PeerStreet is a company providing a new angle on investing in one of the world’s oldest asset classes, real estate. The company utilizes a combination of data analytics and manual underwriting to connect borrowers looking for real estate funding with investors seeking greater returns than cash. In this PeerStreet review, I’ll be explaining exactly how it works, the potential benefits and the risks to be aware of.
Before we jump into the detailed PeerStreet review, let’s summarize the biggest pros and cons for this alternative investment platform.
- Low initial investment of only $1,000
- Access to real estate debt as an investment, an asset class not generally available on traditional investment platforms
- Fixed returns based on the level of risk you’ve agreed to
- Flexible terms based on your investment objectives
- New investment opportunities offered daily
- Only available to Accredited Investors (explained below)
- Doesn’t directly invest in real estate. Your only return is in the form of mortgage repayments, not properties increasing in value
- No secondary market means once you’ve invested, your money is locked away until the end of the term
How Does PeerStreet Work?
Essentially, PeerStreet is a middleman between borrowers and brokers who are looking for funding, and investors who are looking for a return. Before the internet, the only place that a borrower could go for funding was a bank or similar financial institution. The bank would assess the risk of the borrower, work out what they could afford to repay and then offer a loan based on that assessment.
The reason the bank could afford to offer these loans was because they also accepted deposits from their other customers, which gave them the cash to be able to lend out. In practice it’s a lot more complicated than that, but at its very core that’s how the system has worked for decades.
These days, this is still the most common way of sourcing finance, particularly for a home. In recent years, there has been a surge in what’s known as Peer to Peer (P2P) lending. As the name suggests, this removes the bank in the equation and allows the borrower and investor to connect directly.
The problem that PeerStreet aims to solve, is matching these 2 parties. For a borrower who is seeking hundreds of thousands or potentially millions of dollars, it would be difficult to find an investor to take the risk of handing over all of their hard earned cash to that one borrower. Aggregator platforms like PeerStreet allow that borrower to crowd source their loan from potentially hundreds of different investors.
It’s for this reason that the initial investment amount is so low. The PeerStreet minimum investment is only $1,000 and is therefore a low barrier to entry to try the investment service to see if it’s right for you. As an investor, you can select how long you’d like to commit your money for, and the level of risk you are prepared to take. Obviously the higher the risk, the higher the interest rate that is charged to the borrower and therefore the higher your return, however this increased risk means an increased chance that the borrower struggles with their repayments.
PeerStreet also only provides funding for short term property financing, commonly known as “bridging finance”. These loans are typically used to fund property development, improvements or renovations to allow an owner or developer to increase a property’s value prior to sale. For this reason, the terms on offer tend to be a maximum of 3 years, rather than a traditional mortgage of 25 years or more.
It’s important to note that PeerStreet offers exposure to the real estate sector via this financing mechanism, but doesn’t offer investment in real estate directly. This is a bit misleading, as the front page of the website states that you can invest in real estate. When you invest with PeerStreet you don’t gain any ownership of, or return from, the underlying property holdings that are being used as security for the loan.
Because of this distinction, an investment with PeerStreet is really a form of Fixed Income, though at a higher level of risk than your typical US Treasuries or corporate bonds.
How Do Investors Earn a Return with PeerStreet?
As with other forms of P2P lending, PeerStreet essentially allows you to become the bank. You provide the capital upfront, you receive monthly interest payments and then at the end of the agreed term you get your money back.
The interest rate you are paid with these monthly repayments will depend on how risky the loan is. A Doctor with an 850 credit score and only borrowing 50% of the value of the property is going to pay a much lower interest rate than an Entrepreneur with a 600 credit score and a 10% deposit. Whilst you might want to opt for the higher return option, it’s important to keep in mind that as the risk increases, the greater the chance that the borrower will have problems with their repayments. Like all investments, it comes down to a trade-off between risk and return.
Because interest rates are so low at the moment, traditional mortgage lending tends to be available for less than 5%. PeerStreet suggests that investors on their platform can achieve high single digit, or even double digit returns. It’s important to note that this level of return is on offer because the risk is higher than traditional mortgage debt.
As mentioned above, the private lenders offering loans on PeerStreet are generally undertaking some form of development or renovation work, which comes with much more risk than a traditional, fixed mortgage repayment. Risk isn’t necessarily a bad thing, but it’s just important to understand where this form of investment sits in conjunction with the rest of your portfolio.
If the investment works as designed, the monthly repayments are made to the investor and the capital sum is returned in full at the end of the term. Because there is risk involved, there is always the potential that the borrower may not be able to make the repayments, or may not be able to repay the lump sum at the end of the term.
Should any of these issues occur, PeerStreet negotiates with the borrower on your behalf and can levy penalty interest or late fees. In the worst case scenario, PeerStreet can start the foreclosure process and seek repayment of the funds that way. This is a benefit over other forms of P2P lending which aren’t backed by security such as real estate.
Who Can Invest with PeerStreet?
One of the major drawbacks with the PeerStreet platform is that it is only available to accredited investors. If you’ve not heard this term before, it’s basically the SEC’s way of saying “You’re wealthy enough that you should know what you’re doing!”
In order to be classed as an accredited investor, you need to have an individual (or joint if you’re married) net worth of $1,000,000 or regular income of over $200,000 per year ($300,000 if joint with your spouse). This net worth can’t include equity in your family home, so it needs to be in investment assets.
You don’t have to meet both of these definitions, just one or the other. Becoming an accredited investors opens the door to many forms of investment that aren’t available to your typical retail investors, and the PeerStreet platform is one example.
So whilst the PeerStreet minimum investment is only $1,000 you aren’t going to be able to invest with them unless you have significantly more than this.
It’s also important to note that PeerStreet is only available for investors in the US, and requires a Social Security Number or Taxpayer ID Number in order to open an account.
How To Get Started with PeerStreet
Once you’ve opened a PeerStreet account, there are a couple of different ways to get started. The first is to browse the available opportunities and invest your funds manually in offers that match your objectives. PeerStreet offer good levels of information on these opportunities, including details on the borrower, the property and the loan. This ensures you fully understand every investment you choose to make, and gives you time to weigh up different options.
The downside is that it means you may potentially miss out on investment opportunities that meet all of your personal criteria. For this situation, PeerStreet offers automatic investing. This allows you to set pre-defined criteria on what you are looking for an in an investment, and the system automatically reserves a spot for you for 24 hours when an offer that matches your criteria comes online.
You can customize your portfolio across many different loans, meaning you can diversify geographically but also based on risk. A very important point to note is that there is no secondary market for PeerStreet investments. What this means is that once you have committed your funds to a borrower, you can’t get your money back out until the end of the term. So if you’ve agreed to a 24 month term you won’t be able to access any of your capital until the 24 months is over.
As with any form of investment, it’s really important to keep in mind whether it meets your investment risk objectives and your investment timeframes. If you’re unsure of this, it’s always worthwhile speaking to a professional such as a Financial Planner.
What Fees Does PeerStreet Charge?
As a business, PeerStreet obviously needs to make a profit. PeerStreet makes their money by charging what they call a servicing fee, which is essentially a spread on the interest rate the borrower pays and the return the investor receives.
In practice, it means that PeerStreet keep a bit of the interest paid before they pass the rest to you. The servicing fee is different for different loans, but is disclosed prior to investment and is generally in the range of 0.25% to 1.00%.
As an example, let’s consider an investment charging interest to the borrower of 7.50%. They would pay 7.50% to PeerStreet, who would keep, for example, 0.50% as their servicing fee and the remaining 7.00% would get passed to the investor.
The P2P lending and investment space has grown rapidly over recent years and is now actually quite big. There are many companies offering platforms that have a similar overall structure to PeerStreet, but focus on different forms of lending.
Examples include Kiva, which offers P2P micro loans to small business and entrepreneurs in developing countries or Peerform, who offer P2P unsecured personal loans. I wouldn’t consider these direct competitors to PeerStreet as there is no security on the loans, but they work in broadly the same way.
There are also companies such as Fundrise and Diversyfund which allow investors with smaller amounts of money to contribute to crowdfunding of property asset purchases. Again, this is different to PeerStreet as the investor owns a portion of the underlying real estate asset. This comes with a completely different risk profile, and whilst similar at first glance, is a different investment proposition to PeerStreet.
One of the main direct competitors to PeerStreet is Groundfloor. They offer a very similar proposition to PeerStreet, with the ability to invest in the same type of bridging finance, with regular repayments and flexible terms. There are a couple of key differences though, with the biggest being that Groundfloor is available to non-accredited investors and to investors outside of the US.
In this PeerStreet review, we’ve covered how the platform works, the assets it invests in, the level of expected returns and some of the risks to be aware of. PeerStreet provides an option for alternative investing that could potentially fit within a diversified portfolio.
It’s important to note that this form of debt financing isn’t a mainstream asset class, and comes with potentially higher levels of risk than more traditional Fixed Income assets such as US Treasuries and corporate bonds.
There are major restrictions in access to the platform, given that is only available to accredited investors who reside in the US. With this in mind, it’s not going to be a realistic option for many retail investors, but is something to consider if you meet these requirements.
Do want to learn more about other alternative investment platforms? Check out our Fundrise Review for a different take on real estate exposure in your portfolio.