Lately I’ve been obsessing over passive income.  Namely how I don’t have any.

If you stopped working tomorrow, how long would it be until you ran out of cash?

This will be priority #1 in 2012.

-Nick

Related posts:

1. Occupy Wall Street: Income Inequality Share Tweet Income Inequality: Occupy Wall Street thinks the American...

Related posts brought to you by Yet Another Related Posts Plugin.

Here’s an update on my experiment with peer-to-peer lending with Prosper.com.  The micro-loans have been active for 6 months, so it’s a good time to review the performance.

My Prosper numbers:

• Initial investment: $5000
• Interest payments received: $393.18
• Charge-offs: $25
• Net Gain (interest minus charge-offs): $368.18
• Approximate annualized rate of return: 14.7%

I’m pretty happy with that, even though I received my first charge-off since the last update.  The return is especially nice considering the same amount invested in the S&P 500 would have lost about 15.5% during the same time.

I have 204 active notes (loans) remaining.  Of those, about 6% are delinquent, so I will probably see some more charge-offs in the future.

One thing to be aware of is that Prosper.com has gotten rid of their Automated Plans and replaced them with a new option called Quick Invest.  In taking the 1-minute tour, Quick Invest seems really simple and similar to Automated Plans except you can see the notes you’ll be investing in beforehand.  You can read what each borrower plans to use the money for rather than investing blindly like I did with the Automated Plans.  (And if you prefer investing blindly, no one will force you to read the loan descriptions.)

I’m looking forward to seeing how the loans do the rest of the year and what happens with the delinquent notes.  While I hope these borrowers get their act together, the account is set up to be able to tolerate a certain loss ratio while maintaining a strong return.

-Nick

Related posts:

1. Prosper.com Update: My Loans Are Earning Over 10% Share Tweet Now that I’m a couple months into my...
2. Your Citi ThankYou Rewards Points Are Worth Less Than You Think Share Tweet Citi makes their ThankYou Rewards program out to...
3. Even More Fun With the IRS Share Tweet I received a letter from the IRS last...

Related posts brought to you by Yet Another Related Posts Plugin.

Now that I’m a couple months into my experiment in peer-to-peer lending with Prosper.com, I thought it would be a good time for a performance update.

Using their automatic investment plan, I bought a portfolio of 199 notes with varying credit ratings.  So far, 193 are current, 4 are delinquent, and 2 have been paid off in full.  Because the notes had different acquisition dates, I haven’t calculated an exact rate of return.  But based on the range of acquisition dates, my loans are earning between 13.4% and 19.4% in real annualized returns.

I know it’s too early to judge the long-term performance of these investments, but I’m excited to be earning 13-19 times more than I was with the money sitting in savings.

I expect the returns to move toward the 10.4% historical average as more notes mature and more fall into delinquency.  The beauty of the diversified portfolio is that a certain number of these notes are expected to fail, and those write-offs are built into the 10.4% returns Prosper.com advertises.

If you want to set up your own investor account, I would keep three things in mind:

• Understand that just like the stock market, past performance is not a guarantee of future returns.
• Invest an amount you’re comfortable with, but large enough to build a diverse portfolio of loans.  The minimum per note is $25.
• Understand the money will probably be tied up for 3 years.  Most notes have a 3-year term (although some are paid off early), and I don’t know if there is an aftermarket where you can sell to other investors for cash.

If you sign-up or are a current Prosper.com investor, please feel free to share your experience here.  As time goes by, I’ll probably post another update.

Disclosure:  The figures above are from my actual experience as a Prosper.com lender, which began in late January 2011.  Links to Prosper.com are affiliate links.

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

I recently signed up for Prosper.com.  Prosper.com is a site that facilitates peer-to-peer lending — offering borrowers lower interest rates than credit cards or hard money loans, and offering lenders higher interest rates than traditional CDs or savings accounts.  It’s a win-win, and a cool business model that creates value for everyone involved.

Across a diversified network of personal loans, Prosper.com investors have earned a 10% annualized return (according to their recent data).  Since my ING savings account currently pays just 1.1%, I figured I might as well give it a shot.  Of course past results are not a guarantee of future returns, and unlike ING, there is a small chance my investment could go to zero.

How Investing in Prosper.com Works

As an investor, you can choose between individual loans and automated plans.  For individual loans, you will see the requested loan amount, the interest rate, the Prosper.com rating (similar to credit-rating), and a personal note from the borrower explaining what they intend to do with the money.  Individual loans are perfect for investors looking for specific types of loans — debt consolidation or certain small businesses, for example.

You can invest as little as $25 in each loan, or any amount up to the full value of the loan.  Prosper.com loans are capped at a maximum principal balance of $25,000.  Like any investment, diversity is key to minimizing your risk.

Based on historical performance, Prosper also provides investors lots of statistics, including estimated loss rates and rates of return for each loan rating level:

As a Prosper.com rookie, I selected two automated plans: one that will invest in A, B, and C-rated loans, and one that will invest in D and E-rated loans.  Within a few minutes of setting up the plans, I already see several pending investments in my account.  They will become active once the loan reaches 100% funding.  I opted to invest in $25 increments to maximize diversity.

After the loans close, then I play the waiting game.  I’m curious to see how the peer-to-peer loans on Prosper.com perform.  If I end up doing better than 1.1%, which hopefully won’t be too hard, it will be a great victory.  If this initial test investment goes well, I can see myself allocating more funds to Prosper.com loans.

Prosper.com Pros and Cons for Investors:

Pros:

• Earn better returns than savings or CDs.
• Invest in real people, not big companies or banks.
• Customize your investments for risk, return, and personal interest.

Cons:

• Not FDIC insured.
• No guaranteed return.
• Not as liquid.

I’m looking forward to tracking the results of the little experiment.  The company has had its share of legal battles and other headaches, so it will be interesting to see what happens in the next couple years.  Anybody else had experience (positive or negative) with Prosper.com?

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

The Big Short: Inside the Doomsday Machine is bestselling author Michael Lewis’ (Liar’s Poker, Moneyball, The Blind Side) look at the 2008 financial crisis and the events and adventures that created it.  I didn’t get it.  Or, more accurately, it wasn’t a very satisfying read.

The Big Short leaves you — at various points in the plot — intrigued, inspired, confused (a lot of times), hopeful, hopeless, happy, and angry.  But mostly I walked away scratching my head.  As a history text, I tried to read it for an answer to the question, “What can we do to prevent a similar collapse in the future?”  And I’m not sure it was in there.  The nature of the problem and it’s causes seem so complex and yet so financially lucrative, I’m skeptical that government regulation alone will be able to curb it.

In hindsight, of course the subprime mortgage crisis was easy to spot.  There were plenty of warning signs and outspoken naysayers, but surprisingly few people put their money where their mouth was.  Lewis casts these people as the central characters in the book, people who made huge bets against subprime loans.  To me, these where the inspiring characters.  I take very little interest in the stock market, pretty much invest in index funds and reason that thousands of people much smarter than make the market run efficiently.  These guys took the opposite view: that the market was beatable if you found the right plays.  And given the evidence they saw of impending doom in the housing sector, they took that gamble.  Everybody thought they were crazy.

Here’s my basic understanding of what went down, and I had a hard time sorting through all the Wall Street lingo, so could be way off.

• Mortgage lenders popularize the “originate-and-sell” business model, meaning they sign the customer up for the loan, and then immediately sell the loan to some bigger bank.
• This ultimately leads to them not caring much about the credit-worthiness of the homebuyer, since they collect a fee upfront and quickly rid themselves of the (semi-unlikely to receive) stream of receivables.
• Homebuyers are offered an exotic array of home loan products, including low 2-year teaser rates, $0-down loans, interest only loans, negative amortizing loans, etc.  All without verification of income!
• Since everyone can get a home loan now, demand for housing booms and prices skyrocket.
• Homebuyers (I think) understand their loans are unsustainable, but are told they can refinance in 2 years as long as prices keep rising.  It’s a win-win, people keep their houses, loan originators collect a new fee, the bubble continues to grow.
• Wall Street banks package thousands of these subprime mortgages into bonds.
• Wall Street banks convince the ratings agencies (Moodys, S&P) the bonds contain loans that are significantly diverse enough to warrant high (AAA) ratings.
• A rating of AAA meant the bonds were essentially riskless, the same rating as US Treasury bonds.
• The sell them off to other big banks and investors.
• A few people recognized the bonds really weren’t riskless, given that one factor could cause huge numbers of these homeowners to default all at once: a decline in home prices.
• These people start buying insurance on these bonds, where the insurance pays out if the bond goes bad.
• Since these bonds are riskless AAA-rated bonds, the likelihood of them going bad is ostensibly very low, so the insurance is very cheap.
• AIG and other big companies end up being the insurers.
• The bottom drops out, the bonds go bad, the good guys get rich, and the bad guys lose their shirts.
• The government gives the bad guys their shirts back.

And the rest of saw our property values plummet, our retirement accounts cut in half, and unemployment spike above 10%.  Lewis calls it the “most purely financial economic disaster in history.”  A worldwide recession triggered by trading paper.  Was it worth it?

I don’t know.  Loved Moneyball, thought The Blind Side movie was good, just wasn’t that into this one.  I think being on the losing side of the game as a homeowner, investor, and taxpayer jaded my opinion.

FTC Disclosure: If you buy The Big Short through the above link, Amazon will pay me 4% of the purchase price.

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

I recently had the opportunity to play the CashFlow board game with a group of Bay Area real estate investors.  CashFlow is a game designed by Robert Kiyosaki (Rich Dad, Poor Dad) to teach basic financial and bookkeeping skills.  It’s something of a cross between Monopoly and Life, with the object of the game being to escape the “Rat Race” by growing your passive income enough to cover your monthly expenses.

In the Rat Race, players go around in a circle, collecting paychecks, buying “doodads,” and making investments.  There are a number of ways to increase your passive income including buying dividend-paying stocks, rental real estate, and small “auto-pilot” businesses.   In my game, I had a number of rental properties but the investment that really put me over the top was a car wash business.  That acquisition increased my passive income beyond my monthly fixed expenses, allowing me to quit my teaching job and escape the Rat Race.

After that, I was onto the “Fast Track” — another loop of spaces on the board filled with potential big business deals and living-large experiences.  At the beginning of the game I’d put my “dream” piece of cheese on the “Heli-Skiing in the Alps” square.  I managed to get divorced and sued along the way, but eventually made it to my heli-skiing dream.

I had some serious beginner’s luck, but I think CashFlow is a pretty fun yet educational game.  It gets you thinking about how to better put your dollars to work for you.  Since I’m a huge nerd like that I had a hard time sleeping that night after playing; my brain was firing on all cylinders.  It may not be the most realistic depiction of life, but it definitely gets you thinking about how to apply some of the same strategies personally.

The CashFlow boardgame itself is super-expensive, like $260.  But I suppose that cost is justified if it gets people to make better financial decisions, and I imagine they’ll be more likely to take it seriously with that kind of upfront cost.  The best bet may be to find a local group playing and join them.  My game was $5 and I reconnected with an old friend as well as met some other interesting and motivated people.

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

Location, location, location.

On the Internet, a good domain name is the online equivalent of that corner lot in the neighborhood with good schools.  The problem is, all the good names are taken and only “fixer-uppers” are left.  That’s why you have companies called Flickr, Rowdii, Weebly, and Sedo — which auctions off domain names to the highest bidder.

Did You Know?

• According to GoDaddy.com, there are 456,976 possible 4-letter .com domain names.  Of those, only 0.7% remain unregistered.
• Sex.com holds the record for the most expensive domain name ever. It sold for $14 million in 2007.

“Domaining” is the art and science of domain-name speculation.  It turns out that online real estate is much cheaper than the real thing: you can register domains for under $10 a year.  And with the potential to strike it rich by selling to some individual or company with deep pockets, it’s easy to understand the appeal.  No lawns to mow, no rent to collect, only 1′s and 0′s in the ether.

But those kinds of large price tag sales are rare.  A more common way to monetize your domain is to place some text ads or directory ads that look like search results.  Most of these worthless sites won’t show up in Google’s index, but instead rely on “type-in traffic” — where the user just types the domain name into his browser to see what’s there.  For more obscure names, traffic is undeniably low, but it doesn’t take much to cover your cost.  And for a common misspelling of a popular site, it could be a big moneymaker.

I haven’t played these games, but do own a handful of domains.  Most are bookmarked for future projects.  Some I’ll let expire when I realize I’m never going to do anything with it or when I think of a better one to replace it.  My favorite?  BetterThanDuctTape.com is going to be your future source for all spare car parts.

Dot-coms are much more valuable than dot-nets, but it’s hard to quantify how much more valuable they are.  The owner of shoesrus.com had an idea: $5000.  That was three years ago when I said, “no thanks.”  I’ve made a number of attempts to contact him since to make a counter-offer but haven’t had any luck.  Oh well, you live and learn on your first big project.

One of my first domains was NJLEnterprises.com, a quick site built in college for my company at the time.  After moving across the country and changing company names, it had fallen out of use.  Then some guy called me randomly one day and wanted to by it for $100.  Deal.

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

And all I have to do to claim my winnings is send my bank account information to some guy in Nigeria with a hotmail email address.   Here is the super-official text of my winning notification:

From: House Of The Senate House

Subject: Attn

This is to officially inform you that 6.8 Million Dollars has been credited
to you. for info, contact Mr. Eric Lawal on email  atmdept02@hotmail.com
providing him with your Name,age,occupation,Address.
KINDEST REGARDS,
MR DAVID MARK.

If these guys could do just a few little things better, they might get a few more suckers to reply.

1. Pretend to represent entity that actually exists.  “House Of The Senate House” isn’t going to cut it.
2. Write a better subject line.  No official notification has the subject “Attn.”
3. Learn and use proper grammar, spacing, and capitalization.  Presumably if you can afford to give away $6.8 million you could afford some basic education.
4. Get a real domain and email address.  HouseOfTheSenateHouse.com is available for like $10/year.  I can’t suggest using that one, but having a legitimate domain shows you’re way more official than someone using a free hotmail account.  And again, with $6.8 mil in the bank you should be able to afford it.  Consider it an investment.
5. Start smaller.  Nobody believes they can be “credited” $6.8 million for doing nothing.  Maybe if you tried $250 or $500 and said it was part of the stimulus package, you’d have a few more takers.

Since I can appreciate their entrepreneurial spirit, I’ve sent these tips to the spammers at atmdept02@hotmail.com.  I’m looking forward to their response and their next attempt!

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

The “crowds” (Amazon reviewers) liked James Surowiecki’s The Wisdom of Crowds, so I checked it out and read it poolside in Cabo.  I wasn’t a huge fan.

While the book had a few interesting tidbits, it was mostly filled with less-than-insightful passages explaining why our collective intelligence can actually be pretty smart.  For example, it doesn’t seem too surprising that a large group can fairly accurately estimate the number of jelly beans in a jar.

Surowiecki offers up Google’s algorithm as a perfect example of the wisdom of crowds in action.  Google couldn’t possibly sort through the billions of webpages it indexes and rank them in a fraction of a second all by themselves, so their algorithm looks at what sites are linking to other sites for particular keyword phrases.  Each link counts as a vote, with links from “higher-value” sites weighing more heavily.

But I’m skeptical as to how wise crowds really are. After all, it was a crowd that trampled a Wal-Mart employee last Christmas in search of a bargain TV.  And it was a crowd that voted to take civil rights away from their fellow citizens.  The book doesn’t address these kinds of collective failures, but does talk about market bubbles and the perils of “group-think.”  To be truly wise, members of the crowd need to be diverse and act independently.  So break away from the crowd that thought this was an awesome book and skip it.

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.

I picked up David Bach’s Smart Couples Finish Rich from the library and finished it over the weekend.  I can’t remember who had recommended it, but I didn’t feel it was the best financial book for a couple in their mid-twenties.  Too much time was spent on wills and trusts, life insurance, long term care insurance, and other legal and financial instruments designed to protect your assets and your loved ones when things go south.  I guess it’s never too early to start thinking about that stuff, and maybe I’m just being naive, but I got the feeling I was not target demographic for the book.

Based upon the title alone, I was worried Smart Couples would promote “finishing” rich, at the expense of living richly your whole life.  And while Bach is a proponent of the deferred life plan (at least in Timothy Ferriss’s terms), he does spend considerable time assessing each couples’ values and recommending ways to live happier in the present.  After all, there’s no point in starving yourself for 40 years only to be able to feast at 65.

Much of the financial advice presented is your pretty standard “invest x dollars per month at y percent interest and in z years you’ll be a millionaire.”  Bach explains the value of investing with pre-tax income with a 401(k) plan, and also asks readers to examine how their “little” purchases each week add up to significant dollar amounts, especially when compounded over a number of years.

The real value of Smart Couples Finish Rich is in the idea of setting out a financial plan –as a couple– and sticking to it.  Bach cites money-trouble as the #1 cause of divorce in the US, and says the only way to prevent that is open and honest communication.  Common sense stuff but I guess all too commonly avoided!

Since it was written in 2001, some of the tax law facts are now outdated, as are the websites referenced.  Although there is nothing particularly ground-breaking about Smart Couples Finish Rich, it is a good refresher course on how to be smarter with your hard-earned dollars, which is always valuable –especially in today’s economy.

-Nick

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.