FinTech has been disrupting the financial services industry in recent years by bringing aboard new players who were previously denied entry to markets that required high capital such as real estate. One section with the most impact is peer-to-peer investing.
In this PeerStreet review, we look at one of the platforms that are changing how people invest in the real estate market. Read on!
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What is PeerStreet?
PeerStreet is an online peer-to-peer investing platform that was founded in 2013 by three partners among them Brett Crosby, the founder of Urchin Software, which was acquired by Google and rebranded as Google Analytics. It offers real estate loans for crowdfunding as an intermediary between loan originators and investors. The company is based in El Segundo California.
As of March 2019, the company claims to have transacted over $2 billion and over $1 billion in asset under its management. The company has transacted on over 4,700 loans since inception with fewer than 3% (136 loans) going into default. However, that does not mean that investors have lost their money, 40% were paid off before completing foreclosure and others are actively in the foreclosure process.
PeerStreet uses the same concept used by other peer-to-peer lenders, but in this case, borrowers place real estate as collateral. If the borrower cannot pay the loan, your money will be recovered, but this can take months and sometimes years.
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- Automated investing feature for those who like hands free investing
- PeerStreet loans are often in the first lien – should the loan go into foreclosure, they are the first in line to get money back if liquidation occurs.
- Interests are paid twice monthly (1st and 15th after repayments)
- Low minimum investment ($1000)
- Excellent transparency
- Short term maturity
- Investment is only open to accredited investors
- High service fee (1%)
- There is no secondary market – you have to hold your loan until it matures.
How PeerStreet works
Unlike other peer-to-peer platforms, PeerStreet does not originate its own loans. Instead, it teams with regional loan originators who source loans from borrowers, often real estate developers and investors who want to flip a property. This purchase of loans from third parties removes a potential conflict of interest as firms that originate their own loans find it hard to stop originating loans when they earn an origination fee. However, this means it is more expensive because they still have to make money, in this case, only from you, the investor.
The investments they offer can also be called ‘hard money lending’. The investors are usually looking for short-term loans, mostly up to 24 months and they need the financing quickly as soon as they identify a project. Traditional lenders are usually not interested in quick turn around and short-term loans, the investors, therefore, turn to loan originators who fund the projects and sells the loans in parts to lenders on a platform like PeerStreet.
PeerStreet vets originators by reviewing their track records, licensing and their adherence to state usury laws, legal and underwriting process, financials and running background checks before adding them to their list of originators. They also perform independent underwriting of all loans using big data analysis, independent valuation, review the legal documentation and ensure that each loan complies with their set underwriting guidelines.
Note that the loans are already funded by originators before they are sold on the platform.
What exactly are you investing in?
By investing on the platform, you are not directly investing in the commercial real estate. You are investing in the loans that are secured by the property. These loans are divided into notes to reduce your exposure and help you diversify your portfolio. The minimum amount you can invest in each note manually is $1000. Institutions are however allowed to purchase whole loans.
You must be aware that your note is not secured by real estate, the underlying loan is.
Multiple accounts available – Self-directed IRA accounts, trusts, joint and individual accounts
Income tax reporting – the platform provides investors on the platform with IRS form 1099 reporting their income since the earnings from the platform are taxable.
Interests are paid twice monthly, on the first and fifteenth of each month. Interests can either be reinvested or withdrawn. Principle and other distributions are paid to investors as they are received
No secondary market – this means no liquidity. If you invest in PeerStreet loans, you have to hold them until the loans mature. You also cannot resell them in private transactions.
Available in all 50 states
Types of loans offered by PeerStreet
The platform offers the following loans for investment:
Bridge loans – these are short term loans, usually 3 months to 3 years that are used to ‘bridge the gap’ between financing and a future event such as refinancing, sale, or removal of an existing obligation. Bridge loans on the PeerStreet platform are for an investment or a business purpose only. Bridge loans provide the capital needed to fix and flip the property or buy to rent.
30-Day Note – this is a short-term investment that provides investors with more liquidity. In 30 days, the principal and interest are repaid to the investor who can then decide to reinvest in another or the same note. The underlying loan is secured by real estate. PeerStreet will repay the loan, principal and interest in full regardless of whether the loan payment is made on time by the borrower.
Cash Offer Loans – these are short term loans that enable buyers to give their sellers an all-cash offer instead of waiting for mortgage finalization. The homebuyer identifies the home and engages an agent or service provider to purchase it on their behalf. A bridge loan is made to the agent or service provider using the new home as collateral; the buyer puts down an earnest money deposit and moves in as a tenant in the new home. When the homebuyer finalizes mortgage or sells the current home, the agent or service provider sells the home to them and repays the loan.
Why would borrowers consider hard money loans?
Here are some reasons why borrowers take loans such as those on PeerStreet
- Quick closing – the real estate investor wants to purchase the undervalued property immediately, most traditional lenders take up to 90 days to issue a loan. By the time it is funded, it may be too late.
- Short–term financing – the investor wants to fix the home and sell it as first as possible at a profit. A 30-year mortgage plan may not be helpful here.
- Nature of the property – the fix and flip property may need some work, traditional lenders shy away from such investments as they see the flaws as additional risk.
- No cash flow – the property is not generating cash which raises the lender’s risk considerably, especially if the property was trashed or abandoned by its previous owner.
Do How to start investing in PeerStreet
As with most platforms, the first step is opening an account. The process is not complicated on PeerStreet, the first form requires you to fill in your name, working email and setting a password.
The next step is choosing the account type you are opening. Currently, the platform has four types of accounts including individual, trust, IRA, and company.
Once you select, you have to provide additional details such as state of residence, phone number and income assessment to prove that you are an accredited investor. You also have to choose your risk tolerance, experience and investment objective on the next page. You can complete your profile including verifying and funding the account on the platform
Choosing investments on PeerStreet
The platform allows you to invest in loans that match your risk appetite. The offering page presents the loans available for investing including details such as property photos, location, LTV ratio, term, interest rates and total loan amount.
You can click on ‘more info’ to view additional information about the property including bed/baths, appraisal value and date, square feet, value per square feet, rate details and PeerStreet fees.
The ‘learn more’ button takes to a separate page where details of the originator and their skin in the game are provided in addition to loan purpose and strategy, maps showing the property and nearby projects and their value, projected return calculator and payment terms.
The platform provides an auto invest tool that allows you to set your loan preferences. It enables you to set interest rates, LTV, loan terms and investment per loan. The tool matches your investment criteria to loans and if it matches, a pending purchase is made.
In case a loan is oversubscribed, such as loans with higher interests and lower risk, a queue is formed in the system. The selections made by the auto invest tool are displayed in the ‘loan positions awaiting closing’ section where you can back out within 24 hours.
The auto invest tool can be turned on or off at any time.
Risks associated with investing in PeerStreet
Default – There is always a risk of the loan going into default or becoming delinquent. The loans on PeerStreet are backed by property but that is not a guarantee that all your money will be recovered. If the loan is recovered, PeerStreet first pays legal fees and other related fees then distributes the rest to investors on a pro rata basis. PeerStreet distributes 50% of default interest to investors
Early repayment of loans – PeerStreet does not penalize borrowers for repaying their loans before the term ends. This means you may lose some of the interest you would have earned if the loan made it to maturity.
Liquidity problems – The platform does not offer a secondary market where you can sell your notes before the term ends. It is therefore impossible to raise quick cash if you want to opt out of the loan early.
How much can I earn on PeerStreet?
Your earnings depend on the loans you pick, invested amount, risk tolerance among other factors. The historical loan statistics on the platform put the returns between 6% and 9% for loans between 6 to 36 months. However, most loans on the platform currently offer interest rates from 7% to 8%.
The platform also charges a servicing fee on each loan. The fee represents the difference between the interest payable on the loan and the interest you will receive. It ranges from 0.25% to 1% and is disclosed for each loan.
Who is eligible to be an investor?
To be eligible for a loan on the platform, you must:
- Be above the age of 18 and have a social security number
- Be an accredited investor (Have earnings exceeding $200,000 or $300,000 with a spouse for each of the last 2 years and be expecting the same this current year, have a net worth of more than $1 million).
PeerStreet Review: Verdict
PeerStreet is worth considering if you are an accredited investor. The platform offers an opportunity to earn much higher interests than you would get in other fixed-rate investments. However, the returns offered are still lower than other crowdfunding platforms.
Investing on the platform won’t hold your money for years since the loan terms range from 6 to 36 months, also, the nature of the investments offered by PeerStreet make them less risky than those on other platforms.
Does PeerStreet make loans to borrowers directly?
No, PeerStreet sources loans from regional real estate lenders who know their market well. All that PeerStreet does is offer them a secondary market where they can sell their loans. Borrowers have to go to their network of lenders
Can you reinvest balances less than $1000?
Yes, you can, if you are using auto invest. Payments from interests can be reinvested automatically when they reach $100. Manually it is not possible.
Does PeerStreet offer loan extensions?
Yes, extensions can be granted on a case-by-case basis where the borrowers request the extension of the loan term. PeerStreet charges an extension fee, of which you will receive 50%.
Can I have multiple accounts on PeerStreet?
Yes, you can have different types of accounts (IRA, Individual, Company, Trust) as long as they are all accredited and set up with different emails.
What are the fees for opening an account?
Signing up for PeerStreet is free.
Are there fees for opening a self-directed IRA?
Yes, the platform charges $50 for account set up, $100 annual account fee and $50 processing fee. You are also required to fund the account with $5000 or more.
Does PeerStreet require lenders to keep skin in the game?
PeerStreet encourages the lenders to keep skin in the game but they are not required to.