PeerStreet is doing for real estate investing what Lending Club did for personal lending. PeerStreet is a peer-to-peer (P2P) lending platform that brings investors and borrowers together on one website to create real estate loans. And since it involves real estate loans, its function is more commonly referred to as crowdfunding.
It is an online marketplace where investors invest in high-quality private real estate loans. The objective is to provide real estate loans in a niche that is not easily accessed by those who are not traditional real estate investors.
PeerStreet concentrates on private money loan investments because they believe that the risk for the asset class is mispriced in favor of investors. They structure the loans to mitigate the various risks associated with such investments. And since the loans are secured by a deed or mortgage, there is a hard asset to backup the loan.
PeerStreet is different from a real estate investment trust (REIT) because as an investor you have an opportunity to select which loans you will invest in. This is unlike a REIT, where your investment represents a percentage interest in the overall real estate portfolio being held by the trust.
How Does PeerStreet Work?
Loans made on PeerStreet are usually first liens secured by real estate. The deals are put together by “originators” who represent the principal parties in the transaction. The loans are funded by investors on the platform. Those investors must be accredited investors.
Investments made through PeerStreet are a real estate loans, and not on the real estate itself. It’s also important to understand that although the loans that are made through PeerStreet are secured by real estate, the notes themselves that you invest in are not. That’s because the note represents a slice of the loan, and not the loan itself. You do however have the option to invest in an entire loan.
PeerStreet can include loans made on single-family residences, either to rent the property or to do a rehab on it to increase the value.
The loans are usually short-term in nature, typically running from six months to 24 months, and have loan-to-value ratios that are usually below 75%. The loans are made across the country, on different types of real estate projects, with different originators, and different property types, in order to create a wide diversification of potential investments.
Real estate loans are underwritten by PeerStreet’s team of finance and real estate experts. They underwrite each loan using advanced algorithms, big data analytics and manual processes to make sure that loans are high quality investments.
They also carefully evaluate originators, and allow only highly experienced private lenders with strong track records onto the site. Investors and originators are required to do their own due diligence process in order to select the borrowers and loans that they want to invest in.
For originators, PeerStreet reviews track records, financial statements, licensing and adherence to state usury laws, background checks, and review of legal and underwriting processes.
For loans, they perform independent underwriting of all loans using a combination of manual processes as well as big data analytics, order independent valuation (BPO/Appraisal), ensure that each loan complies with PeerStreet underwriting guidelines, and also perform a review of legal documentation.
For income tax purposes, PeerStreet will issue IRS Form 1099, which could be issued for interest income, original issue discount (for notes with terms longer than one year at the time of issue), cancellation of debt, or for miscellaneous income, such as incentives and late fees, if they exceed $600.
Features and Pricing
Choose your own investments. The platform gives you the ability to select loans individually and build a portfolio based on your own parameters and preferences.
Automated investing. Just as is the case with P2P lending sites, PeerStreet also enables you to use the site’s Automated Investing function. You set parameters based on your own investment preferences, and the automated feature will automatically add those loans to your portfolio.
Expected annual returns. PeerStreet maintains that typical loan investments will earn an average APR of between 6 percent and 12 percent. This is substantially higher than mortgage rates typically charged by banks and mortgage companies, but that’s because they represent loans for special situations, such as property rehabilitation. They’re the kind of loans that are not typically available to real estate investors and banks.
List of originators. PeerStreet actually provides a list of originators. This will help you as an investor to do some research on the people and businesses that you will be providing investment capital for.
Type of accounts available. In addition to regular taxable investment accounts, you can also open up a traditional or Roth IRA through PeerStreet. IRA accounts are self-directed.
Account protection. Investor funds are held in an Investor’s Trust Account with City National Bank, and have FDIC insurance coverage up to $250,000 per investor.
Site security. All interactions on the platform take place over a secure and encrypted connection that uses SSL/TLS, which is a security technology that is used by all banks and other financial institutions. Personal data is stored in public key encryption technology. PeerStreet’s hosting services provider also undergoes regular penetration testing and vulnerability assessments.
Loan defaults. PeerStreet holds defaulted loans in a bankruptcy-remote entity that is separate from the regular business. They will move to handle the workout process, work on behalf of investors to protect their investment and maximize proceeds on liquidation. Their staff includes people who have a deep understanding of real estate lending, including commercial lending experience, as well as law and regulatory compliance.
Annual fees/cost. PeerStreet charges a servicing fee on each loan that is offered for investment. That’s the the spread between the interest rate that is due from the borrower, and the interest that investors will receive from those loans. The servicing fee ranges between 0.25% and 1.00% of each loan.
Minimum deposit to open account? $1,000.
The platform does not offer a mobile app.
- Investments are in loans only — That means that your profit on the investments is not tied to their performance. You will receive interest income on the loans per the loan terms. That is, your investment interest is that of a lender, and not a direct investor. It is closer to bonds than it is stocks, so you are less likely to get wiped out completely.
- Diversification — All loans and notes are invested in real estate, however they can be diversified across a wide variety of parameters. This can include investments in different states, and in different types of properties and loans.
- No interest rate risk — Long-term bonds and other fixed income assets face interest rate risk in the event that interest rates rise above the rate you're receiving on your investment. Since PeerStreet loans are a maximum of 24 months, the interest rate risk is minimal, if it exists at all.
- Very low minimum initial deposit — At $1,000, the initial investment requirement is well below that of many mutual funds and exchange traded funds.
- Loans are not liquid — Once you invest in a loan or note through PeerStreet, you must remain in the investment until it pays off. There is no secondary market for these loans and notes.
- Accredited investor requirement — This requirement effectively removes small investors from PeerStreet. You must earn income of over $200,000 per year (or $300,000 with your spouse) in each of the previous two years, and have a reasonable expectation that such an income level will continue, or you must have a minimum net worth over $1 million - which excludes the value of your primary residence.
- This is not an investment for "widows and orphans" — Most fixed income type investments are fairly simple - you invest money, get a certain annual interest income, and you are repaid at the end of the term. Many such investments come with FDIC insurance coverage. But real estate loans, particularly the type that PeerStreet offers, are higher risk loans, because they're mostly taken for entrepreneurial purposes related to real estate. You have to be prepared to face those risks, particularly in the event of an economic downturn.
Despite the low minimum initial deposit requirement, PeerStreet is not an investment platform that will work for most investors, and certainly not small investors. The platform offers sophisticated loans, based on unconventional arrangements. For example, PeerStreet loans are not at all like investing in mortgage-backed securities, and certainly not certificates of deposit.
You have to have a certain level of knowledge about specialized real estate lending, as well as a strong understanding of the risks that you are taking on. PeerStreet will certainly appeal to certain high asset, high-risk investors, but it is not a platform for the average investor.
The crowdfunding aspect of PeerStreet is definitely innovative, and has the potential to be the wave of the future particularly for commercial real estate lending. But the lack of liquidity alone will be an issue for most investors.