PeerStreet is an online marketplace where accredited investors can invest in fractional shares of a promissory note that is backed by private real estate loans. (more on this later) The underlying loans are also known as ‘hard money loans’ and are first position mortgage backed securities. The typical interest rate for a private loan ranges from 6%-12%. PeerStreet investments are debt investments. In a capital stack, debt is referred to as senior debt, or first position mortgages, much like a mortgage on a home. In the event of foreclosure, senior debt is first line to be paid before equity.
Private money loans are made to real estate developers large and small. Most of the loans on PeerStreet are made on non-owner occupied residential homes with a few small multi-family units and commercial properties in the mix. So who are the borrowers for a private loan? They are real estate investors and developers who purchase a non-owner occupied property, rehab it, then sell it for a potential profit. Why would someone need a private loan instead of going to the bank and getting a traditional loan? There are several reasons for this.
PeerStreet does not originate their loans. Instead they rely on select third party lenders to originate the loans. On the origination partners, they review track records, review financials, review licensing and adherence to state usury laws, run background checks, and review legal and underwriting processes.
For the individual loans, PeerStreet performs independent underwriting using both manual process and big data analytics. They use independent valuation (BPO/ Appraisal), review legal documentation, and ensure that each loan complies with their own underwriting guidelines. After the thorough review process, the loans are placed on the platform and made available to investors.
The PeerStreet loans are secured by first liens on real estate. They are typically short in duration (6-24 months) with LTVs (loan to valuation ratios) of below 75%. The loans are made in a number of different states which allows for geographic diversification.
For this service, PeerStreet charges a fee of 0.25%-1.00% of the loan amount.
In the event of borrower default, PeerStreet handles the workout process at each stage of the default/foreclosure process. Depending on whether the loan is made in a judicial or non-judicial state, the foreclosure costs are estimated at 3-6% of the loan balance. This is to cover legal and administrative costs and fees related to a foreclosure. Other costs may include past due property taxes, property insurance, property management fees, and disposition costs.
PeerStreet also holds loans in a bankruptcy-remote entity that is separate from the primary corporate entity. In the event that PeerStreet goes out of business, a third-party “special member” will step in to serve as a trustee to manage loan investments and ensure that investors continue to receive interest and principal payments. All non-invested investor funds are held in an Investors Trust Account with a FDIC bank insured up to $250,000
PeerStreet is a relatively new company and has been open to the public for two years as of October 2017. Since then, they’ve funded loans totaling half a billion dollars with ZERO losses to investors. Currently their monthly origination volume surpasses $50 million. Their goal is to ‘level the playing field between Wall Street and Main Street’ by providing access and transparency. Their site is integrated with Betterment, Wealthfront and Personal Capital for a more seamless and convenient customer experience.
It’s important to note what investors actually invest in on PeerStreet. The investors do not own part of the actual loan itself. Instead, investors purchase shares of a mortgage-dependent promissory note, or “MDPN”. This is an unsecured note in which an investor receives stated interest and principal, provided the borrower makes payment on the underlying loans. The investor does not own the underlying property and their name is not on the property title or loan documents. In other words, when you invest in a PeerStreet offering, you buy shares of a unsecured note, the MDPN. The note is tied to the performance of the underlying loan which IS secured by the property.
Since last year, interest rates have come down and are now hovering around 7%-8%. The more attractive loans tend to fill quickly within 30 minutes to an hour so you have to be standing by to pull the trigger immediately. As a result, it is difficult to do any sort of meaningful due diligence before investing. There is an automated investing feature where you can set your criteria for interest rate, LTV, loan term, and investment amount per loan. After you are placed in a new loan, you have 24 hours to cancel the order.
Risks:PeerStreet investments should be considered medium risk. In their private placement memorandum (PPM), a list of risk factors takes up 18 pages. It lists each and every way an investor can lose their entire investment. Some more important ones include:
Available investments are presented on an offerings page which includes location of the property, photos, interest rate, LTV, term, and total amount of loan offering. There is a status bar which tells you what percentage of total has been funded. The minimum investment amount is $1000 for each offering. When you click on ‘more info’, you are presented with more property information such as beds/baths, square feet, value per square foot, appraisal value and appraisal date, projected return chart, rate details and PeerStreet fees.
A separate investment overview page includes information on origination and maturity dates, loan purpose, strategy, property purchase price, rehab budget, and LTV.
The property’s valuation is provided in an appraisal and/or BPO attachment.
On the dashboard, I can see all my loan positions and each of their status. Monthly statements and all tax statements are easily accessible through the dashboard. There is a incentive feature that allows for a 1% bump in interest rate on a future investment for each friend referral.
They are a transparent and innovative company providing an investment opportunity to the masses in a medium that’s never been done before. The fact that they have lost zero investor capital speaks volumes. Late payments and defaults are inherent risks in this investment class and are clearly spelled out in the PPM. Anyone investing in this asset type should expect a small percentage of loans to default. The real test will be how Peerstreet handles the foreclosure and attempt to return investor capital.
Lastly, since PeerStreet interest payments are taxed at the investor’s ordinary income rate, a self-directed retirement account would be the best place to hold these investments.
Other PeerStreet reviews:
Mr. Money Mustache: High Efficiency Real Estate Investing with PeerStreet
Max Your Freedom: PeerStreet Review
Gen Y Finance Guy: Hard Money Lending – For the Retail Investor
The Biglaw Investor: PeerStreet Review: An Investor’s Look
Retire Before Dad: PeerStreet Review: Low-Risk Real Estate Loan Investing
The Real Estate Crowdfunding Review: PeerStreet: Comprehensive Review and Ranking
My Money Blog: PeerStreet Review: Real Estate Backed Loan Investments, My 22-Month Experience
Investor Junkie: PeerStreet Review 2018 – Invest in Real Estate Debt
© Copyright 2018
All rights reserved