PeerStreet is a commercial loan marketplace that allows individual investors to invest in high-quality real estate loans. In the past, it was very difficult for individual investors to gain access to commercial real estate opportunities given their much higher price points. Now with real estate crowdfunding and PeerStreet, such access is possible.
As of June 1, 2018, PeersStreet has funded over $1 billion in loans and they've raised $50.6 million in venture funding from the likes of Andreessen Horowitz, Rembrandt Venture Partners, and World Innovation Labs. Their latest funding was their Series B funding on April 5, 2018 for $29.5M, so they are clearly doing quite well.
I've personally invested over $800,000 in real estate crowdfunding so far.
PeerStreet allows you to invest in commercial real estate loans with as little as $1,000. In the past, you would need to lend at least $100,000 for many commercial real estate projects.
PeerStreet is similar in concept to other peer-to-peer platforms, but these borrowers have real estate as collateral. Whereas if the borrower on LendingClub or Prosper defaults, it's extremely hard to get your money back because they might simply disappear. Commercial real estate investors who need financing to fund their ventures. Those investors are referred to as “originators.”
The end result is that you're investing in commercial mortgages. Loans vary in length, property type, location, loan-to-value, and maturity. Common loan types include originators purchasing multi-family properties, office buildings, or strip malls with the intent to increase occupancy and rents, or increase the value of the properties through renovations and then flip.
PeerStreet was founded by Brew Johnson and Brett Crosby in 2014. Brett started Urchin Software, which was later acquired by Google and rebranded as Google Analytics. Brew worked as general counsel at VirtualTourist where he oversaw the company’s $85 million sale to Expedia/TripAdvisor. They are based in Manhattan Beach, California.
What Do You Exactly Invest In?
When you invest through PeerStreet, you're not investing in the commercial real estate directly. You're investing in the loans secured by the property. And, like with other peer lending platforms, you're not committing to the entire loan, just smaller amounts in the form of notes.
Each note has a minimum investment of $1,000. That means that if you invest $10,000 in PeerStreet, you will be able to spread your investment across at most 10 different loans. That will provide you with a measure of diversification against the risk of default by any individual loan.
Most people open a PeerStreet account as a general investment account. But some also open up an account with their traditional or Roth IRA. Whichever account you choose, you will need a minimum initial investment of $1,000 to open the account.
In order to open an account, you must be an accredited investor. In other words, you need to earn an income of over $200,000 per year – or $300,000 if you're married – in each of the previous two years. Or, you must have a net worth excluding your primary residence of over $1 million.
Funding your account is easy. Once your account has been opened, you can fund your account with a wire transfer or an ACH bank transfer. Cash held in your account is held on deposit through City National Bank. Any cash held in your account is fully insured by FDIC for up to $250,000 per depositor. However, your actual investment in loan notes on the platform is not covered by FDIC.
Various Investment Options On PeerStreet
PeerStreet gives you the ability to choose which loans you will invest in. Since you can invest as little as $1,000 each, this gives you the ability to diversify your holdings across many loans. You can invest in whole loans if you want, but you're not required to.
If picking the loans isn't in your wheel house, you can elect PeerStreet to choose the loans for you automatically based on your objectives and risk tolerance.
For automated investing by PeerStreet, you set the parameters for the type of loan you want to invest in and Peerstreet handles the rest. For example, you can choose the specific type of property, investment strategy (buy-to-rent, fix-and-flip, etc.), or loan-to-value ratio (LTV). The Automated Investing tool will select loans based on that criteria. This will eliminate the need on your part to investigate every loan that you will invest in.
PeerStreet fully vets all originators and loans before making them available to investors. Loans have short terms, generally between 6 – 24 months. LTV's are typically below 75%, which reduces the overall risk of each loan. They project that a diversified portfolio will provide an annualized return of between 6% and 12% per year.
Given there is no secondary market for these loans, you must hold these loans to maturity.
How Does PeerStreet Make Money?
There are no fees to open or maintain your account but PeerStreet will collect a spread on each loan.
This will range between 25 and 100 basis points (0.25% and 1.00%) taken out of interest payments. For example, if the interest rate on the loan is 10%, and PeerStreet has assigned a 75 basis point (0.75%) fee to the loan, your net return on investment will be 9.25%.
Since it's based on the interest payment, if you don't get paid, they don't get paid. This aligns their interest with yours.
How PeerStreet Handles Loan Defaults?
With PeerStreet, since the loan is secured by property, there is a much better chance you can recover some or most of your investment since it is secured by that property.
Defaulted loans are held in a bankruptcy-remote entity, separate from PeerStreet's regular business. There, they will set up a workout process, designed to protect investor interests by maximizing liquidation proceeds. They have a dedicated staff in this capacity, who are experienced in commercial lending, law and regulatory compliance.
As of January 2018, PeerStreet has originated $500 million in loans and have experienced zero investor losses.
Alternative Investing With PeerStreet
I'm a big fan of real estate crowdfunding that has democratized access to commercial real estate for individual investors. I've personally got over $800,000 invested in real estate crowdfunding in order to diversify my holdings away from San Francisco, Lake Tahoe, and Honolulu, where I own physical property.
I believe investing in the heartland of America is a good long term trend because technology is making it possible for Americans to live anywhere. No longer do people have to live in San Francisco and spend $4,000+ to live in a 2 bedroom apartment due to technology. They can now live in a nice 4 bedroom house for $2,000 a month in Texas and live a much better quality of life.
Here are some other reasons why I'm bullish on the heartland:
- There will be a net migration out of Blue states into Red states as more people realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- Trump’s tax plan calls for an elimination of State and property tax deductions, hitting California, New York and New Jersey the hardest, while benefitting cheaper states with no state income taxes to deduct e.g. Texas.
- Now that investing in real estate is more efficient, Red State 10%+ cap rates compared to <4% cap rates in Blue cities are too hard to ignore. The spread should narrow.
- A potential expansion of who can invest in real estate crowdsourcing will lead to an increase in demand and prices.
- The rise of real estate crowdsourcing platforms increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments.
Sign up with PeerStreet and explore the platform yourself for free.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
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