PeerStreet Review 2021: Should You Invest in Real Estate Debt?

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Real estate is often criticized for having high barriers to entry. That is, it’s hard for small investors to get involved. Real estate crowdfunding platforms are looking to change that. Today, I will share what you need to know about one of those platforms:  PeerStreet. In this PeerStreet review, you’ll learn just how easy it is to get started investing in real estate! 

What is PeerStreet?

PeerStreet Logo

PeerStreet is a real estate crowdfunding service that allows investors to invest in real estate debt. When most people think of real estate loans, they probably think about conventional 30-year mortgages. However, PeerStreet focuses on short-term loans (typically 6 – 24 months), all of which are backed by a first-position lien. What is a first-position lien? It means you get paid before equity-holders or any other debt-holders.

PeerStreet works with lenders nationwide (including many private money lenders) who originate loans. Those lenders then bring loans to PeerStreet, who offers them to investors as a fixed income (debt) investment. 

PeerStreet is the first of its kind two-sided market for real estate debt, bringing together real estate lenders and investors. 

PeerStreet Review Pinterest Pin

How does PeerStreet Work?

Wondering how PeerStreet works? Here’s what the PeerStreet process looks like:

  1. A borrower needs a short-term loan (more on why they might need a short-term loan later)
  2. A lender within the PeerStreet nationwide network lends to the borrower
  3. The lender then submits the loan to PeerStreet
  4. If PeerStreet approves of the loan, it then publishes it on the PeerStreet marketplace
  5. PeerStreet investors crowdfund the loan (i.e., many investors purchase small slices of each loan)
  6. PeerStreet manages the loan and distributes principal and interest payments to investors

One of the unique things about PeerStreet is its management of the entire process. They underwrite the loans (make sure they meet stringent requirements), and they provide asset management/loan servicing (e.g., collecting payments, distributing them to investors, dealing with non-paying loans, etc.). 

You may be wondering why lenders would work with PeerStreet. The answer is that the investor base behind PeerStreet helps to capitalize lenders, allowing them to originate more loans. Simultaneously an opportunity is created for investors. 

When it comes to selecting investments, PeerStreet is a bit different than some of its peers. While peers like Fundrise offer REITs, which are essentially a package of real estate investments, PeerStreet investors must select individual investments. 

By selecting individual investments, investors can choose loans that align with their investing goals. Want to target higher-yield investments? You can do that. Interested in short-term loans? PeerStreet offers those. Only want to invest in low LTV (loan-to-value) loans? Choose those for your portfolio!

Whatever your investing preferences, PeerStreet offers loans to fit your needs. Investments are posted each day at noon Pacific time, at which time investors can review and select the loans that are of interest.  

PeerStreet Features

Next, in this PeerStreet review, let’s cover some key features. PeerStreet offers a unique set of features to make the investing process easier. 

Automated Investing

While investors choose individual investments on PeerStreet, it is possible to automate investing.

Here’s how it works. First, set up your investing preferences (yield, LTV, loan term, property type, etc.). Once you set these preferences, automated investing reserves your right to invest in investments that meet your required criteria.

Each day, once investments go live, PeerStreet will identify which investments meet your criteria. After PeerStreet identifies potential investments, you will have 24 hours to review each opportunity and decide whether to invest. 

This automated investing feature can help you gain diversification as well as reinvest small dollar amounts. While the minimum investment is $1,000 per loan, PeerStreet does permit reinvestments in new investments with as little as $100. 

Account Types

While PeerStreet investments are generally taxable (more on that a bit later), it is possible to invest in PeerStreet using a self-directed IRA.  

PeerStreet offers both Roth and traditional self-directed IRAs through a partnership with Strata Trust Company. 

Unfortunately, there are fees to open and maintain a self-directed IRA. However, PeerStreet will reimburse many of these fees on a one-time basis when you open an account and deposit $5,000 or more. However, because there is an ongoing $100 per annum fee, you may only wish to consider a self-directed IRA if you plan to invest a large amount of money through PeerStreet. 

PeerStreet Pocket

In 2021, PeerStreet launched a new feature called PeerStreet Pocket. PeerStreet Pocket allows investors to provide funding for the short-term acquisition of warehouse loans before loans are offered for sale on the PeerStreet marketplace.

In other words, if PeerStreet acquires a loan, it has to hold it for a while until investors on the marketplace purchase it. Investors can help provide liquidity to PeerStreet for these warehouse loans through PeerStreet Pocket.

Money put into PeerStreet Pocket isn’t tied to any specific loan but rather a pool of loans that PeerStreet is waiting to sell to investors. PeerStreet will pay you interest on the money held in PeerStreet Pocket (2% as of the time of this writing) in exchange for leaving money “on deposit.” PS Funding guarantees interest and principal, so you don’t bear the same risk as investing in individual loans.

PeerStreet Pocket allows you to earn interest on your cash with monthly liquidity. 

You can read more about PeerStreet Pocket here.  

Types of Loans

As part of this PeerStreet review, I want to share with you some of the types of real estate loans PeerStreet offers to investors on its investment platform. 

Bridge Loans

One of the most common types of loans on the PeerStreet marketplace is bridge loans. Bridge loans are a form of short-term financing for businesses or investors.

I mentioned earlier that PeerStreet investments are not long-term mortgage loans. Bridge loans offered by PeerStreet are non-traditional, short-term loans primarily used by investors. Let’s walk through a few scenarios.

Imagine that an investor wants to purchase a house, fix it up, and flip it (sell it). If the fix-up takes six months, it doesn’t make sense to take out a 30-year mortgage, mainly because it is a lot of hassle and often comes with a great deal in fees.

Fix-and-Flip

Instead, investors will often approach a private money lender (like the ones in PeerStreet’s nationwide network) for a short-term loan. This loan allows them to buy the property, fix it up, sell it, then pay back the private money lender. 

In exchange for this type of loan’s convenience, investors will typically pay a relatively high-interest rate. As you can see, this type of financing is bridging the investor from purchasing the property to the sale of the property. 

Fix-to-Rent

Another type of bridge loan is the fix-to-rent loan. In this type of loan, a buyer purchases a property to fix up and rent out. Once it is rented out, the investor can seek more traditional financing. 

This fix-to-rent scenario is what I did when I purchased my first rental property. I borrowed from a private money lender, fixed up the property, and then refinanced into a 25-year commercial loan and paid off the private money lender.

Buy-Rent

A final example of a bridge loan is a buy-to-rent scenario. In this case, an investor buys a property, rents it out, and then refinances. Why would you take out a private money loan in this case? Because it would allow you to buy the property for “cash,” making your offer more attractive while still retaining the ability to refinance later.

30-Day Notes

This next type of loan is all about liquidity. With this type of loan, you are returned principal and interest at day 30.  

PeerStreet is responsible for repaying your loan on day 30, regardless of whether the loan itself has been repaid. For this reason, PeerSteet charges a liquidity premium (ranging from 3-8%) for this type of loan.

The 30-day note program is in a pilot stage, so whether it will continue in the future remains uncertain. However, if you’re looking for a high-yielding, short-term real estate investment, this is an option to consider. 

You can read more about 30-day notes here.

Cash Offer Loans

This third type of loan offered to PeerStreet investors is the cash offer loan. With this type of loan, a homebuyer chooses a home they’d like and engages a provider to purchase the home on their behalf. 

A loan is made to the provider, collateralized by the house. The homebuyer then moves into the property as a tenant. Once the homebuyer finalizes a mortgage for the new property, the provider sells the home to the homebuyer and pays off the loan.

This loan type is short-term in nature and provides reasonable liquidity to investors because of the speed with which the borrower repays the loan. 

Learn more about cash offer loans here.

PeerStreet Investment Returns

As part of this PeerStreet review, I am sure you wonder what investment returns you can expect from PeerStreet. 

Private money loans generally come with a higher interest rate than traditional mortgage financing. What does that mean for PeerStreet investors? It means that investors have the opportunity to purchase real estate debt at higher yields than are typically available in other fixed-income investments.

Loans on the PeerStreet marketplace have historically returned 6 – 9%, though every individual loan will perform differently. 

PeerStreet Pros & Cons

Next, in this PeerStreet review, I want to cover a few pros and cons of investing with PeerStreet.

PeerStreet Pros

  • Low Investment Minimum

PeerStreet investors can get started with just $1,000. Each loan requires a $1,000 minimum investment. However, in practice, you may wish to purchase many loans to achieve adequate diversification.

  • Short-Term Investment

While other platforms require investing for a more extended period, PeerStreet allows you to choose the notes that meet your investment duration requirements. For example, if you only want to invest in notes that will mature in six months, you can do that. 

  • Automated Investing

PeerStreet allows you to get particular about the types of investments that interest you the most. And, once you set your investment criteria, PeerStreet has made it super easy to invest through its automated investing program automatically.

PeerStreet Cons

  • Accredited Investors Only

Perhaps the biggest downside to PeerStreet is that it is only available to accredited investors. Traditionally, this means having an income of $200,000+ per year ($300,000+ for couples) or a net worth greater than $1 million, excluding your primary residence. 

While there are new ways to qualify as an accredited investor, PeerStreet may not be accessible for many who are interested. You can learn more about the definition of an accredited investor to find out if you qualify. 

  • Debt Only

Unlike other investing platforms like Fundrise, PeerStreet only offers debt investments. If you are interested in investing in equity (which carries more risk but potentially higher upside), you’ll need to look elsewhere. 

  • No Loan Packages

When investing in PeerStreet, you have to choose individual loans. While this does allow you to be selective, it can slow down the investing process. Some of PeerStreet’s peers, by comparison, have created packages of investments (REITs) to simplify the process. Luckily, with PeerStreet’s sophisticated automation tools, this downside is easily overcome.

PeerStreet Alternatives

To help you understand if PeerStreet is right for you, I want to share how PeerStreet stacks up to some of its competitors. 

PeerStreet vs. Fundrise

One of PeerStreet’s most well-known competitors is Fundrise. Fundrise is different in that it handles diversification for you by placing investments in a fund (what it calls eREITs). So, instead of choosing individual investments, Fundrise helps you invest in a package of diversified investments based on your goals.

Additionally, Fundrise investments span both debt and equity investments, providing different types of exposure to real estate.

Perhaps most importantly, Fundrise is available for non-accredited investors, so if you aren’t eligible for PeerStreet, Fundrise is a great option. 

I have been investing in Fundrise for a couple of years now, and I have been exceptionally pleased with it. If you want to learn more, check out our review!

Fundrise

Fundrise is my favorite tool for getting started with real estate investing. It allows you to invest in a diversified portfolio of commercial real estate at low costs and with a great deal of transparency. Check out my full review to see if this tool is right for you!

PeerStreet vs. Realty Mogul

Unlike PeerStreet and Fundrise, Realty Mogul focuses primarily on commercial real estate properties. Realty Mogul is similar to Fundrise in that it offers investments in REITs, but for accredited investors, it also offers investments in individual properties. 

Realty Mogul has one REIT focused on debt investments and one REIT focused on equity investments, so you have multiple investment options.  

However, Realty Mogul’s investment minimum is $5,000, making the barrier to entry much higher than both PeerStreet and Fundrise. 

PeerStreet FAQs

Wrapping up this PeerStreet review, let’s cover some of the most frequently asked questions. 

How is PeerStreet Different than a REIT?

PeerStreet is different than a REIT because you must select individual investments to meet your investing goals rather than purchasing a package of investments over which you have no control (as is the case with a REIT).

For example, with PeerStreet, you can select loans based on geography, property type, loan maturity, etc.

What are PeerStreet’s Fees?

Are you wondering how does PeerStreet make money? PeerStreet earns a servicing fee on each loan offered for investment. This fee is a spread between the interest rate paid by the borrower and the interest rate you receive as an investor. 

This fee is typically 0.25% – 1.00%. PeerStreet discloses this fee for each investment, so it’s easy to see your expected net return (post-fee) before deciding to invest.

With PeerStreet’s fee structure, they only get paid when investors get paid, helping to align incentives (i.e., only offering loans which PeerStreet believes will perform).  

Who can Invest in PeerStreet?

Only accredited investors can invest in PeerStreet.

Under Regulation D of the Securities Act of 1933, certain non-registered securities can be sold to investors if the seller satisfies certain exemption criteria. In the case of PeerStreet, this exemption is possible because PeerStreet investments are only available to accredited investors. 

Accredited investors are likely to be more aware of potential investments’ risks and have a larger cushion when invested in assets with limited liquidity. 

How Safe is PeerStreet?

PeerStreet, like all investments, carries risks. PeerStreet offers only fixed income (debt) investments, which typically carry less risk than equity investments. 

Additionally, all of PeerStreet’s investments are at a loan-to-value ratio of less than 75%, meaning that there is a cushion (in the form of equity) if things go wrong. 

Regarding the security of the website itself, PeerStreet uses a secure, encrypted connection. Amazon Web Services powers its data center and undergoes continual assessments to ensure compliance with industry standards. You can read more about PeerStreet’s data security policies here

PeerStreet Review Pinterest Pin 2

How Does PeerStreet Handle Loan Defaults?

If there is a loan default, PeerStreet will handle the entire loan workout process. Their goal is to get investors paid as quickly as possible through their process. PeerStreet will work through many actions, with foreclosure being the last resort. 

In terms of costs in the case of a default, PeerStreet first pays any legal fees and foreclosure-related costs. Then, they’ll distribute principal, interest, and default interest payments to investors. 

What if PeerStreet Goes Bankrupt?

While PeerStreet has been around since 2013, you may want to know what happens to your investments if, for some reason, they go belly-up.

Loans are not held by PeerStreet directly. Instead, PeerStreet holds investments in a bankruptcy-remote vehicle. If PeerStreet were to go out of business, a third-party would step in to manage any existing loans and ensure investors continue to receive principal and interest payments.

Additionally, any funds received from investors for an investment that has not yet closed are held in a trust account with Wells Fargo and backed by FDIC insurance. 

How Can You Sell PeerStreet Investments?

At this time, it is not possible to sell PeerStreet investments as there is no secondary market. 

Is there a PeerStreet App?

As of the time of this writing, PeerStreet does not have a mobile app, though its website is mobile-optimized, so it’s easy to use on the go. 

Is PeerStreet Legit?

Yes! PeerStreet is a well-known real estate crowdfunding service and has a proven track record. 

Since its inception in 2013, PeerStreet has seen rapid growth, having transacted on over $3.5 billion of real estate and returning over $175 million in interest payments to investors. 

What is the Tax Treatment of Peerstreet?

Generally, the government taxes Income from PeerStreet as ordinary income. In other words, you will pay tax on your PeerStreet interest income at your ordinary income tax rate.

PeerStreet will issue a 1099 each year with details to provide to your tax professional.

PeerStreet does offer a self-directed IRA option, which can help you achieve more favorable tax treatment on your investments. 

While I’ve covered a few of the most frequently asked questions as part of this PeerStreet review, there are many other common questions. To learn more, check out PeerStreet’s FAQ page

PeerStreet Review Summary:  Is PeerStreet a Good Investment?

So, finishing up this PeerStreet review, is real estate crowdfunding with PeerStreet worth it? In my opinion, YES! PeerStreet is an extremely robust platform for investing in real estate debt and allows you to seek consistent income with short-term loans.

PeerStreet has a strong track record and is an easy way to start investing in real estate! So, get started with PeerStreet and start earning passive income today!

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