If you’re familiar with other P2P platforms, like Lending Club, Prosper and SoFi, then you already have a general idea of what PeerStreet is all about. The difference is that while other P2P platforms provide personal loans to individuals, PeerStreet supplies financing for real estate transactions. The purpose of the platform is to make these sophisticated investments in commercial real estate available to ordinary investors.
Related: Prosper vs. LendingClub SmackDown–Who has the best interest rates?
Table of Contents:
PeerStreet Features and Benefits
A variety of accounts are available including taxable accounts and self-directed traditional, Roth and rollover IRAs. The minimum initial investment is $1,000.
Similar to other P2P lending platforms, PeerStreet offers this feature to allow users to build a portfolio of loans. Once you set your investment criteria, you will receive an allocation based on PeerStreet’s algorithm.
Short-term investments offer investors greater liquidity. It enables investors to take a position in a given loan for a term of just 30 days. PeerStreet generally charges a liquidity premium on these loans in exchange for bearing the obligation of repaying principal and interest at the end of the 30-day term. The fee typically ranges between 3% and 8% of the note. These investments are currently operating as a pilot program.
How PeerStreet Works
PeerStreet works a bit different from other real estate crowdfunding platforms. They don’t necessarily originate new loans on the site. Instead, they source loans from existing private real estate lenders, then make those loans available to individual investors.
Unlike a real estate investment trust (REIT), where your investment is a representative share of the trust itself, you can select individual loans for investment with PeerStreet. The platform performs an extensive vetting process on each loan, before making them available to investors.
As an investor, you are free to choose the loans you want to invest in. You can do that based on property types, loan maturities, and even certain geographic regions. In short, PeerStreet enables you to select and control the investments you will hold.
PeerStreet Vetting Process
Loans are subject to a screening process also referred to as a due diligence process. PeerStreet investigates both the lenders who make the loans and the loans themselves.
PeerStreet reviews the lender’s track record, financial statements, licensing and adherence to state lending laws, legal and underwriting processes. They also conduct background checks on the principals.
To verify loans, PeerStreet reviews an independent valuation (appraisal) of the underlying property, legal documentation, and ensures each loan complies with PeerStreet’s underwriting guidelines.
General Loan Parameters
The loans are generally short-term, between six months and 24 months. They also have conservative loan-to-value (LTV) ratios, of not more than 75% of the value of the underlying property.
Types of loan investments include:
- Single-family residential buy-to-rent properties
- Single-family refinances
- Single-family Value Add (This is a property that is purchased then renovated for sale, sometimes referred to as a fix-and-flip loan.)
- Bridge loans
When you invest through PeerStreet you purchase notes that represent slivers of whole loans. This enables you to invest in a large number of loans with a relatively small amount of money. Whole loans are available, but only to institutional investors.
Interest and Principal Distributions
Interest payments on notes are typically dispersed twice each month, on the first and the 15th. Principal is distributed as it is received.
PeerStreet Investment Returns
PeerStreet advertises investment returns ranging between 6% and 12%. That puts them in the range of higher-quality loans available on other P2P lending platforms, such as Lending Club and Prosper. However, PeerStreet loans have one major advantage over those other lending platforms–their loans are secured by real estate.
With other P2P lending platforms, the loans are almost always unsecured. Should the borrower default, there will be no property to seize in satisfaction of the loan. Plus, with PeerStreet’s LTV typically below 75%, there’s an excellent chance you’ll get back at least most of your investment in the event of a default.
Service fees apply ranging between 0.25% and 1.00% and will vary by loan.
PeerStreet has three fees associated with a self-directed IRA:
- Account set up fee – $50
- Annual account fee – $100
- Processing fee – $50
PeerStreet will make a one-time reimbursement for the above fees for a self-directed IRA account with an initial balance of $5,000 or more.
Loan Defaults and Foreclosures
These is always a risk when it comes to real estate lending. However, PeerStreet has processes in place to mitigate that outcome. If the loan defaults, they will set up a workout process to protect investor interests and may even seize the property to pay the loan.
PeerStreet does not guarantee full protection for investors. In a standard uncontested foreclosure located in a nonjudicial state, PeerStreet estimates the foreclosure costs to be between 3% and 7% of the loan balance, though those fees relate only to legal and administrative costs. There may be additional losses due to unpaid property taxes, insurance, property management fees and disposition costs. Those costs may be even higher in a judicial foreclosure state, or if bankruptcy is involved.
PeerStreet Investor Requirements
Real estate crowdfunding is a high-risk investment. Traditionally, it was an investment class for commercial banks and private equity lenders. Because of the higher degree of risk, PeerStreet and other real estate crowdfunding platforms are required to accept only investors who qualify as accredited investors.
To qualify, an investor must meet one of the two following requirements:
- An annual income of $200,000 individually (or $300,000 jointly) for the past two years, with a reasonable expectation of earning at least that much in the future
- A net worth over $1 million, excluding your primary residence
Presumably, those who invest in real estate crowdfunding loans or equity investments must have large enough investment portfolios to absorb the losses that can occur.
Pros and Cons
- Low notes are secured by the underlying real estate. If the loan defaults, there will be an asset to seize in satisfaction of the loan.
- PeerStreet’s underwriting guidelines are tighter than most other platforms. The LTV requirement of 75% or less provides strong protection for investor capital in the event of default.
- The loan minimum investment of $1,000 makes it possible to diversify across many different loan notes with a relatively small amount of money.
- Very low interest rate risk. This is the risk all investors assume on long-term fixed income investments, like loans. For example, if you invest in a 10 year loan paying 10%, and interest rates go up to 15%, you’ll be stuck with the lower rate for the duration of the investment term. PeerStreet loans are no more than 24 months, minimizing this risk.
- You must be an accredited investor to participate on the platform, which virtually eliminates new and small investors, and even a lot of mid-level investors.
- Real estate crowdfunding loans always present the possibility of the loss of some or all of your invested principal.
- Investments in loan notes are not liquid. There is no secondary market where you can sell your notes. But this is generally true of all real estate crowdfunding investments.
If you’re not certain you want to invest with a real estate crowdfunding platform, you may be interested in Streitwise. It’s a public, non-traded real estate investment trust (REIT) that invests in commercial real estate. You can invest with as little as $1000, and it doesn’t require being an accredited investor, unless you invest more than 10% of either your net worth or your income.
The REIT structure has major advantages. First, REITs are legally required to return 90% of their net income to their shareholders. Second, they offer important tax advantages. Not only can depreciation expense on the underlying properties reduce your taxable income, but they also offer a 20% pass-through deduction. And when the underlying properties are sold, you’ll get the benefit of lower long-term capital gains tax rates on any capital appreciation earned.
Streitwise is currently paying annual dividends of between 8% and 9%, net of investment expenses. And given their unique investment methodology and approach to commercial real estate, it’s likely those dividends will continue for a long time.
Read our full Streitwise Review
Should You Invest With PeerStreet?
The real estate crowdfunding platform is not for everyone. Again, this type investing is higher risk than more traditional investments. This is specifically why there is a requirement for accredited investors.
But if you are an accredited investor, PeerStreet is an excellent choice. The average returns on investment are comparable to other P2P lending platforms, and even many mutual funds. Also, just as important, PeerStreet uses conservative underwriting for the loans they offer to investors.
The $1,000 minimum investment per note enables you to diversify across a large number of loans, with a relatively small amount of money. For example, with a $20,000 investment, you can hold positions in as many as 20 individual loans.
Remember, real estate crowdfunding is risky. You should invest only a small portion of your portfolio in the asset class. Traditional investments should dominate your portfolio.
To sign up for the platform or to learn more about it, check out the PeerStreet website.