September 27, 2018

PeerStreet Review: Is It Good?

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If you've had your heart set on investing in real estate, but are more of a passive income type investor, PeerStreet may be the answer you need.

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PeerStreet offers crowdfunding for real estate, but not in your typical manner. While investors "pool" their money to fund real estate purchases, it's not a direct investment. PeerStreet works as the "middleman" in the process. PeerStreet purchases loans from vetted originators (lenders) and sells them to investors.

Many of PeerStreet's loans are made to real estate investors. In other words, they lend to professionals who buy and flip homes for a profit. Many of the loans have terms between 6 and 24 months and have loan-to-value ratios of 75% or lower. PeerStreet offers bridge loans, buy-to-rent loans, multifamily property loans, and small commercial real estate loans.

Keep reading to learn how PeerStreet works to see if it would be a good fit for you.

How PeerStreet Works

As we stated above, PeerStreet is the "middleman" between the loan originators and investors. PeerStreet vets both sides of the equation to make sure everyone is qualified enough for the investment.

On the originator's side, PeerStreet ensures that the lender has a proven track record with loan funding. PeerStreet ensures that the lender carefully qualifies its loan recipients to avoid the risk of investing in bad loans. They use a combination of complicated algorithms and manual underwriting to maximize the chance of choosing high quality loans.

The loans that pass the PeerStreet evaluation are then offered on the PeerStreet platform to investors. The investors are people like you—who provide the funds for the loans. You don't invest in the real estate directly. Instead, you invest in the loan or debt. You can invest in an entire loan; in other words, provide the funds for the full loan amount. You may also provide a portion of the loan, pooling your funds with other investors to fulfill the loan's needs.

Once 100% of the loan amount is invested, the loan closes. This process takes a few days. Once closed, the investor begins to earn interest on a monthly basis. PeerStreet makes interest payments on the 1st and 15th of the month after receiving the payment from the borrower. Your payments go to your investment account within PeerStreet. You can reinvest the interest once your account hits the $1,000 minimum threshold.

You can see the status of your account on the dashboard. On the "Overview" tab, you'll see your available cash, amount waiting for loan closing, and the outstanding principal already invested. You'll also see the interest paid-to-date and your total account value.

If you want more detailed information, click on the "Positions" tab. Here you will see a breakdown of the active loan positions (loans funded), loans awaiting closing (funds you invested but haven't closed yet), and paid off loans (investments that reached maturity). On this tab, you'll see a running total of interest for each loan as well as the status of each loan.

You'll see a variety of statuses on your dashboard. Following are the most common:

  • Current: PeerStreet is the official loan servicer and all loan payments are up-to-date. Interest has been distributed to investors.

  • Paid off: The full principal amount of the loan has been paid in full and all investors have been paid off as well.

  • Late 30: If a borrower makes the payment 30 days past its due date, it enters this status. Late 30 may happen more often than you realize, as the loan gets situated with the new servicer "PeerStreet." Sometimes it's an oversight or servicing issue. But there are the cases where it's the borrower's fault.

  • Late 60: If a loan becomes 2 months past due, it enters the Late 60 status. This status occurs most often for properties that are under negotiation for sale or refinancing. Of course, there are borrowers who just neglect to make their payments as well.

  • Late 90: Loans that become 3 months past due enter the Late 90 status. This is typically when PeerStreet begins the foreclosure process unless other arrangements have been made.

If a loan hits Late 90, you may eventually see a Default, Short Pay, REO, or NOD status. Each of these statutes show that the borrower is in default and that PeerStreet or its third-party servicer is working the situation out by either taking possession of the property or completing the details of a "work out."

How many loans end up in default?
According to PeerStreet, in 2017, only 0.78% of their loans ended up in default. This means in foreclosure or notice of default. PeerStreet gets involved immediately, before it even hits the 30-day late mark. At 11 days, they send notices and then again at 21 days. From there, they continue to get in contact with the borrower to find out the reason.

In the private lending sector, late payments are common. It's not always a fact of negligence. Sometimes it's a simple delay in transferring the loan servicing to PeerStreet or human error in providing the wrong billing address. Other times, the borrower is awaiting payment from the sale of the property and accepts the late payment fees rather than asking for a loan extension.

What's the Minimum Investment Required?

PeerStreet requires a minimum of $1,000 investment in each loan. Once you hit that $1,000 threshold, you are free to invest it in one loan. If you have $10,000 to invest, you can invest it all in one loan, or break it up into as many as 10 loans with $1,000 invested in each loan.

What Are the Returns?

According to PeerStreet, investors receive an average return of 6% - 9% on short-term, moderate LTV loans.

Investing with PeerStreet means you invest in debt, not equity. You are the lender, albeit a pass-through lender since the loan was already funded by the originator. As long as the borrower makes the required payments, you receive your portion of the interest plus principal when the loan is paid off. You won't receive any portion of the equity or appreciation in the property, though.

Equity investors (which PeerStreet doesn't offer) invest in the real estate directly. They may receive a portion of the net proceeds of the sale. Debt investors receive the predictable return of interest plus principal assuming the loan is paid as agreed.

What Are the Fees?

PeerStreet charges a service fee known as the "spread." The spread is the difference between the interest rate charged on the loan and the rate you receive. Typically, the fee or spread is between 0.25% and 1%. You can see the fees directly on the investment page before you decide to invest in a loan.

You'll see the PeerStreet Note Purchase Rate, which is the rate the borrower pays. Next, you'll see the PeerStreet fee (0.25% - 1%). The Net Investor Rate is your rate of return should you decide to invest in the loan.

You may see additional fees from time to time, but PeerStreet is transparent about them, letting you know upfront if there are additional origination or service fees.

Is PeerStreet safe?
PeerStreet doesn't hold on to investor funds. Instead, they are held at City National Bank, where you receive FDIC insurance of up to $250,000 per investor. This insurance protects you should PeerStreet go under. It doesn't protect you in the case of a "bad investment."

PeerStreet uses SSL/TLS encryption similar to that used by other banks. Any stored data uses public key encryption as well.

Reasons We Like PeerStreet

  • PeerStreet loans are secured by the real estate they fund. If a borrower goes into default, you have the backing of the Peer Street workout process. This is PeerStreet's attempt to recoup the funds either from the borrower or by taking possession of the property and selling it.

  • You can diversify your risk. As long as you invest the $1,000 minimum in a loan, you can diversify your portfolio over many parameters. You can choose different property types, property locations, or different loan types.

  • The $1,000 minimum makes it easy to invest and/or diversify. With only a $1,000 minimum, you don't have to worry about a lot of cash drag, or money sitting around not doing anything.

  • Most PeerStreet loans have a short duration. On average, you'll see loan options for 6 - 24 months. Because the loans are made to real estate investors, they typically buy and flip homes, paying the loans off in the short-term.

  • PeerStreet has a process in place for loans in default. PeerStreet gets involved in loan defaults almost immediately. This active involvement helps to lower your risk of total loss. Because default is common in the investment real estate industry, it's important to have a certain level of tolerance for the late payments while trusting PeerStreet's methods of handling the process.

  • You can open a variety of account types, including retirement accounts. PeerStreet offers taxable accounts, traditional IRA and Roth IRA accounts, all of which are self-directed.

  • You have the option to set up auto-investments. If you select Auto Invest, you select your criteria and PeerStreet puts you in the queue. If a loan comes up that meets your criteria and you are next in line, you invest in the loan. If the loan becomes oversubscribed, you remain in line for the next available loan that meets your criteria.

  • You can manually select your loans. If you don't want to wait in line or leave the investments up to chance, you can manually invest as well. Manual investments give you the opportunity to thoroughly vet the opportunity yourself before making any decisions.

  • PeerStreet loans are often the first lien. This puts PeerStreet first in line should the loan go into foreclosure. If liquidation occurs, you will be in line to get some of your money back. As with any liquidation or default, there's no guarantee of a return of your principal investment, though.

  • PeerStreet borrowers have "skin in the game." The maximum allowed LTV for any PeerStreet loan is 75%. Many investors have lower LTVs of around 60% - 70%, though. This gives the borrowers "skin in the game," i.e., more incentive to make their payments or they risk losing their own money invested in the property.

Reasons You May Want to Look Elsewhere

  • You must be an accredited investor. An accredited investor has a minimum net worth of $1,000,000 and makes at least $200,000 per year. If you don't meet these criteria, you cannot invest with PeerStreet.

  • You can't estimate your risk. While many investments, including the stock market, put your money at risk, real estate can be a wild card. If borrowers default, there's no magic formula telling you how much of your investment you might recoup.

  • You must be actively involved if you prefer manual investing. As loans become available on PeerStreet, the automated investors get first dibs. That may leave only a small portion of the loan available for manual investors. If you aren't at your computer ready to invest as soon as the loan becomes available, you could lose the opportunity to invest.

How It Compares

RealtyShares: Only accredited investors may invest with RealtyShares, just like PeerStreet. RealtyShares has a $1,000 minimum for student housing investments, but a $5,000 minimum for commercial real estate investments. RealtyShares offers investments in either debt or equity investments compared to PeerStreet's debt-only investments.

Fundrise: You don't have to be an accredited investor to invest with Fundrise. You also only need a minimum $500 investment. Fundrise isn't a crowdfunding site, though. Instead, you invest in eREITs and eFunds rather than investing directly in real estate loans.

Lending Club: You don't have to be an accredited investor to invest in Lending Club, but you do have to meet their income requirements. You need a minimum of $1,000 to invest and can diversify your funds in $25 increments. The main difference, though, is the type of loans you fund. Lending Club provides personal loans, which are unsecured versus PeerStreet's secured real estate loans.

Bottom Line

If you are an accredited investor with a passion for real estate investing, PeerStreet can be a good option. As long as you understand a secured loan doesn't mean a guaranteed return and you can set up automatic investments or be ready to jump on a new loan opportunity quick, it could be a viable way to invest in real estate.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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