if one Treasury Bill matures (deposits $1,000) and another is issued on the same day (withdraws $995), your bank account should have a net positive $5 balance at the end of that day.

Visual Guide To Setting Up A Treasury Bill Ladder
Laddering is a method of purchasing that increases the liquidity of fixed term investments such as Treasury Bills. Imagine if you bought a T-Bill every week, and each one lasts for 4 weeks. After four weeks, you could simply use the proceeds of your first T-Bill to purchase your fifth T-Bill. The week after that, you could use the proceeds from your second T-Bill to purchase your 6th T-Bill, and so on forever. If you stopped buying T-Bills, you would get $1,000 back each week until all have matured.

TreasuryDirect now has a minimum purchase amount of $100, allowed in increments of $100. This means you would need to commit 4 x $100 = $400 to create a weekly ladder. Other brokerage firms may impose a higher $1,000 minimum per T-Bill. If you don’t have enough, you can simply buy them at less frequent intervals. Below are four visual examples for buying a $1,000 T-Bill every month, every two weeks, and every week:

Monthly Ladder of $1,000 T-Bills ($1,000 committed)
Assuming a discount value of $995:
Week #1: T-Bill #1 will be issued on Thursday (net taken from bank account: -$995)
Week #5: T-Bill #1 will mature (+$1,000) and T-Bill #2 will be issued (-$995) on Thursday (net: -$990)
(and so on…)


In some months, there may be a gap between the T-Bill maturing and the next one issuing, but you should never have more than $1,000 invested “outside” in T-Bills. However, you may have to wait up to 28 days for your money to come back to you.

Bi-Weekly Ladder of $1,000 T-Bills ($2,000 committed)
Week #1: T-Bill #1 issued on Thursday (net: -$995)
Week #3: T-Bill #2 issued on Thursday (-$1990)
Week #5: T-Bill #1 matures, T-Bill #3 issued on Thursday (-$1985)
Week #7: T-Bill #2 matures, T-Bill #4 issued on Thursday (-$1980)
Week #9: T-Bill #3 matures, T-Bill #5 issued on Thursday (-$1975)
(and so on…)

As you can see, you should never need more than $2,000 committed to T-Bills using a bi-weekly ladder. If you have $2,000, this would be a better way to set up your investments since in the worst case you can stop buying new T-Bills and get access to half your investment in 14 days once the ladder is constructed.

Weekly Ladder of $1,000 T-Bills ($4,000 committed)
Week #1: T-Bill #1 issued on Thursday (net: -$995)
Week #2: T-Bill #2 issued on Thursday (-$1990)
Week #3: T-Bill #3 issued on Thursday (-$2985)
Week #4: T-Bill #4 issued on Thursday (-$3980)
Week #5: T-Bill #1 matures, T-Bill #5 issued on Thursday (-$3975)
Week #6: T-Bill #2 matures, T-Bill #6 issued on Thursday (-$3970)
Week #7: T-Bill #3 matures, T-Bill #7 issued on Thursday (-$3965)
(and so on…)

Practical Details
If you don’t already have a preferred brokerage account, you can buy T-Bills online at TreasuryDirect.gov. Check out the TreasuryDirect Guided Tour for a walkthrough; It’s very similar to opening an online bank account. You will need to verify your identity with your Social Security Number, but there is no credit check. You will need a bank account as an initial source of funds.

After logging in, do not use “Purchase Express”, click on the “Buy Direct” tab on top instead, and choose “Bills”. Here is a screenshot of the entire purchase screen, including the option for automatic reinvestment (into another T-Bill of the same type and term):

If you choose your interval correctly, everything pretty much goes on autopilot. For a 4 x $1,000 weekly ladder, you would just set up 4 purchases and have them reinvest automatically for up to 2 years. Note that I chose both the source and destination of funds to be my bank account. If you are using a savings account, remember that they are limited to 6 withdrawals per month. If you want to avoid the extra transactions at the expense of a little bit of interest, you may choose to use the “Certificate of Indebtedness” as your source or destination account. Just think of it as a savings account that pays no interest that serves as a holding place for money. Obviously, you don’t want to keep too much in there.

Bottom line. Individuals can invest in Treasury Bills, which are Treasury Bonds with a maturity of one year or less. T-Bill interest rates are now competitive with top online bank accounts, even exceeding them in some cases due to the interest being exempt from state income taxes. Structuring them as a T-Bill ladder is a way to increase your liquidity. By creating a ladder of 4-week T-Bills maturing every week, you can always have access to 1/4th of your funds in a week, 1/2 of your funds in 2 weeks, and so on.

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