Not so Talked About Investment Options I Tried (Part One)
Today’s guest post is from Leonard Loo, an entrepreneur and author based in Japan. He actually sent me an email a few weeks ago asking about whether he could sponsor a post on the site about his new book. As you know, RetireJapan does not run ads or paid content, and normally I would just delete unsolicited pitches. However, his email was really polite and well-written and I ended up buying Leonard’s book to check it out. It’s a good read and I was interested that it talked about social lending and day trading, two forms of investing I am less familiar with. And so the guest posts this week and next week were born. Take it away Leonard 🙂
Social lending (which is more commonly known as peer-to-peer or P2P lending in English) gives individuals like you and me the ability to lend money to other individuals or businesses through online services (referred to as “platforms” below) that match one with the other. Simply put, if I have some extra money lying around, I can lend it out to someone else and earn some interest.
Since I believe that lending to individuals correlates with higher chances of the borrower defaulting on paying back the loan, I only signed up with platforms that lend money to businesses. Personally, I have accounts with three such platforms: Crowd Bank, OwnersBook, and SBI Social Lending.
The way these platforms work is that they create funds for certain projects that need financing. A few examples of such funds relate to real estate, solar energy generation, and biomass powerplants. For each fund they come up with, they provide information regarding the project it will be used for, the borrower, the expected return on investment (ROI), the duration, and the collateral (if any), among other things.
If I am convinced that my money will be safe and it will be returned to me with interest, I submit an application to lend money to the borrower. Usually, the minimum amount is 10,000 yen, although this can vary depending on the fund. After that, I just need to wait for the platforms to report how much I made.
For some perspective and to get a better grasp of the numbers, let me compare this to how much interest I receive for my savings account with Mitsubishi UFJ Bank. Based on a little research, the current interest I receive for keeping my money with them 0.001% per year. In other words, if I had 1 million yen in my savings account, that would amount to 10 yen worth of interest after a year. Now, if I take half of the 1 million yen (of course I need to set aside some money for emergencies) and lend the same to a fund run by one of these platforms at the interest rate of 3.0% (this is the lowest advertised ROI for these three platforms, and it could go as high as 10%), that would be equivalent to 15,000 yen worth of interest for the social lending platform, plus 5 yen worth from the savings account. That’s 1,500 times better than simply leaving all my money in the bank.
(*Note: For simplicity, these calculations use simple interest and are before taxes.)
For me, the biggest risk for this kind of investment is the possibility that the borrower defaults on paying back the loan, resulting in the entire principal disappearing. To mitigate this danger, I only choose funds that have a collateral. I also spread out the amount I invest between the three platforms, remembering not to “put all my eggs in one basket.”
I hope the above is sufficient for you to understand at least the basic idea behind this type investment. However, if you have things you would like to clarify, please leave a comment below and I will try to answer them to the best of my ability based on my own experience.
Thanks Leonard! Anyone else have any experience with social lending in Japan? Any questions?
Where to start…
1. How do you assign a probably of default/loss given default to your investments? In other words, how do you decide whether you’re earning a reasonable rate of interest?
2. How do you take into account collateral for #1?
3. What types of collateral are being offered?
4. What are the platform fees?
5. What is the liquidity profile of these investments like (i.e. how long do you lock your money up for)?
6. Can you give some concrete examples?
The article was quite short on detail.
Thank you for the feedback. ^_^
1 to 3. In my case, I researched the platforms themselves first to see their track record by reading reviews of third party websites including kuchikomi found online. In my opinion, if the platform is trustworthy, then the funds they have would also be trustworthy because their business would suffer if word got out that investors lost money from using them (during the course of my research, I found one which I believe was sued – I didn’t take a look into the details of the said case anymore). From there, if the fund had collateral (for real estate related funds, this would be the property itself and/or the land it was standing on; for solar power generation related funds, the land where the power plant is being built, etc.) and there were no serious red flags (like the balance sheet of the borrower being horrible), I would put in a small amount (around 50,000 yen) and look to another one I could lend money to. I diversify as much as I can so that the risk related to any single fund is minimized.
4. None to open an account, at least for the three I mentioned. You have to shoulder the bank fees to transfer money to them to start. I believe some also ask you to cover the bank fees when they transfer money back into your account.
5. Depends on the fund. I have money that is locked in for only six months, and some for three years.
6. By concrete examples, I’m assuming you mean a fund. OwnersBook handles real estate-related funds. One of the funds I applied for before with them was for a fund to buy an apartment unit. I believe it advertised a 4% ROI (approximately). They provided the location of the property, their valuation of it, etc. (Their valuation was higher than the amount being borrowed.) After maybe 6 months, they managed to re-sell the apartment unit at a profit and paid off the loan. Thus, the entire principal was returned to me plus a little interest (since it didn’t last an entire year, the ROI was less than the advertised amount).
*Please note I am not recommending these platforms and I am simply sharing my own experience. I also do not claim to be an expert on the subject. 🙂
Hey just wondering which, if any, of the social lending platforms in Japan are accessible to non-permanent resident foreign investors?
I still don’t have permanent residency status so these three would probably still be accessible to non-permanent residents (unless they changed their guidelines from when I opened my accounts).
Thanks, good to know. Seem, to remember maneo requiring permanent residency
Thank you for taking the time to share your experience. I definitely feel your pain regarding the low interest rates on our bank accounts here. How long have you been investing in this P2P lending? How does the tax reporting get handled?
My pleasure. ^_^
I started earlier this year in January. As for tax reporting, the platforms I use automatically deduct the withholding tax (源泉徴収税) from what they give you. For example, if you lent money and you are entitled to 2,763 yen in interest, they would provide this information on the platform then tell you that you actually only receive 2,204 yen because 559 yen was withheld (these numbers are an actual example of what happened in my case for a single month). Based on my understanding, they will be providing me with a full-year summary of how much I earned and how much tax they withheld sometime in January to February, to submit to the tax office. Since I am not a regular employee and I need to file a tax return anyway, I am not sure about the obligation to do the tax reporting for regular employees.
Just what I wanted to know; thank you!
To play devil’s advocate, why would you invest in P2P rather than, say, index tracker funds? The yields seem to be similar (average long term yield of stock market might be around 7%, which is pretty much in the middle of your 3-10%), and presumably investing in an index tracker gives you greater diversification with lower risk of default. Would be interested to hear your thoughts, and many thanks for the post!
You’re welcome! ^_^
It’s not that I prefer this over investing in index funds; it’s my own personal decision to diversify as much as possible. I have tsumitate NISA and iDeCo accounts which periodically invest in such funds. I also have regular securities accounts where I again invest in various index funds, and where I trade stocks as well (part 2 is about this! ^_^). This is just another type of investment to diversify.
The recent wave of failures in Europe P2P industry highlight the risks (Lendy, Collateral and TrustBuddy) that investors should be aware of.
Lendy for example is currently in administration. It will take years to fully resolve. The administrators have claimed recoveries will vary between 7% and 100% of the loan value. Investors can probably expect 50% capital loss!
Lendy highlights many risks that these platforms have. On the surface it can look pretty safe with all asset backed loans that had maximum of 70% LTV (loan-to-value). However you can have:
* Incorrect valuations of asset that backed loans.
* Valuations of assets much lower when in a distressed sale.
* Property development projects failing before anything of value has been created.
* Unscrupulous borrowers that go bankrupt https://www.theguardian.com/commentisfree/2019/aug/26/bury-britain-gigg-lane-brexit
* High recovery fees that eat into the amount recovered from defaulting loans.
* Borrower threatening to sue lenders – https://www.businessinsider.com/lendy-faces-lawsuit-2018-10
I’d recommend: doing careful research; diversify across platforms and don’t make P2P a high portion of your wealth.
This is a great resource on UK platforms – http://p2pindependentforum.com/
Thanks! I completely agree with your recommendations here. I did/do the same. 🙂
The social lending concept as outlined here sounds like high risk little reward. Having one million yen on the line, with the possibility of gaining 15,000 yen?
As it is a new fairly new concept and regulation (compared to banks) is probably not what it should be.
Anyone ‘investing’ in these schemes will get their fingers burnt eventually.
I’m not going to defend social lending since I also think there is a risk with using them. That is why I only invested a small portion of my savings there. It is also the reason I use three platforms and spread out lending money to numerous funds.
P.S. My example was to use half of the million yen to receive 15,000 yen. ^_^
Leonard fair enough if you are happy with using the social lenders. But I think the potential market is relatively small.
I wouldn’t want to spend the time researching options and doing the necessary transactions and form filling for 15,000 yen to deposit my money in place potentially less secure than bank.