Is Peer to Peer Lending, the ultimate passive income?

 Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.

Traditionally, the most traditional way to earn a passive income was via property. Buy a property, rent it out and recieve a monthly income, hey presto – passive income.

But as any landlord out there will confirm, there are more than a few hurdles to overcome and pitfalls to manage.

1. Saving up enough for the deposit;
2. Sourcing the property (residential or commercial);
3. Arranging a mortgage;
4. The purchase process;
5. The costs involved, legals, valuation, agents, finance brokers, insurance, etc etc;
6. Letting the property, finding and vetting tenants;
7. Agreeing tenancy agreements;
8. Letting agents fees;
9. Safety certificates;
10. Insurance;
11. Finally once the property is let, the ‘Passive Income’ starts;
12. Property is an illiquid asset calls it takes time to both buy and sell.
13. But the boiler breaks, a tap leaks, the tenants miss a rental payment and suddenly, it’s not so passive anymore.
14. Property investing is an equity investment and returns should be commensurate.

Peer to Peer lending is now firmly establishing itself as an increasingly popular form of passive income.

1. P2P lending involves lending money to borrowers, who in return pay the lender regular monthly interest;
2. You can start P2P lending from as little as ￡10;
3. It can all be transacted online;
4. Using peer to peer platforms you can make loans to consumers, SME businesses and property investors and developers;
5. You can sign up to a platform in minutes, transfer funds usually within a couple of hours and be invested the same day;
6. You can decide whether to pick and choose the borrowers you want to lend to or use a facility called ‘auto-lend’;
7. You decide your lending criteria and the platform automates the process for you;
8. You can diversify your lending across platforms, across borrower types and across borrower grades;
9. Diversification lowers the risk of one bad borrower wiping out all your loan investments;
10. If the borrower fails to make a payment or defaults on the loan, the platform follows up with the borrower on your behalf;
11. Some platforms offer provision funds or only offer secured loans;
12. Depending on your tax status, you can earn between ￡500 to ￡1,000 of interest tax free;
13. If you have a SIPP or SSAS, some pension administrators allow you to make Peer to Peer loans via your pension pot;
14. You can invest through the Innovative Finance ISA, which allows tax free returns from lending up to your annual ￡20,000 ISA limit or using your existing ISA pots;
15. Most Peer to Peer platforms have a secondary market, which offers but does not guarantee a liquidity function; and
16. Peer to Peer Lending is a fixed income investment and by reinvesting your income, you will benefit over time from the effect of compound interest, often described as ‘the 8th wonder of the world’

Peer to Peer Lending is an incredibly efficient form of passive income but be aware there are downsides.

1. Peer to peer lending is not a savings account;
2. Your capital is at Risk should the borrower default; and
3. Peer to Peer lending is not covered by the Financial Services Compensation Scheme (FSCS).

As Warren Buffet once stated:

If you don’t find a way to make money while you sleep, you will work until you die.

?Brian Bartaby is the Founder & CEO of Proplend , a P2P Platform specialising in sub ￡5m commercial property debt. Matching borrowers demand for loans with investors demand for income. The views above are my own and not a representation of Proplend or any other platform. Investors' capital is at risk.