The Easiest Way to Invest in Real Estate with Short Term Debt
Are you interested in real estate investing? Are you looking for a more passive option vs buying rentals? Is the idea of property management unattractive to you? If you said yes to all these questions PeerStreet might be appealing to you.
Crowdfunded real estate investing gained popularity in recent years. Technology companies are building platforms to help investors access private market deals. Before this trend, only wealthy and connected investors could invest like this. Thanks to new legislation and technology that’s all changing.
Companies like PeerStreet are changing the landscape of real estate investing. PeerStreet’s platform allows accredited investors to invest in real estate debt. Short-term bridge loans that pay high yield interest. The PeerStreet technology platform connects lenders with investors. The result is the first two-sided marketplace for private real estate debt.
What is peerstreet?
Peerstreet in a real estate debt marketplace. As an investor, you invest in short-term loans made to everyday real estate entrepreneurs. These bridge loans give entrepreneurs the money they need to renovate properties. These properties get rented or sold for profits.
The borrowers make monthly payments to the loan. PeerStret collects these payments and distributes the interest to the investors.
This private real estate debt market is only available for accredited investors. These loans are high yield, with 6% to 9% annualized yields. The value of the property backs every loan in the network. If the loan defaults, PeerStreet takes ownership of the property. This helps to protect the principle of all investors.
When peerstreet started
PeerStreet started in 2013 headquartered in Los Angeles California. With 8 rounds of funding, PeerStreet raised over 121.9 million dollars of funding.
Who founded peerstreet
The following team founded PeerStreet:
- Brew Johnson, CEO
- Brett Crosby, COO
- Alex Perelman, CTO
PeerStreet is a real estate technology company. It’s offering jobs and careers in:
- Engineering & Product
- Real Estate & Finance
Wonder what it’s like to work at PeerStreet. Check out the GlassDoor reviews. Always take online reviews with a grain of salt. The super happy and super pissed are most likely to write online reviews.
How PeerStreet works
It starts with an individual looking to borrow money. These borrowers need a short-term loan to improve a property. These properties get rented or sold after the improvements.
These entrepreneurs get a loan from a lender within PeerStreet’s network. PeerStreet has a nationwide network made up of hundreds of lenders.
The lenders then submit the loan to the PeerStreet platform. PeerStreet’s technology matches the supply of these loans to investor demand. Following screening and review, these loans get published on PeerStreet’s marketplace.
Investors review the details of these loans. Investors can do this manually or through rule-based Automated Investing. Investors can choose to invest as little as $1000 per loan. Loans are available on the platform until they raise the entire amount of the loan.
Funded loans move from the marketplace to PeerStreet’s management system. Legal and finance teams manage the loan through its duration. The PeerStreet teams manage the collection and payment of all interest for the loan. It’s common for loans to get paid off early. When that happens investors get back the principal of their investment.
As an investor, you’ll find this platform is as easy as buying stocks or bonds in an online brokerage account.
How does PeerStreet make money?
PeerStreet acts as a debt broker and charges a service fee for each loan. The fee per loan ranges between .25% and 1%. This is common in debt marketplaces. For example, if PeerStreet acquires a loan for 8% from a lender, it will sell that loan in its marketplace for 7%. The interest rate spread of 1% is the fee kept by PeerStreet.
How to invest with peerstreet
It’s easy and quick to set up an account with PeerStreet. Once you create your account and fund it you can invest in any available loan in the marketplace.
Who can invest with PeerStreet?
Only accredited investors can invest in the PeerStreet marketplace. These private market real estate loans are not registered with the SEC. The law states that only accredited investors are eligible to buy unregistered securities.
Funding your account
You can fund your PeerStreet account via a Bank Transfer/ACH or a Wire Transfer. It’s very easy to transfer funds to and from the PeerStreet platform via your bank account. You can also set up recurring deposits from your connected account. This makes regular investing automatic.
What is the minimum investment?
You can get started with only $1,000. This is the minimum amount you must invest per loan. This helps an investor diversify across several loans to reduce risk.
PeerStreet offers the following investment options:
- Bridge Loans
- Cash Offers Loans
- 30 Day Notes
Bridge loans are short-term loans ranging from 3 to 36 months in length and pay between 6% and 9% annual interest.
Cash offer loans are shorter loans with an average 3-month duration. These loans pay 5% annualized interest. Borrowers use these loans to make an all-cash deal for a property.
30-day notes are one-month loans that pay 3% annualized yields.
PeerStreet is also planning to launch a Credit Opportunity Fund. This new product is not yet available. Interested investors can join a waiting list.
Investors can manually select the loans to invest in. Additionally, investors can also use PeerStreet’s Automated Investing tool. The automated tools screen loans based on predefined criteria. This is the fastest and easiest way to diversify and stay fully invested.
The average duration of the loans ranges from 3 to 36 months. These loans are illiquid. Investors can not sell the loans before the loan ends. Investors must wait until the loan reaches maturity to get their principal.
It’s common for the borrower to pay back the loan before the end of the loan. When that happens the investor gets back the invested principal.
PeerStreet collects monthly interest payments from each loan. These interest payments get paid to all investors per loan. As an investor, you can transfer these payments to your linked bank account. Or you can reinvest the money in new loans.
All interest paid by these loans is ordinary income. These are not qualified dividends and are treated like taxable bond income. At the end of each year, investors receive a 1099-INT and 1099-OID statement.
PeerStreet published the most recent performance number in September 2020.
- The average rate of return for investors was 6.9%
- 97% of loans never went to foreclosure
- Returns of foreclosure vary and have led to losses
How many peerstreet loans default
Only 3% of PeerStreet loans file for foreclosure, which totals 190 loans. 87% of the foreclosures get resolved before PeerStreet takes ownership of the property.
When PeerStreet takes ownership of the property, it can sell it for cash. This money gets paid back to the loan investors. It’s possible that investors still lose money. The real asset backing the loan limits the downside of that loss.
Personal Investment Results
I’ve been investing with the PeerStreet platform for 4 years going on 5 years. My annualized return to date is 5%. I was one of the lucky investors that owned a loan that PeerStreet took ownership of and sold. I lost money on that particular loan, which reduced my overall average returns.
I expected this to happen and after 4 years of investing it only happened one time. This speaks to the quality of the process PeerStreet has in place.
An average rate return of 5% is solid and on target with my expectations for this asset class. A 5% return is 5x higher than the 10-year treasury, as of January 2021.
Going forward I expected similar annual returns, between 5% and 6%. There will be losses within the portfolio but I own over 20 loans at any given time. This spreads the risk and limits exposure to any one loan.
The two-sided marketplace serves both parties well, the borrower and the investor. As long as people need money to renovate real estate the marketplace will remain strong. Consistent deal flow is critical for the long-term success of the PeerStreet marketplace. Remember, PeerStreet makes money with interest rate spreads. Without a consistent flow of loans, PeerStreet’s revenues will dry up. That puts all investors at risk.
There is no clear direct competitor for PeerStreet. No other crowdfunded real estate platform offers exclusively short-term real estate loans. I suspect that’s why PeerStreet is saying it’s not a real estate crowdfunding platform.
Investors looking for other options may find Fundrise attractive. Fundrise started in 2010 and offers investments in real estate debt and equity. You do not need to be an accredited investor to join the Fundrise platform.
PeerStreet is a compelling investment option for accredited investors. These short-term debt loans do not lock up capital for a long time. Their high yields are attractive and significantly higher than treasuries or corporate bonds.
Investors comfortable with the risk and illiquidity will find PeerStreet is worth considering. The platform is easy to use and the Automated Investing platform offers a hands-off way to invest.