If you’re looking to give your fixed income portfolio a bit of an interest rate bump, or if you’re looking to diversify beyond a portfolio of stocks and bonds, PeerStreet can provide an attractive alternative.
They enable you to invest in real estate loans, at returns that are much higher than what you can get on conventional fixed rate investments. It may also provide an important “port in a storm” if you’re looking to diversify into a high yield investment, while reducing your stock position in an uncertain market.
But be aware up front that PeerStreet is only available to investors who qualify as either high income, high asset, or both.
What is PeerStreet?
PeerStreet is an online investment platform where investors can invest in private real estate loans. And since it’s a peer-to-peer (P2P) service, it’s also where real estate entrepreneurs come to get financing for their projects. Much as is the case with the many P2P platforms that have developed across the web, PeerStreet enables investors to fund the loans real estate entrepreneurs need to make their deals happen.
It’s a fairly high-risk arrangement, since the possibility exists that a real estate deal can go sour. But that’s balanced out by the possibility of investors earning much higher returns on their money. The high risk/high reward dynamic is the reason why PeerStreet restricts participation to investors with stronger financial profiles.
PeerStreet is unlike real estate investment trusts, which are something like mutual funds for real estate investments. Instead, PeerStreet enables investors to select the individual real estate loans they want to invest in.
When you invest with PeerStreet, you invest in loans, rather than in equity investments. This makes returns more predictable, and also provides the security of collateralization by the underlying real estate. PeerStreet acts as a secondary market for existing real estate loans made by well established lenders. That is, Peerstreet doesn’t make direct loans to borrowers.
PeerStreet began operations in 2013, and is based in El Segundo, California. It has a Better Business Bureau (BBB) rating of D+ (on a scale of A+ to F), however that rating is based on a single complaint to which PeerStreet did not reply. PeerStreet is not BBB accredited.
Since the platform was launched, they’ve completed total funding volume of $1.7 billion, with more than $1 billion taking place in 2018 alone.
How PeerStreet Works
Loans are relatively short-term, at between six and 36 months, and limited to not more than 75% of a property’s “as is” value. Both qualifications tend to lower investment risk, since the loans are short-term, and the property sponsor has substantial equity in the project.
One of the major advantages of Peestreet is that the minimum per note investment of $1,000 means you can diversify across many different loans with a total investment of several thousand dollars. You can diversify your holdings by property type, geography, loan maturity date and overall risk profile.
You will purchase loan “notes” which are slivers of whole loans. Institutions can purchase whole loans, but individual investors are limited to notes only. The notes are part of mortgage-dependent promissory notes issued by PeerStreet, and linked to the performance of the corresponding loan tied to the property.
PeerStreet’s vetting Process includes:
- An independent underwriting of all loans, using a combination of manual processes, as well as big data analytics.
- Reviewing of an independent appraisal on each property.
- Ensuring each loan complies with the platforms underwriting guidelines.
- A full review of legal documentation.
PeerStreet will also evaluate participating lenders based on their track records, financial conditions, licensing, legal and underwriting processes, as well as to run background checks.
Loans typically provide returns in the 6% to 9% range, depending on various asset characteristics. This is substantially higher than what you can get on other fixed income investments, like certificates of deposit, and US Treasury securities. However, it’s lower than the published returns provided by other real estate crowdfunding platforms.
Automated investing. This is a tool you can activate that will enable you to set parameters for loan criteria, and have investments purchased automatically. You’ll have a chance to invest in loans as soon as they hit the platform. It requires a minimum availability of $1,000 to invest in any loan. It doesn’t guarantee you’ll get every loan within your investment criteria. If a particular loan is over-subscribed you may not get a position.
30 Day Notes. These are short-term notes that enable investors to earn high returns on more liquid investments. Basically, you invest in a loan that’s scheduled to mature within 30 days, regardless of the original term of the loan. It adds a short-term investment option to your real estate loan portfolio mix. There’s a liquidity premium charged by PeerStreet on these notes, equal to 3% to 8% of the note amount.
You can track the status of your loan portfolio on the PeerStreet Positions Dashboard:
PeerStreet Investor Requirements
PeerStreet requires participants to be accredited investors. This limits investors to those with high income, high net worth, or both. The requirements to be an accredited investor are as follows:
- You must have an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years, with a reasonable expectation of reaching the same income level in the current year, OR
- An individual net worth, or joint net worth with that person’s spouse, in excess of $1 million not including your primary residence.
This means PeerStreet is not available to small investors. If you don’t qualify as an accredited investor, and you want to invest in real estate crowdfunding, you can do so through platforms that do not require accredited investor status. Examples include:
PeerStreet Features and Benefits
Minimum initial investment. $1,000.
Accounts available. Joint and individual accounts, trusts, and IRA’s. IRA accounts must be self-directed (“SDIRAs”). You can even have multiple accounts.
Distributions. PeerStreet distributes interest payments on the first and the 15th of each month. Principle and other miscellaneous distributions are paid as they are received. Distributions can either be withdrawn from the platform, or reinvested in other loans.
Income tax reporting. Since PeerStreet loans pay interest, you’ll receive IRS form 1099 reporting your income, similar to what you will receive from a bank for interest income.
You may receive IRS Form 1099-B, but only if there is a gain or loss on the sale of the property in the event of foreclosure. (Capital losses and gains are not typical with PeerStreet investments.)
Availability. All 50 states.
No liquidity. When you invest in a PeerStreet loan, you must remain invested for the full term of the loan. There is no secondary market for Peerstreet notes, and no ability to sell them in private transactions.
Customer service. PeerStreet can be contacted by phone or by online messaging, during regular business hours. Online messaging typically provides replies in one business day.
Platform security. All transactions on the PeerStreet website take place over a secure and encrypted connection that uses SSL/TLS, which is industry standard security technology used by all banks and other financial firms. Personal data is stored using the latest in public key encryption technology in the platforms data center, powered by Amazon Web Services. The platform hosting service provider also undergoes regular penetration testing and vulnerability assessments.
PeerStreet Is different from many other real estate crowdfunding platforms in that their investments don’t focus on large commercial properties, like apartment complexes, and retail, office, an industrial space. Instead, they focus investing on the small residential investment market.
Specific loan investments center on single family properties. The loans can be used to purchase homes for rent, fix-and-flip ventures, and even single family refinances and bridge loans.
What’s more, PeerStreet limits investments to loans on those properties, rather than equity investments. This means your investment is both more secure, but generally lower yielding than investments offered by other real estate crowdfunding platforms. The lower yield reflects the lack of equity participation, which also makes the investments generally safer.
As a result, returns on PeerStreet investments are well above those of more traditional fixed rate investments, like bonds, Treasury securities, and bank savings vehicles. However, they are at least somewhat below returns offered by real estate crowdfunding platforms offering equity participation investments.
PeerStreet applies a servicing fee on each loan offered for investment. This fee represents the spread between the interest rate payable on the loan and the rate you receive as an investor. The fee will range between 0.25% and 1.00%, and will be disclosed for each loan. However, there is no fee to open an account.
How to Sign Up with PeerStreet
You must be at least 18 years old, and a US resident. (The platform is currently unavailable for non-US residents.) And once again, you must be an accredited investor. You must have a US tax identification number, which is either your Social Security number or an employer identification number (EIN) in the case of a trust.
You can fund your PeerStreet account by ACH from your linked bank account. You can also use wire transfers. On wire transfers of $25,000 or more, PeerStreet will reimburse up to $50 in wire fees. You can even set up recurring deposits to fund your account on a continuous basis.
PeerStreet Pros & Cons
- Invest with as little as $1,000.
- Interest payments are paid twice monthly.
- Loan investments tend to be more conservative and less risky than on other real estate crowdfunding platforms.
- Short-term investments – six to 36 months.
- 30-day note investments for shorter-term investing.
- Select your investments manually or automatically.
- You must remain invested in a loan until it pays out.
- Returns on PeerStreet investments are lower than other real estate crowdfunding platforms, since they’re limited to loans only.
- Not available to non-US residents.
- Peerstreet investments are not guaranteed.
Should You Invest with PeerStreet?
PeerStreet is worth considering if you meet the criteria of being an accredited investor. It offers an opportunity to earn much higher returns than you can get on conventional fixed rate investments. And it also provides an opportunity to move at least some of your stock portfolio into an alternative investment – one that’s not tied to the fortunes of the stock market.
The two disadvantages to this platform are that 1) it’s not open to small- and medium-size investors, and 2) the returns offered on investments are somewhat below those advertised by competing real estate crowdfunding platforms.
However, despite those lower returns, the nature of PeerStreet investments make them less risky than those of competitors. First, they invest primarily in the single-family housing market. That has the advantage of being the most liquid form of real estate, particularly when compared to commercial property. And since PeerStreet loan terms range from six months to 36 months, you won’t need to tie up your money for several years.
If any of these advantages interest you, PeerStreet is definitely worth a closer look.
If you’d like more information, or if you’d like to open an investment account, visit the PeerStreet website here:
|0.30% - 0.50%/year
|3% up front fee, 2% annual management fee.
|Intake fee of between 0.5% and 1.0%. 1% annual management fee.
|0.5% service charge + 10% of all profits
|0.25% - 1.0% setup fee
|0-2% setup fee
|Patch of Land
|0-3% of loan total
|Intake fee of between 1-3%. 1.5-2% annual management fee.
- Invest with as little as $1,000
- Interest payments are paid twice monthly
- Short-term investments – six to 36 months
- 30-day note investments for shorter-term investing
- Select your investments manually or automatically
- You must remain invested in a loan until it pays out
- Returns on Peerstreet investments are lower than the competition
- Not available to non-US residents
- Investments not guaranteed