stock investment

Investing – New way to CFD trading

Recently I have been told about margin trading, and decided to give it a go. However, instead of buying shares with only my money. I trade with CFD, which comes with greater risk, but higher rewards.

Tl; dr;

I invest into dividend stocks that pay dividend more than what I need to cover the margin loan interest rate, and pocket the difference.

There are risks involved such as margin call when stock price drops to a predetermined level, companies decide to pay less dividend than before, etc.

What is CFD?

CFD stands for Contract for Difference. According to investopedia, a CFD trade pays the difference between buying and selling prices, and enables trader to borrow money to buy shares. For example if I buy at $10 and sell at $11, I will profit $1 per share. However if I buy at $10 and sell at $9, I lose $1.

There are other fees involved when trading CFD, as per below.

  • Brokerage fee: this depends on the brokerage platform, normally ranging from 0.01% to 1%, applies to both buying and selling positions.
  • Interest rate: the interest rate that trader needs to pay for the margin loan that he or she borrows to trade. The interest rate is predefined in the PDS of the brokerage website, and it can be as cheap as (RBA + 2.5%) to as high as (RBA + 9%) or even higher that I am not aware of.
  • Guarantee stop loss fee: in the event of stop loss sell, if the price already moves past the stop loss point, this will ensure that I can still sell the share at that stop loss points. E.g. I buy stock at $10, stop loss is at $8, but the stock drops under $8 before I have a chance to sell. If I pay for the guarantee fee, it will sell the shares for me at $8 instead.

Risks when trading CFD.

I need to take massive risks when trading using CFD.

  • Margin call: when the stock falls below a certain threshold, the platform will sell my share automatically to preserve the amount that I borrowed, which basically will crystalize my loss.
  • Higher exposure to the market, and higher exposure to loss due to leveraging.
  • Noone can time the market correctly, and accurately predict the movement of a company stock.

How do I (potentially) reduce the risks?

  • Utilizing an angle of CFD: CFD shares can receive dividend at ex-dividend date. Therefore I do not need to time the market to make profit. In an ideal world, if I buy in a share that pays more than the interest rate, I can pocket the difference without waiting for the share to appreciate in value.
  • To prevent margin call, or to lessen the blow if that happens, I place a realistic stop loss level. This will ensure that I do not lose all my capitals, should the price drops too low.
  • The mindset is simple, if I trade 10 positions, I just need to win 8, and accept the other 2 as necessary losses.

Let’s talk number

AIZ numbers

As per the calculations above, with the assumption that the price movement is minimal, we can pocket $402.86 after a year waiting (allocate some of that to pay tax please).

This trade was executed yesterday, and all data you see is the actual figure.

There are a few caveats with this approach.

  • Cash reserves to pay interest every day: we need some cash sitting idle to pay interest every day at midnight as the holding cost.
  • If stock increases in value, interest is also go up because of the formula that the brokerage service uses to calculate interest amount.
  • Not for inexperienced trader, since margin trade requires steel-like mindset, able to follow a pre-defined set of rules.

Summary

CFD trading is a high risk form of investment. With a different approach angle, we can significantly reduces the risks. However even with this approach, the risk is still massive and therefore I do not recommend people to follow my method unless they spend some time researching the feasibility of the approach.

Make no mistake, my passion is still with Real estates. This is something that I experiment on the side only.

By Tuan Nguyen

property investment

Discussion – National Rental Affordability Scheme

National Rental Affordability Scheme, or NRAS, is a government scheme to help low to moderate income people with an opportunity to rent homes at a lower rate.

Can investors like us take advantage of that? Let’s find out.

Tl; dr;

  • NRAS pays landlords with an incentive that is 20% or above market rent to offset what tenants need to pay.
  • NRAS commenced on 01 July 2008, and has been through 5 calls for applications.
  • There will be NO further call under this scheme in the foreseeable future.
  • NRAS targets low to moderate income tenants, and targets medium to large-scale investment body (usually 100 or more houses).
  • Payments usually comes in a form of refundable tax.

What is National Rental Affordability Scheme?

NRAS

Source: knowledgesource.com.au

In Layman’s terms, the government will pay a portion of rents to the landlords, and approved tenants will pay the remaining.

E.g. If market rentals is $1,000 per month, Australian government will commit to pay at least $200 per month, and the tenants only need to pay the remaining $800.

NRAS started on 01 July 2008, and was planned to go through 5 calls for applications. However the last call did not commence since the Scheme only supports 38,000 allocations. I.e. Only 38,000 properties can be approved for this scheme.

Who can benefit from this Scheme?

beneficiary

Source: travelinsurancegungei.blogspot.com

Low to moderate income tenants need to be approved to rent  the properties that were approved for this scheme. This means there are 2 separate approval processes that applies to the tenants and the properties. Tenants only need to pay up to 80% of the market rent, and the lowest is 20%.

E.g. If market rent is $1,000; tenants only need to pay between $200 to $800, depending on the approved finance.

The scheme aims to organisations that have about 100 or more houses, provides them with a financial incentive for up to 10 years. This means individual investors will not be able to apply for the scheme directly. However if they buy properties that are already approved, then the scheme will go with the properties.

Financial benefits come in the form of refundable tax credits. The amount of the tax credits is available here.

One thing to note is that the tax credits adjusts for inflation. Which means the amount of credits will be different each year, protects the investors from inflation.

Summary

NRAS is a scheme to help low to moderate income Australian to be able to rent their homes by providing financial incentives to landlord.

It is no longer open to apply in the foreseeable future. However if individual investors buy an approved property, the scheme will follow the dwelling.

By Tuan Nguyen

property investment

Discussion – First Home Loan Deposit Scheme

First Home Loan Deposit Scheme has been in the news since the Coalition won the election. Let us take a deep dive and see what it is and how you can benefit from it.

Disclaimer: information provided in this blog post does not constitute financial advice, please do it at your own risk.

Tl; dr;

  • The scheme is only for individuals who have not bought a property before, or for couple who BOTH have not bought a property before.
  • May work with FHSSS, according to the proposed plan.
  • Up to 10,000 applications per year.
  • No Lender Mortgage Insurance required.
  • Supports low and middle income class.

The scheme

The Coalition government, in the attempt to win the election, rolled out their plan to help low and middle income families to own a house without having 10-20% deposit. According to the plan, eligible applicants only need up to 5% deposit.

The plan allows average Australian to own their house easier, continuing the Australian dream.

The plan commences on 01 January, 2020. You can apply for it here.

What are the benefits

benefits of first home buyer scheme

Source: news.com.au

Multiple benefits are introduced with the scheme, as seen below.

  • Buyer only needs 5% deposit to apply to buy a property as their home.
  • No Lender mortgage insurance applied to properties bought under this scheme.
  • May work with First Home Super Scheme Saver, i.e. if buyer already has 5% of the property value in their super, they may be able to use that to buy the home they want.

An example of a property that can be bought under this scheme.

Property price $600,000
Buyer’s saving $15,000
Super balance $15,000
Saving + super $30,000 (5%)

With the above financial situation, he/she may be able to buy the property. There is no stamp duty since it still eligible for stamp duty exemption.

Disclaimer: there are other fees that can be applied as well, e.g. lodgement fees, PEXA fees, etc.

The catches

the caveat

Source: murfett.com.au

Of course it doesn’t come free, there are multiple caveats that come with the scheme.

  • Only 10,000 successful applications per year. This is quite reasonable and I don’t think there will be a shortage.
  • Australian citizen only, i.e. PR holders will not benefit from this scheme. Indirectly this reduces the potential applicants amount.
  • If a successful applicant refinances, the benefits will be gone. I.e. they will need to pay LMI once they refinance with less than 20% deposit on the house.
  • Applicants will need to have their annual taxable income less than $125,000; and a couple of less than $200,000 combined taxable income. This should not be a big concern, considering the income threshold is quite high.
  • If applying as a couple, both people will need to be first home buyers.
  • Only supports property that have values up to a threshold, this threshold depends on regions. You can find the full table here.
  • Banks want to charge a higher interest rate on properties under this scheme. More information here.
    • This is understandable. If buyers only have 5% saved up and not 20%, there are chances that they are not as responsible with money. Therefore the risk of defaulting is higher.

Summary

There are a lot of benefits for people who can take advantage of the First Home Loan Deposit Scheme. However they will need to be more responsible with their finance so they can keep their home.

Reading the fine print is crucial for families who apply. There can be multiple conditions that you need to know of before signing the contract.

By Tuan Nguyen

house price going up

Discussion – How technology affects housing prices?

Considered to be the largest commodity in the world, real estate has quite a notable exception with an estimated $217 trillion valuation.

Technology, with the emergence of the Internet had greatly impact the whole industry benefiting buyers, sellers, and agents. From the good old day’s basic cold calls, print ads, emails, open house visit, etc., we are now moving to a wide variety of social media sites, virtual apps, IoT devices, chatbots, cloud computing, advanced analytics, and blockchain. Thus, there’s huge room for sales, purchases, and prospects.

Not just that, technology has made it easier to get data on quality via user ratings on certain websites. People doesn’t only look for accessibility, pleasant climates, booming economies, and appealing amenities, but also the quality of nearby amenities.

recent study in the Journal of Urban Economics that uses data from Washington D.C. finds that restaurant quality, as measured by Yelp reviews, impacts property values: A doubling of the number of highly rated restaurants (rating > 3.4) within a mile radius of a home is associated with an 11.5% increase in the home’s value.

Information accessibility through technology thus, opens a wide market landscape with specific variables, thus, affecting housing prices.

As the aforementioned study has shown, housing prices increase in areas with the best amenities as the quality of those amenities becomes well known.

Tl; dr;

Technology plays a major role in making it easier for everyone to share and gather digital information in acquiring homes.It helps buyers getting more-realistic view of the property plus, the quality of amenities available on that certain area. The higher the housing demand on that area, the higher the housing value of the homes located nearby.

The housing industry does affects customer decision at the same time, the market value of homes.

The Ever-changing Housing Industry with Technology

smart home

Source: iot.eetimes.com

Traditionally based on three assets, namely land, building and money, the housing sector under the real estate industry has now digital information employed to technologically assess in terms of demographics, government policies, interest rates on certain locations through valuable apps and websites, enabling customers in need of buying or renting homes to deeply monitor housing rates. This is very much useful for the younger generation who will interested in home ownership.

In 2018, CoreLogic together with RTi Research of Norwalk, Conn., conducted an extensive consumer housing sentiment study, combining consumer and property insights. In their findings, potential buyers in the younger millennial demographic have the desire to buy, 40% are extremely or very interested in home ownership.

In fact, 64% say they regularly monitor home values in their local market. However, while, 80% of younger millennials plan to move in the next 4 or 5 years, 73% cite affordability as a barrier to home ownership (far higher than any other age cohort).

“Our consumer research indicates younger millennials want to purchase homes but the majority of them consider affordability a key obstacle,” said Frank Martell, president and CEO of CoreLogic. “Less than half of younger millennials who are currently renting feel confident they will qualify for a mortgage, especially in such a competitive environment.”

Rentals market

In talking about home value, online platforms such as Airbnb claimed that they bring more money to cities in both rental fees and the money that renters spend during their stays.The company also notes that roughly three-quarters of its listings aren’t in traditional tourist neighbourhoods, which means that money is going to communities typically ignored by the hospitality industry. Knowing that the company offers over 5 million properties, in over 85,000 cities across the world, and its market valuation exceeds $30 billion.

There is no further evidence on how they came to that conclusion.

Then on, a working paper has been published centering about the effects of home sharing on house prices and rents, collecting data from 3 sources:

  • consumer-facing information, from Airbnb, about the complete set of Airbnb properties in the U.S. (there are more than 1 million) and the hosts who offer them;
  • zip code–level information, from Zillow, about rental rates and housing prices in the U.S. real estate market; and
  • zip code–level data from the American Community Survey, an ongoing survey by the U.S. Census Bureau, including median household incomes, populations, employment rates, and education levels. We combined these different sources of information in order to study the impact of Airbnb on the housing market.

Investigation results show that in aggregate, the growth in home-sharing through Airbnb contributes to about 1/5 of the average annual increase in U.S. rents and about 1/7 of the average annual increase in U.S. housing prices. By contrast, annual zip code demographic changes and general city trends contribute about 3/4 of the total rent growth and about 3/4 of the total housing price growth.

Summary

Technology impact in the housing industry has underlying economics.

Evidences in the aforementioned study about Airbnb show that the platform affects the housing market through the reallocation of housing stock. And by looking at housing vacancies, Airbnb supplies two things: it positively correlates with the share of homes that are vacant for seasonal or recreational use and negatively correlates with the share of homes in the market for long-term rentals.

By Tuan Nguyen

Discussion – Peer to peer lending platforms

Peer-to-peer (P2P) lending platforms is now growing in popularity. They are online investing platforms that match people or companies looking to lend and borrow allowing them to make direct arrangements between one another.

Providing intermediary services, these platforms perform the relevant due diligence risk assessments and credit checks that often include with fee charges for their services but are not part of the final lending agreement.

Some notable P2P lending platforms in Australia are RateSetters, MoneyPlace, SocietyOne, etc.

Tl; dr;

P2P lending system websites connect borrowers directly to investors (lenders), setting the rates, terms, conditions and enables the transaction. People use P2P lending services for a variety of reasons, such as for auto loans, home renovations, debt consolidation, small business loans, and many more.

These platforms are far better than what they can get from credit cards or personal loans from traditional banks.

The system and benefits of P2P lending platforms

peer to peer lending principle

Source: Finextra

A form of direct lending of money to individuals or businesses, peer-to-peer (P2P) lending also called person-to-person lending or social lending has no official financial institution involved in participating as an intermediary in the deal, matching lenders (investors) with potential borrowers.This lending system is generally done through online platform that match lenders with potential borrowers.

One benefit about P2P lending is that borrowers can get loan offers from lending websites at better interest rates compare to traditional banks with overhead costs since peer-to-peer lending companies generally operate online.

Investors get to see and select exactly which loans they want to fund.

Offering both secured and unsecured loans, most of the loans in P2P lending are unsecured personal loans. Secured loans are rare for the industry and are usually backed with luxury goods.

The following are the general steps in P2P lending process:

  • First, a potential borrower obtaining a loan needs to complete an online application on the peer-to-peer lending website.
  • Second, the lending platform assesses the application and determines the risk and credit rating of the applicant. The applicant is eventually assigned with the appropriate interest rates.
  • Third, once the application is approved, the applicant receives the available options from the investors based on his/her credit rating and assigned interest rates.
  • Fourth, the applicant can now evaluate the suggested options available and choosing one of them.

Lastly, the applicant is deemed responsible to pay periodic (typically monthly) interest payments and repaying the principal amount once it reached maturity.

Benefits and fallbacks

Some benefits of P2P lending are:

  • Higher returns to the investors relative to other types of investments.
  • For both lenders and borrowers,P2P platforms are more agile, efficient and transparent to deal with than traditional banking institutions.
  • Great option to diversify the investment portfolio of the investors much less likely to be affected by economic turbulence.
  • More accessible source of funding for some borrowers than conventional loans provided by financial institutions.
  • P2P loans have lower interest rates for borrowers due to competition between lender with lower origination fees.
  • P2P platforms offer high level of security for lender’s investment.
  • Lenders can withdraw their funds anytime.
  • P2P platforms offer greater chance of making an ethical investment.

Risks can be:

  • A lender should be aware of the default probability of his/her counter party, given the fact that most borrowers who apply for P2P loans possess low credit ratings that do not allow them to obtain a conventional loan from a bank.
  • Government protection isn’t included for lenders in case of the borrower’s default.
  • Peer-to-peer lending may not be available to some borrowers or lenders.

Summary

Peer-to-peer lending is a unique platform for borrowers and lenders, providing both with alternative options to traditional banks and building societies. Though it has its strengths and weakness, P2P lending is gaining traction and seems certain to become more popular in several countries such as China, Japan, Italy, and the Netherlands.

By Tuan Nguyen

ratesetter logo

Product review – RateSetter Australia

Recently I am aware of Peer-to-peer(P2P) lending investment type. With curiosity, I registered into a platform called RateSetter, which is a platform that acts as a broker between lender and borrower, and it operates in Australia.

After reading the PDS carefully, I feel the need to note my findings down so we can discuss the profitability of P2P lending in general and RateSetter in particular.

Tl; dr;

RateSetter is an online P2P lending platform that connects the lender and the borrower. Being backed by something called a Provision Fund, their claim to only “Lending to credit worthy Australian-resident individuals”, and the distribution of borrowers; it seems to be a relatively “safe” investment (notice the double quotes, :wink:).

Although there is no management fee for small deposits, there is a 10% fee on the interest received, and certain management fee for deposits that are more than a certain amount ($50,000).

What is RateSetter?

personal lending rates 2018

Source: RateSetter analysis, based on Monetary Policy Changes (A2) and Indicator Lending Rates (F5) datasets published
by the RBA at, October 2018.

Originated from UK, the company was founded in October 2010. Claiming to “redefining investing and borrowing in Australia”, it opened the Australian operations in November 2014. RateSetter product is a platform that manages the connections between cash borrowers and lenders. It allows lenders to deposit funds, and distribute the funds to appropriate borrowers. Because of its nature, RateSetter is NOT a bank.

Regulated by ASIC, RateSetter Australia is dedicated to investors in Australia only. Meaning you cannot deposit funds into RateSetter Australia and lend it to UK borrowers.

The platform matches lenders with creditworthy borrowers who wants a simple, convenient loan. They claim to have an assessment process that ensures the borrowers are creditworthy, and are able to afford repayments.

There are multiple products that allows your to invest into different timelines and different interest rates.

ratesetter lending products

Source: RateSetter

What is Peer-to-Peer lending?

It is the oldest form of borrowing and lending. Back in the old day, before the invention of banking, people who need quick money went to another person who has some money to spare and ask for a loan. They repay the principle and interest at a time interval, until the debt is paid off.

With P2P lending, one lender can provision funds to multiple borrowers, therefore reduces the risk of defaulting.

E.g.

A lender transfers $10,000 into a P2P platform, another lender transfers $5,000.

A borrower is approved to borrow $7,000 loan. He can take $5,000 from the first lender, and $2,000 on the second one.

This is a very simple example, in general, within a loan application, there can be multiple lenders involved. That reduces the risk whether the borrower defaults on the loan, each investor loses a smaller amount of money, instead of “losing all their eggs in one basket”.

how Peer to peer lending works

Source: Lenden club

What are the fees associated with RateSetter?

  • No fee on opening account.
  • No fee on depositing funds into your account.
  • No fee on withdrawing funds that are NOT in loan.
  • No fee on closing the account.
  • No fee associated with managing the money if you have less than $50,000 in your account.

Now the worse part….

  • 10% of gross interest that the lender earns. E.g. if received interest is $10, the platform takes $1.
  • All interests from the holding account that are NOT in loans. E.g. if you have $1,000 in the holding account and have not loaned to anyone, the platform takes all interests generated from that $1,000 in the Trust Account, with 2% interest pa, the amount comes to $20 per year.
  • Borrower fees. This is NOT applicable to lender. The amount that borrowers need to pay to finalize the loan. For 2018 Financial year, this fee equals to 4.30% of average net assets.
  • 1.5% early access fee. E.g. if you have $5,000 currently lending to people, you want to withdraw $1,000. The platform will charge $15 to withdraw that amount. It then will find another lender to fill in the blank.

Observations

  • Minimum investment is $10.
  • Good Return on Investment rate (significantly more than putting into banks), at 5 years loan, the interest rate fluctuates around 8% (real return after 10% fee is around 7.2%)
  • Reduced loan default risks through loan amount diversification. Moreover, RateSetter has something called Provision Fund, which further protects lender from defaulting actions.
  • Clear fee and business description through its PDS.
  • Easy withdrawing loan deposits through early access feature, in case you have other investment opportunities. Note that it takes 3 business days until the money is in your bank account.
  • Fixed interest rate on the loan package.
  • Comprehensive Reinvestment plan.

Summary

I have personally put in around $2,500, average $500 per month as an experiment. So far the return has been good, since the amount is still minimal.

Peer to peer lending is one of the lesser-known investment forms. Associated with high default loan risk rate, it has not been considered as a good investment. However with RateSetter, the risk is reduced so one can consider having it as a side investment, with little activities and passive returns.

By Tuan Nguyen