webwiz
Posts: 1,133
Likes: 210
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Post by webwiz on May 4, 2016 16:03:56 GMT
Thanks for all those replies. I fear that 18 months with SS and MT with no losses may have made me complacent. Still I suppose I should be happy with 6-8pc net if that is w hat I end up with.
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Post by meledor on May 4, 2016 17:05:00 GMT
I did say very roughly, but even so I do seem to have made a mistake. I didn't correctly compound the interest over 5 years. But no meledor I don't think it is as simple as you state. You don't earn interest on the loans that default. Still it is much higher than I had it, probably just over 8%. Rather than the lack of interest on loans that default the key issue is the reinvestment assumption which webwiz alluded to. If a 12% return is part compensation for future capital losses as has been stated, then that part needs to be reinvested to protect capital.
You can construct a model with starting capital of £1000, 12% interest, 5.5% default rate per year with 50% recovery delayed by 2 years. Over 10 years the capital maintenance element is 3%. In other words you could withdraw £90 as income in the first year and 9% of capital in each subsequent year (capital slightly dips below £1000 initially due to the 2 year delay assumption on recoveries before rising back to £1000) and still have £1000 at the end of the period.
If we did not have a 2 year delay for recoveries then capital maintenance would be 2.75% (giving the income yield of 9.25% as per my previous post).
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Post by propman on May 5, 2016 7:51:38 GMT
I did say very roughly, but even so I do seem to have made a mistake. I didn't correctly compound the interest over 5 years. But no meledor I don't think it is as simple as you state. You don't earn interest on the loans that default. Still it is much higher than I had it, probably just over 8%. I make it about 9.6% of loans defaulting for 50% to reduce returns to 6%. However this is not a realistic scenario. If we assume 1% default recovering 50% 2 years later for 4 of the years, but in year 3 there is a crash. 3 in 8 loans would need to crash in the middle year to reduce returns to 6%. Obviously there would actually be a smaller absolute default, but many suffering reduced repayments and the crash might spread over a longer period, but that is not a particularly unrealistic model of smaller property developers.
- PM
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