With an ex-Google co-founder and backing from Andreesen-Horowitz, PeerStreet is attacking real estate lending exactly the way you’d expect a tech company to attack a large market filled with legacy incumbents: with technology and Big Data. (Co-founder Brett Crosby was on the team that created Google Analytics – he joined Google when his prior startup, Urchin Software, was acquired by Google in 2005 – so it’s fair to say they have some credibility with that approach.)
Unlike some other platforms, PeerStreet itself is not a direct lender. Instead, they work within the existing ecosystem of private-money lenders to resell loans to crowdfunding investors. Arguably, that allows the folks with the expertise in underwriting loans (the private lenders) to keep doing what they do best (after they’ve sold the loan off via PeerStreet, they can then “recycle” their capital into the next loan). While lenders are encouraged to retain some “skin in the game” and retain a portion of the loan in order to better align interests, they do not always do so.
Types of investments PeerStreet offers
PeerStreet only offers real estate debt investments. Most of their loans are for residential acquisitions or refinancings, and rental investment, though they also occasionally offer multi-family, industrial, and other commercial real estate loans. Investors can choose individual loans as they become available, or utilize PeerStreet’s automatic investing feature to invest (and re-invest) in loans that meet particular criteria (eg interest rate, LTV, term, and investment type). Most loans offered are 6-24 months, and the longest term shown was 36 months on the website as of this writing. Generally speaking, LTV ratios are below 75%.
While the minimum is $1,000 for investing in a new loan, as of April 2019 automatic balance reinvestments of a minimum of $100 are an option, in order to allow investors to easily reinvest interest payments and compound their returns.
What do you get when investing with PeerStreet?
One of the appeals of real estate investing (especially debt investments) is that the investment is backed by a tangible asset that can be sold off to recover investor money if something goes wrong. But as with many of the crowdfunded real estate investment platforms, your investment is, strictly speaking, not actually secured by the underlying property. Instead you receive what’s known as a “Mortgage-Dependent Promissory Note” which entitles you to a specific share of the principal and interest payments received from the borrower on the mortgage.
How does PeerStreet make money?
Like many of the crowdfunded real estate platforms, PeerStreet charges their fees as a “spread” between what the borrower pays and what the investor receives. This way, PeerStreet is paid only as its investors are paid. PeerStreet’s fees are on the lower end among similar platforms, and usually vary between 0.25% and 1.00% (So for example, if the borrower is paying 9% interest on a loan you’ve invested in, and the fee is 1.00%, you’ll receive 8% interest.) The fee is always disclosed alongside the investment info.
Potential returns and cashflow
PeerStreet loans pay 6-9%, on terms between 6-36 months. Investors receive interest payments monthly (the exact date may vary by specific investment), with principal and any other distributions paid to investors as received by PeerStreet. Funds remain in your PeerStreet account until you manually withdraw them (or choose to have them reinvested once you exceed $100, the minimum reinvestment amount).
PeerStreet has improved their investor updates process, but given their high volume of loans, detailed pro-active updates are rare – if you invest in proporties on PeerStreet, plan to check back often to monitor their status.
Breadth of offerings on PeerStreet
PeerStreet knows that when you’re trying to compete on technology, Big Data, and efficiency, volume is key, so there’s a relatively high number of loans flowing through PeerStreet on a regular basis. An investor looking to utilize the automatic investing feature will need to decide if they’re comfortable with PeerStreet’s process and approach to vetting lenders and loans (which is largely reliant on a network of third-party origination partners).
Regulatory framework and due diligence expectations
PeerStreet offers investments only to accredited investors, under SEC Reg D. They are not a registered broker-dealer or investment advisor, though they (or one of their affiliates) are registered as a Real Estate Broker and as a California Lender (they are headquartered in Manhattan Beach, CA). Their advertised due diligence process for their loans includes reviewing an independent valuation and relevant legal docs, verifying that the loan meets PeerStreet’s underwriting standards, as well as doing an independent underwriting with both manual processes as well as “big data analytics”. Before accepting a third-party lending partner, they go over the prospective partner’s track record, state licensing and lending law conformity, and also perform background checks. In theory, their high loan volume gives them a lot of data to work with to help improve the system, though in practice none of these crowdfunded investment platforms have been through a major downturn yet, so the underlying algorithms may not yet have a truly representative picture of loan performance. (That said, I wouldn’t bet against an ex-Googler when it comes to sound algorithm design…)