The Safest Type Of Lending

The safest type of lending is lending to borrowers who own investment properties. This means lending to landlords who own and rent out any of the following:

• Residential properties (houses and flats).
• Shops.
• Offices.
• Factories.
• Car parks.
• Workshops.
• Other land or properties.

What makes investment-property lending so compelling?

• The loans are secured against very solid, very real properties that are worth more than the loans themselves. (See sidebox, below right, for explanation of secured loans.) Contrast with secured business loans that are secured loosely against whatever computers or other items a business happens to have at any point in time.
• Compared to many kinds of secured lending, land and properties are easier to value and future prospects easier to forecast. This is especially so for residential buy-to-let.
• These assets can generally be expected to rise in value over time. Compare this with cars or other bought assets which tend to lose 20%-50% of their resale value as soon as they have been sold.
• The properties pay for themselves: since the landlords are receiving more rent than they pay to us individual lenders in monthly mortgage payments, this steady income stream is easy to measure and relatively easy to forecast.

Which P2P lending sites offer these sorts of loans?

Two P2P lending sites focus exclusively on investment-property lending:

• Landbay* offers residential buy-to-let lending only. (Landbay Quick Expert Review.)
• Proplend* offers commercial buy-to-let lending (offices and other business premises) only. (Proplend Quick Expert Review.)

Others that offer at least some investment-property lending are:

• Assetz Capital.
• Capital Stackers*.
• hnw lending.
• LandlordInvest.
• Relendex*.

Challenges in this industry

Competition to lend to residential buy-to-let landlords is intense, largely because the banks have done this very well for decades, silly sub-prime lending excluded.

In addition, legal and tax changes recently have made it less attractive. Perhaps as a sign of this, Landbay has approved very few loans for the past six months or more.

Commercial buy-to-let lending is more niche and has therefore been less prone to intense competition, which means that lenders can earn higher rates. (E.g. Proplend pays us lenders 6.5%+ when we lend just 50% of the properties' value to the borrowers, whereas Landbay pays under 4% when we're lending as much as 80% of the properties' value to the borrowers.)

However, more often than with residential buy-to-let, the rent on commercial properties could be less certain in some areas and circumstances.

For example, what if a shop stops earning enough rent for the landlord to keep meeting monthly loan payments to lenders like you and I? The cause might be that the high-street the shop sits on has started to fail. The property might, therefore, fail to sell for as high a price as first thought, and therefore increase the risk you don't get all your money back.

Investment-property lending can still be risky

When I say that investment-property lending is the lowest risk, I mean I think it's the lowest intrinsic risk.

So, take one of every averagely competent P2P lending site from across the range of investment-property lending, personal loans, small business loans and so on. Since they are equally competent, the investment-property lending is the lowest risk. Intrinsically.

If their competence is not equal – let's say because the people running the investment-property P2P lending website are total idiots – then suddenly you might find the risks are much easier to contain in small business lending, or even lending to property developers (where the intrinsic risks are relatively high).

Currently I can't think of any investment-property P2P lending websites that I would call incompetent, otherwise I would name them now. For some of them though, we still don't have enough information to begin to judge their competence, such as LandlordInvest.

The situation can be reversed, where other kinds of lending become safer, such as when a vastly large pot of money is set aside to cover bad debts. Business lender Growth Street* springs to mind there.

Your biggest duty!

Even if you've lent through the good ‘uns, that might not be enough reassurance for you when buy-to-let lending goes through a bad patch at a time that other lending seems unscathed. Your overall earnings might dip down while the interest earned on other kinds of loans stays more steady.

That's part of the deal though; sometimes some types of borrower, such as buy-to-let landlords, will suffer a downturn and other times it will be other borrowers, such as individuals or businesses. Any dips affecting borrowers might impact our lending results too.

That's yet another fantastic reason to spread across more P2P sites, so that you also get into different kinds of loans. That doesn't just mean doing both residential and commercial buy-to-let, but also other lending, such as personal loans and business loans. Spreading our money and risks around is our biggest duty as individual lenders if we want to keep making money.