I’m a big believer in doing what you can to build sources of passive income. Like most good things in life, passive income isn’t very easy to obtain. It’s a wonderful thing once it’s established and you’re reaping the benefits. But generally, if you want to build a decent source of passive income, you need to invest time or money (or some combination of the two).
The least time consuming way to build passive income is by investing money. For example, some stocks pay dividends, bank accounts pay interest (although that’s close to non-existent in today’s low rate environment), and rental properties earn rental income.
All of these require you to risk your money.
As you might expect, the more risky the investment, the higher the potential return is (along with a greater chance for loss). As a potential investor, one of your goals is to find investments that have a worthwhile return, given the risk.
With all of this in mind, we turn our attention to peer-to-peer lending (also sometimes called “social lending”). In simple terms, this is when you lend money to another person, and that person repays you with interest.
Practically speaking, there are online platforms that allow borrowers to crowd source these funds. In other words, someone might need to borrow $10,000, but you only have the ability to invest in $25 of that loan. The nice part about these online platforms is that they help you remove some of the potential risk by evaluating the borrower (credit check, employment status, etc.) and giving you that information before you invest.
When selected correctly, many of these investments can provide a relatively high rate of return for a relatively low amount of risk. Personally, I’ve been a big proponent of investing through Lending Club (affiliate link). You can read about exactly how I invest with Lending Club here.
In today’s interview, we talk about peer-to-peer lending with one of the industry’s experts – Peter Renton. He discusses how he got started in the industry (with his blog, Lend Academy), what he thinks about the current peer-to-peer lending websites, and what he believes the future holds for this relatively new (and evolving) form of investing.
If you’re at all interested in this type of passive income, definitely check out the interview below!
Peter, as a big proponent of peer-to-peer (“p2p”) investing, I’m a fan of your blog at LendAcademy.com. I personally think social lending is an area where there is a good opportunity for return (with moderately low risk), yet it’s an area that many people still know nothing about. Tell us a bit about yourself and your journey. How did you first become interested in peer-to-peer lending, and what gave you the idea to start Lend Academy (formerly SocialLending.net)?
I first became interested in p2p lending in 2008 after reading an article about Prosper. I immediately loved the concept as I was looking for an investment that paid a decent yield. But when I went to open an account, Prosper was in a quiet period. So, after a little research I discovered Lending Club and started there.
Then, when I was looking for a new business opportunity after selling my previous company I discovered a blog for sale called SocialLending.net. I bought that site and started writing about this industry. Then, in 2012, I re-branded to Lend Academy which more appropriately captured my mission of educating the world about p2p lending.
What do you consider to be your greatest success (or successes) so far with your blog?
I decided early on that I did not want to pursue an advertising model, which is different than most blogs. I did generate affiliate income by referring people to Lending Club and Prosper, but that also was not my focus.
My greatest success with the blog is not something specifically traffic or revenue related. I have built Lend Academy to be the most respected news and education site in the industry and, in doing so, I have created a reputation as the leading authority in the space. I have had the luxury of working at Lend Academy full time while not needing to make a full time income from it.
Now, Lend Academy supports my other business interests which include the LendIt Conference and my new investment management firm, Lend Academy Investments.
I’ve used both Lending Club and Prosper, the two big players in the social lending space. I have my own personal opinion on which is better, but I’d like to see your thoughts: Which do you prefer, and why?
I get asked this question a lot and the truth is I think serious investors should have accounts at both companies. No one can argue with Lending Club’s success and their leadership in the marketplace. They also have the largest selection of loans available in the industry and they are a great place to start for new investors.
But Prosper has been making major improvements in recent months and is a great compliment to Lending Club. Prosper also has the advantage of having bankruptcy protection for all investors.
In your opinion, what do you think the future holds for social lending? Do you think it will eventually become more heavily regulated? Will the market eventually become efficient to the point where the risk-to-reward ratio mirrors other, more commonly known investment types?
First, the name “social lending” is not all that accurate any more. In fact, peer-to-peer lending is not too accurate either. The new term that was coined at the recent LendIt Conference was “marketplace lending” – we will see if that one sticks.
But to answer your question, I think the sky is the limit for this industry. I truly believe that most investors will one day invest in this asset class either directly or through a mutual fund. As for regulation, the government has said that they are fine with the regulatory framework that is operating today but they are watching the industry closely.
As long as all the major companies involved continue to operate in the best interests of investors and borrowers, there is no need for further regulation at this time. Finally, I believe investors are earning over sized returns today given the risks involved, and that eventually yields will begin to reduce to a place that more closely matches the risk. We are starting to see early signs of this already.
What have been some of the strategies you’ve used to gain traffic and popularity with both your blog and the conference you co-founded (LendIt)?
When I first started blogging I was focused on three things:
1. Create great original content.
2. Guest post on other popular blogs.
3. Comment widely on any article related to my core topic.
I also started developing relationships with the journalists covering the industry, interacting with them on Twitter, and even sending the occasional email in response to something they wrote. But I never pitched the journalists – I just wanted to let them know I was here for them as a resource.
What’s your favorite inspirational quote? (Either from someone else, or one that you came up with.)
This Theodore Roosevelt quote is my favorite but difficult to put into a tweet:
It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.
(Source: http://www.theodore-roosevelt.com/trsorbonnespeech.html)
Here is another quote from Warren Buffett I like:
Risk comes from not knowing what you’re doing. [Click here to tweet this]
What are your favorite online resources as a blogger?
My favorite blogging resource is Smart Passive Income – I love how Pat Flynn models and teaches how to build an online business with integrity. I am also a big fan of Copyblogger and Problogger. All three sites have helped me tremendously, particularly in the early days.
Finally, where can people find you online?
http://www.lendacademy.com/
@LendAcademy
Lend Academy Investments
LendIt Conference
Thanks so much for your time today, Peter.
Do you have any experience with social lending? What do you think about it? Leave a comment below!
(Also, if you enjoyed this interview, like us on Facebook, and stay in touch with every new interview we publish. Thanks! 🙂 )
What’s the average return (in %) that I could expect investing in either Lending Club or Prosper?
It’s tough to say, Dan, because it really all depends on how risky you choose to be (lower quality loans pay a higher return). However, I think if you play your cards right, it’s reasonable to expect returns in the 6-8% range (before taxes). Personally, I’ve averaged around 6.5% with Lending Club. (My average return on Prosper is around 13% but my sample size there is WAY too small to consider this an “expected” return.) Lending Club is my preferred platform for peer-to-peer investing.