Real Estate, Stocks or Peer to Peer Lending - What's my best investment?

Hello all, this is my first post so a brief introduction. My name is Mitchell and all my posts will be related to investing and financial knowledge. It is what I love to write about and is a field I've held many hats in over the past 15 years.

Hopefully people can gain some financial lessons from my posts. Also note that I write from a risk adverse mindset, hence the user name scaredycatguide. My goal is to learn, earn and teach investment ideas that are of reasonable risk, yet aim for a worthwhile return. The bottom line - investing in US treasuries ain't getting done these days!

This post is going to broadly touch on three types of investments to create a discussion on which is the best or more importantly help you figure out which is best for you.

Let's start the discussion with:

STOCKS

Basically, one can put their money into the stock market and hold for appreciation. Easiest way to do this is to invest in market index ETFs. There is also the basket of mutual funds route, but you going to pay management fees on those, thus eating into your returns a bit.

The general consensus is that the long-term average return for stocks is 7%. Not to shabby, you plow your money into some funds, hold on for 30-40 years until retirement and then start to cash out. You can automate adding to investment each year and it really can be as low maintenance as that.

For some, this is ideal. Who wants to deal with actively investing? (well, outside of me) This is what the majority of people do and there is nothing wrong with that. The biggest risk with this though is timing. Depending on when it's time for you to retire you may not get that 7%. In fact, if you're lucky you may do much better. Like folks who were cashing out in 1999 & 2000.

Now picture this - you are set to retire in 2008. How are the returns on your portfolio looking at that point.

Again, the stock market can be somewhat or a set it and forget it investment, but one can't blindly assume 7%.

REAL ESTATE

Let's briefly talk about real estate. The first thing that jumps out at me is you actually own a hard asset with this investment. Now, when I speak of real estate as an investment I'm generally thinking of owning rental properties.

First, let's discuss the negatives that come with this compared to just owning stocks or doing peer to peer lending.

You'll have to deal with tenants (unless you hire prop mgmt, but that will eat into your returns) So things like broken toilets, the AC breaking, etc. will ring to your phone and you will spend time and money getting them repaired.

You also have capital expenditures. For example, the roof won't last forever, it will need to be replaced at some point.

Now, when calculating a rental property investment all these items should be factored in. Dollars for maintenance, reserves, vacancy should all be part of the calculation.

THE GOAL is the find a cash on cash return that is equal or better than the stock market if you are going to deal with that stuff. Let's say you can buy a house for 100K, you need 20k for the down payment and after all the factored expenses, mortgage and taxes you are bringing in $120 in cashflow every month, meaning that's how much there is left over from the rent payment at the end of each month.

Well that $120X12=1440 per year, divided by the 20K you needed to put up gives you a return of 7.2%.

GEEZ, all that hassle is not worth 7.2%! However, you are not just getting 7.2%. SOMEONE ELSE IS PAYING YOUR MORTGAGE on that property. So you are making money on the cash flow and also the reduction in your mortgage.

This isn't even factoring in possible appreciation either. But what about the flipside? What if the home goes down in value? That will hurt my return, won't it? Well, yes but you have some protection. Being that your mortgage is being paid down by someone else, you are building in what is basically a free cushion of protection to the down side each year that passes.

Lastly,
PEER TO PEER LENDING

This is a somewhat new arena for regular investors (i.e, non-accredited investors). But it is interesting and essentially gives us the ability to act as a lender. There is risk because these are basically unsecured personal loans to people like you and me.

People take these loans for everything from debt consolidation (I tend to invest in those) to home renovations to business loans to boat and RV loans.

Returns from 6-12% can be had depending on how much risk you want to take. As stated earlier, I like lower risk so the 7%-ish area is where I'm at. High rated borrowers with previous track records please and thank you!

So the positives of this investment is you do not have to worry about appreciation or depreciation like with your stock or property. There really isn't any management. You invest in a group of loans and then wait for your repayments to come in each month. You can diversify over many loans to reduce your risk of default hurting your overall return.

However, that is the risk. Loans you invest in can default and you basically are out that money.

CONCLUSION
Let me state again, this is a very broad explanation and comparison of these investment types. But, hopefully it has enlightened some who were unaware of them and the benefits and risks associated. I have investments in all three of these investment types, because, well I like to be diversified.

I will look to write more detailed posts about each of these investment vehicles in the near future. In the meantime, feel free to share your knowledge or tell me what you love or hate about each.

DISCLAIMER - This post is in no way investment advice or the offer to sell any investment. One should consult there investment professional when making such decisions.