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Linear Optimization of P2P vs Property Investment
Topic Started: 2 Sep 2015, 11:33 PM (686 Views)
Terry
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Just did an interesting little exercise in linear optimization across a portfolio of P2P loans to approximate the value of the portfolio needed to meet the median rent (which I have benchmarked as the median rent for Sydney provided by Domain as $27,040 p.a. before expenses).

Pumping all that into LibreOffice and optimizing / entering constraints for loan defaults and risk levels, the principal needed to secure a p.a. interest equivalent to a median rental p.a. for a property in Sydney is....wait for it....$243,115.30.

For those with access to cash, the possibilities are quite positive.
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Loki
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Terry
2 Sep 2015, 11:33 PM
Just did an interesting little exercise in linear optimization across a portfolio of P2P loans to approximate the value of the portfolio needed to meet the median rent (which I have benchmarked as the median rent for Sydney provided by Domain as $27,040 p.a. before expenses).

Pumping all that into LibreOffice and optimizing / entering constraints for loan defaults and risk levels, the principal needed to secure a p.a. interest equivalent to a median rental p.a. for a property in Sydney is....wait for it....$243,115.30.

For those with access to cash, the possibilities are quite positive.
What term structure? What is the IRR?


“Talk sense to a fool and he calls you foolish.” - Euripides
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peter fraser
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Terry
2 Sep 2015, 11:33 PM
Just did an interesting little exercise in linear optimization across a portfolio of P2P loans to approximate the value of the portfolio needed to meet the median rent (which I have benchmarked as the median rent for Sydney provided by Domain as $27,040 p.a. before expenses).

Pumping all that into LibreOffice and optimizing / entering constraints for loan defaults and risk levels, the principal needed to secure a p.a. interest equivalent to a median rental p.a. for a property in Sydney is....wait for it....$243,115.30.

For those with access to cash, the possibilities are quite positive.
Completely different risk profile and there is no capital gain, but yes it's an interesting avenue of investment and it would suit many people as long as they understood the risks and they wanted to diversify.
Any expressed market opinion is my own and is not to be taken as financial advice
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Terry
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Loki
2 Sep 2015, 11:38 PM
What term structure? What is the IRR?
It's a very simple linear optimization over a 12 month period without any reinvestment of interest into new loans and an assumption of no early repayments of loans and rental payments going towards servicing costs.
peter fraser
2 Sep 2015, 11:46 PM
Completely different risk profile and there is no capital gain, but yes it's an interesting avenue of investment and it would suit many people as long as they understood the risks and they wanted to diversify.
That's right. There is no capital gain, but monthly interest payments received that can be reinvested, and there are also no requirements to repay and service mortgages and costs for maintenance.
Edited by Terry, 2 Sep 2015, 11:59 PM.
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Loki
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Terry
2 Sep 2015, 11:55 PM
It's a very simple linear optimization over a 12 month period without any reinvestment of interest into new loans and an assumption of no early repayments of loans and rental payments going towards servicing costs.
OK. I calculated your IRR for different average maturity.

Average
Maturity IRR
10 1.99%
11 3.52%
12 4.75%
13 5.74%
14 6.54%
15 7.21%
16 7.76%
17 8.22%
18 8.61%
19 8.93%

Or is $27,040 the interest component only?

Did you use the 1 year default rate in your optimisation?





“Talk sense to a fool and he calls you foolish.” - Euripides
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peter fraser
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Terry
2 Sep 2015, 11:55 PM
It's a very simple linear optimization over a 12 month period without any reinvestment of interest into new loans and an assumption of no early repayments of loans and rental payments going towards servicing costs.

That's right. There is no capital gain, but monthly interest payments received that can be reinvested, and there are also no requirements to repay and service mortgages and costs for maintenance.
I think you said that the interest rate was about 13%, but if they are short term loans and are reinvested then the annual return will be a bit higher depending on the loan terms.

It's debt write offs that would hurt the yield like crazy, but that's a mix of luck and experience and those factors vary considerably between investors.
Any expressed market opinion is my own and is not to be taken as financial advice
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Terry
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Loki
3 Sep 2015, 12:10 AM
OK. I calculated your IRR for different average maturity.

Average
MaturityIRR
101.99%
113.52%
124.75%
135.74%
146.54%
157.21%
167.76%
178.22%
188.61%
198.93%

Or is $27,040 the interest component only?

Did you use the 1 year default rate in your optimisation?


Interest component only. That's the target for the linear optimization to match.
peter fraser
3 Sep 2015, 12:15 AM
I think you said that the interest rate was about 13%, but if they are short term loans and are reinvested then the annual return will be a bit higher depending on the loan terms.

It's debt write offs that would hurt the yield like crazy, but that's a mix of luck and experience and those factors vary considerably between investors.
It depends on the risk. The highest risk loans I see are at set at around 27% interest p.a. for loans typically under $10,000. The lowest risk loans are closer to 12%. Debt write off is where linear optimization comes into play so you can optimize based on default rates.
Edited by Terry, 3 Sep 2015, 12:44 AM.
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Loki
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Terry
3 Sep 2015, 12:38 AM
It depends on the risk. The highest risk loans I see are at set at around 27% interest p.a. for loans typically under $10,000. The lowest risk loans are closer to 12%. Debt write off is where linear optimization comes into play so you can optimize based on default rates.
But do you match the default rate with the term of the loan?

And what is the average maturity? 90 days? 1 year?

Maybe you can provide some links again to the P2P markets you frequent.


“Talk sense to a fool and he calls you foolish.” - Euripides
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Terry
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Loki
3 Sep 2015, 12:48 AM
But do you match the default rate with the term of the loan?

And what is the average maturity? 90 days? 1 year?

Maybe you can provide some links again to the P2P markets you frequent.
I keep that closely guarded for a number of professional reasons but I recommend you read the following from our friends at SMH who also tread carefully re this business.

http://www.smh.com.au/business/banking-and-finance/morgan-stanley-says-peertopeer-loans-will-soar-to-22b-in-australia-by-2020-20150522-gh787e.html
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