P2P Lending VS Real Estate Investing

I’m a duplex owner. My duplex is also the first real estate purchase ever for me. For the sake of this blog post when I talk about real estate I’m referring to income property and its ability to generate money.

It was an “OK” time to buy when I purchased in May of 2011. I had an accepted offer before the Obama home buyer’s tax credit expired and received $8,000 back for my purchase.

The effective price paid for the property was 197K. It’s a good size, 3-bedroom/unit, all brick, newer mechanics, roof, and a 4-car garage to boot.  Not much has to be done at all for maintenance. This is not common when most people buy, in fact the previous owner put in $90,000 in improvement over the course of his ownership.

So here’s the situation:

I paid $197K, I can generate $1.6K a month in rent for both units. Property taxes are $5.4K/year, $1K/yr for insurance, $1.2K/yr water.

My cap rate is 5.88% and this is most likely high.

This does not include anything else, like maintenance for furnaces, fuel for the lawn mower, snow blower or vacancy rate.  There are a lot of little expenses for income property ownership you never plan for.  Property taxes alone take away ~3% of the return.

Some considerations with real estate investing:

  • Property taxes – Roughly 1-2% of assessed value and always climbing
  • Vacancy rates – You should estimate 5% loss of gross income a year
  • Maintenance – Things break, roofs leak, etc.
  • Water bills
  • Problematic tenants
  • Insurance
  • Mortgage interest – The payment is always more than the deduction, I dislike this argument supporting real estate purchases.
  • Tax efficiency in the form of deductions, but no IRA for physical property
  • It’s not possible to directly reinvest income into the house with ease.

Predicting ROI with a duplex can be tricky. Most real estate agents will use cap rate to decide how appealing an investment is.  Many will tell you anything over 7% is considered a buy. To generalize,  real estate agents will take the gross rental income and apply a blanket percentage of 66% of that for the net income.  In my area property taxes are astronomical so the percentage is closer to 60%, but its still a good number to use.

Based on these facts, its pretty easy to see how P2P investing can out perform income property. It also has the added advantage of being able to be reinvested. You can also control how much you invest. Likely you can not buy a duplex for $5K however you can get started with a Lending Club or Prosper account.  It’s flexible and really your only concern is defaults.

If you are considering investing in real estate, I would highly recommend checking out P2P lending. I can tell you from person experience the time commitment and stress is less.  Most important, there are potentially much greater returns! Get started with Lending Club or
Prosper.

Michael

One thought on “P2P Lending VS Real Estate Investing

Leave a Reply