Richard Litchfield is Head of Operations at Lending Works. Here he explains how landlords can boost their profits by investing their rental income in peer-to-peer lending.
Tighter tax and mortgage regulations have hit the buy-to-let market hard in recent years. In fact, investment in rental properties fell from £25 billion to £5 billion between 2015 and 2017, according to the mortgage lender trade body IMLA. This is presumably due to the fact that these newly-introduced rules and regulations are making it increasingly difficult for landlords to see a decent return on their property investments.
This means, if you already have housing that you rent out, or you’re interested in joining the buy-to-let market, it’s worth looking for ways in which you can invest your income to make it go further. And, peer-to-peer (P2P) lending is becoming an increasingly popular option for this. Here, I’m going to explain everything you need to know before giving peer-to-peer lending a try. I’ll explain what it is, what you need to think about before taking the plunge, and what the benefits of this kind of investment are. Read on to find out more.
What is peer-to-peer lending and how does it work?
Traditionally, when a business or individual is looking to take out a loan, they’ll apply through a financial institution like a bank or building society. Peer-to-peer lending is an alternative form of borrowing that happens between individuals without the involvement of a bank.
As an investor, you’ll be lending (rather than borrowing) money in this way, and the process will begin when you sign up to a P2P platform and decide how much of your buy-to-let earnings you’re willing to invest. Next, you’ll need to decide how long you’re willing to lend your money for — generally speaking, the longer the better, because there’ll be a higher potential for returns.
Once you’ve transferred some money into your peer-to-peer lending account, there are typically two ways to get started: some P2P platforms will start making lending offers to suitable borrowers on your behalf, or you’ll have to do this manually. Doing everything on your own will give you the most control, but it can be time-consuming. Having an automated process will speed things up, as well as help to ensure your money is always invested, and therefore always working for you.
Once your money has been matched with a borrower (or borrowers), you’ll begin to earn interest, and most platforms will allow you to choose what you would like to do with these earnings. To help your money go as far as possible, it’s usually best to reinvest it if you can afford to. But, if you would rather withdraw money from your account as you go, you’ll typically be given the option of doing this weekly or monthly. And, you can decide whether you would like to withdraw the full repayments you receive, or just the interest you’ve accrued. We would always recommend keeping as much money in your account as possible, as this will help you to achieve the highest returns.
What do landlords need to consider before giving peer-to-peer lending a try?
When you’re looking to use peer-to-peer lending as a way of boosting your rental income, it’s important that you carefully consider how much you can afford to invest. As a landlord, you’ll have a variety of overheads that you need to account for, as well as unavoidable (but often unexpected) costs that you need to prepare for. So, it’s vital that you do all the necessary calculations to work out just how much money you can afford to invest.
Make sure you know exactly what it costs to be a landlord. Towergate Insurance has a guide to this, which explains what you’ll need to pay for while renting out your property. This includes letting agent fees, insurance, maintenance, repairs, mortgage repayments, and more. Plus, you’ll need to consider the times when you might not actually have any tenants in your property as this will affect your income. All of these factors need to be taken into account before you can work out exactly how much you can put into your investment account.
What are the benefits of peer-to-peer lending?
There are a number of reasons why more and more people are choosing peer-to-peer lending as their preferred method of investing. To begin with, if you put your buy-to-let earnings into a savings account with the aim of making money from the interest, you’ll typically find that the returns are much higher with peer-to-peer lending.
You can also diversify your portfolio through peer-to-peer lending, and this will help to reduce the risk to your assets. You can lend your money to a range of different people, which means you don’t have to put all your eggs in one basket. As a result, if someone defaults on their repayments, you won’t be hit so hard, because you’ll still have money coming in from the other borrowers.
Another advantage is that peer-to-peer lending is regulated by the Financial Conduct Authority (FCA). This means any platform offering this kind of service must be clear and upfront about any risks you might face, and they need to have a plan in place that will help you if things go wrong. Plus, most leading platforms will offer a high level of security, typically with a protection fund and/or insurance. As a result, they can step in and help prevent you from suffering severe losses if things go wrong.
Finally, a huge benefit of P2P lending is that platforms will usually give you freedom to transfer money in and out of your account as you wish. There may be a fee involved if you wish to withdraw money that is already out on loan, but there is still much greater flexibility when compared with many other types of investment. Nevertheless, investing over a longer period — and keeping your money invested the entire time — will help you to earn the best possible returns.
As a landlord, it’s likely you’ll always be on the lookout for new and innovative ways to make the most of your rental income, and peer-to-peer lending offers an easy and low-risk way of making your money work for you.
However, you should always do plenty of research before you take the plunge: work out exactly how much you can afford to lend, make sure you’re completely clear on how the process works, and ensure you know exactly what to expect. Then, you’ll be ready to get started.