And so it was over before it even began …
The tires on my P2P investing (peer to peer) efforts quickly went flat last week when I discovered some very important information.
To bring everyone up to speed, I had wanted to start off 2013 by adding a new form of passive income to my money design. Last year blogging income and dividend stocks were valuable additions. This year out of the available choices I had listed, P2P investing was the one that stood out. It intrigued me in a number of ways:
• Potential higher net rates of return than a stock market index fund
• A steady stream of interest income
• Access to the earnings before retirement age (helping the early retirement efforts)
• Potentially lower risk (if you pick borrowers with good credit)
• You get your principal back (in theory …)
• Diversification from the stock market
Hitting the Internet to Learn More About P2P Investing:
Like most of my investing efforts, I hit the Internet to start educating myself as much as possible on P2P lending and investment opportunities After reading a few basic articles, I started to find some real gold.
One of my searches led me to the Early Retirement forum where there was a thread that was all about P2P investments. The topic initiator was asking whether P2P investing was truly worth the effort given the complexities of how many loans you’d need to invest in, what rates you could expect, etc.
A few responses down another reader posted in great detail his strategy for filtering the information. It was good stuff and went into some vivid detail.
The majority of the thread was based around information that the initiator had found on a peer to peer investing niche site called the Lend Academy. I visited the site and found a few a general articles as well as a free eBook on P2P investing.
I’m beginning to feel like a collector of free eBooks. I went ahead, downloaded it, and quickly began to read. And that’s when I found out something that put the brakes on my efforts:
• Not all states in the U.S. allow P2P lending – including my home state of Michigan!
No P2P Lending for MMD!
Ugh! That can’t be true!? Why would Michigan or any other state not allow me to be a P2P investor? I needed to the hit the Internet again to validate this intel.
Sure enough, it was right. In fact Free Money Finance (also from Michigan) had written a whole post entitled Peer to Peer Investing a Bust in Michigan.
FMF really went above and beyond and looked at what alternatives there were for us “Michiganders” (yes that’s what we’re called) if you really want to participate in P2P investing. Unfortunately however, he concluded that none of the available options were really worth the hassle. Therefore, that was it for me. My P2P ambitions have gone cold.
What I Did Find Out About P2P Lending that I Pass On to You:
First of all, if you’d like to get a free eBook on how to be a P2P investor, download it from that Lend Academy site above.
As you’d expect, P2P investing isn’t as idiot proof as funding loans and getting paid back at high interest rates. Basically your success depends entirely on:
• The quality of the loans available, and
• Your ability to pick out the borrowers who will have the ability to pay you back
In general, every piece of information I found mentioned the following key P2P investing tips:
1. Spread your investment out over as many loans as possible. The minimum you can invest is $25 in each loan. So do just that! Diversity among many loans helps to reduce the effects of default.
2. Don’t be fooled by the loans with really high interest rates. The reason they have such attractive rates is because they are high risk borrowers with undesirable credit histories. Defaults DO happen on P2P lending sites, so make sure you understand the risks.
3. Read up on the loan details and watch for red flags. As part of selecting the right loans, get to know who these borrowers are and if you really think they’ll ever be able to pay you back. The Early Retirement forum thread above has some good discussion on this.
4. Remember that you’ll owe taxes on the interest you earn. Don’t get too excited about those potential return rates just yet. Unless you setup your account as some type of IRA, count on forking over money to the tax man.
If I Can’t be a P2P Investor, Then What’s Next?
So P2P investing is a bust. That really doesn’t stop me. There is certainly more than one way to get rich and hit my goals.
The main attraction to developing P2P income was that it could help me fund my early retirement efforts. So if I again hit up the list on my passive income ideas page, there are a number of other interests I can pursue that could also potentially accomplish this:
1. Building another blog or niche website
2. Writing and selling an eBook
3. Getting aggressive with affiliate marketing
4. Take on free-lance writing projects
5. Put more effort into my stock music licensing
6. Finally buying a rental property
If you were in my shoes and knew that P2P investing was out, which one would you choose?
To be honest, that list is already written in the order of my preference.
No. 1 is my front-runner. The reason why is because I’ve already learned SO MUCH from creating My Money Design and making a small income from it. This gets me wondering:
• If I owned TWO sites, could I possibly double my income?
Writing content is a lot of fun and I’d like to think that I’m getting better / more efficient at it. But perhaps the biggest draw to No. 1 is the low risk. If it fails, who cares? I’m out less than $100. When my real job gets busy, I can always put the project on the sidelines without many repercussions.
I think the biggest challenge will be ranking well in Google. I’m still struggling to meet my stats goals with My Money Design as it is. This would require a little more education in terms of back-linking and other SEO practices.
The eBook is also very high on my list. I’ve got a few topics that I think would be great. In theory, I already have all the material written (ah hmm, the blog). But the biggest challenge here is that I’ve never put one together before. Plus, I have no idea how to effectively market one. I suppose like all things, there’s a lot of trial and error, and you figure it out as you go.
By far, the rental property is the one that scares me the most. Believe me – owning hard real estate is the American Dream and there are a lot of success stories out there. But unlike my blog example, you can’t just “walk away” from a rental property when things get hairy. Tenants still call. Bills still have to get paid. It poses a lot more commitment than I may be ready to make at this time.
Regardless to whatever option I land on, there’s one thing to be said: The answer isn’t “do nothing”. The year is just getting started and I have a lot of ambition to get out there and get developing another passive income stream! Let’s get going!
Image courtesy of Toa55 / FreeDigitalPhotos.net