221 comments

High Efficiency Real Estate Investing with PeerStreet

Some of the world’s most expensive real estate, displayed oceanside a few blocks from Peerstreet HQ

This Mr. Money Mustache blog recently blew past its fifth birthday. In real life, things haven’t changed all that much: I live just a couple of blocks from where I lived in 2011. We are still retired and yet busily employed raising one boy. Still have the same cars and the same level of annual spending.

But when looking back through the posts that relate to technology and personal finance, I’m surprised at how quickly things in the wider world have changed, as the explosion of these touchscreen computers we all carry in our pockets has opened up all sorts of new business opportunities. The world of software has grown and matured and polished itself massively, which means that things that used to be complex and specialized are now streamlined and used by millions.

Some of my favorite changes have been in the world of investing. Index funds and ETFs have become more popular and easier to invest in. High-fee, “I can beat the market” financial advisers and funds are losing popularity. And outside of this traditional world of stock investing, software has opened up many other ways to productively deploy your green paper employees.

Lending Club and Prosper have smashed up the traditional role of big banks and credit cards, and taken over the personal lending market. For over 3 years I’ve had $30,000 lent out to several thousand people via slightly risky personal loans, and you can watch the results in my Lending Club Experiment page.

But the latest and perhaps the most interesting change to me has been the opening up of the real estate market. Worldwide, real estate represents a breathtaking chunk of humanity’s wealth: in the United States, the figure is about $25 trillion, which is about the same as the value of all of businesses of our stock market combined. Real estate has created many millionaires and billionaires (and also many bankruptcies for those less fortunate), but until recently it has been a localized, insider’s game.

With the right skills and drive, you can master your local real estate market and build a very nice firehose of cash that will propel you to a prosperous early retirement*. But those of us without that particular personality trait, or those stuck in overpriced cities with terrible rent-to-price ratios, were left behind.

This opportunity has not gone unnoticed, and now there are companies springing up to make real estate investing easier as well. Companies like Fundrise, PeerStreet, Yieldstreet, Patch of Land, GroundFloor, RealtyShares, Money360, RealtyMogul, LendingHome, and any number of additional competitors have been popping up in the news (and in some cases sending me promotional emails) to compete for a share. And while I’ve been reading about them, I have found it difficult to separate the well-managed from the risky. Before writing about any investment for this blog, I need to learn enough to invest my own money first.

How Peer-to-Peer Real Estate Investing Works

Although real estate provides the sizzle of this new industry, it’s a little different from buying an office building or becoming a landlord. As an investor, you’re usually funding loans, which are then used to buy and improve real properties, and you get paid for doing so. But because you’re not competing in the well-developed 30-year residential mortgage market, you can expect to collect annual interest in the 7-10% range, rather than the 3-4% that mortgage securities pay their owners. This is a newer market, which means more uncertainty and thus more risk. How could I dive into it responsibly, without just blindly throwing money at something I didn’t fully understand?

How and Why I Chose PeerStreet

In a handy shortcut, I had been enjoying an extended email conversation since last year with a reader named Liz, who happens to be a San Diego commercial real estate banker in real life.  She is highly technical and motivated and has been quietly excelling in that field since 1998. And as we talked through our financial and life strategies, she mentioned that she had started doing some investing with a company called PeerStreet.

Her justification for that choice was that the loans are structured in a safer and less speculative way. As an investor with this company, you are buying only first-lien positions in loans on conservatively valued properties, compared to other companies where you end up with “Equity” in larger deals. Equity is still a valid legal ownership, but the first lienholder is the first one to get paid back in the event of any trouble.

To illustrate the large difference between this type of lending versus unsecured consumer stuff like Lending club, I’ve had over $8,000 in loans go into default in my Lending Club experiment (and yet it’s still profitable because the interest rates are high enough to overcome the defaults). Meanwhile, PeerStreet has not seen a single loan default – zero – since its founding in 2013. The net return to investors is similar, but based on a much more stable pool of money.

After learning a bit about the industry from my friend Liz, I decided to just open a test account with PeerStreet and poke around.

The Deceptively High-Tech Founders

brett_teaches

Former Googler Brett Crosby schools us on Peerstreet technology in their meeting room.

No sooner did I create the account than I got an email from co-founder Brett Crosby, who was already familiar with the MMM blog due to a motivated brother (also a tech entrepreneur and bike enthusiast) who keeps sending him articles. With this second conversation started, I figured I had a great insider shortcut to help me learn much more. From various conversations, news stories and a Lend Academy podcast interview with the other founder Brew Johnson, I came away impressed. This is not just a bubble-economy financial firm run by well-connected Wallstreet MBAs.  Brett is a software entrepreneur who created an outrageously advanced web analytics system called Urchin which was bought by Google and is now known as Google Analytics. Then he spent the next ten years in Google working on Gmail, Chrome, Docs and Drive. I use every one of these products daily.

 

BrewJohnson

Brew Johnson simulates a moment of calm on the Manhattan Beach pier, just a block down the street from headquarters (this image from their website).

Brew Johnson trained and practiced as a real estate attorney, but discovered an entrepreneurial bent and could not help but see market opportunities in his antiquated field. But he’s really less of a lawyer and more of a complete Business and Finance Savant. During an extended late-night conversation with him I was charged up by a fantastic and deeply technical analysis of the US finance and debt system that ran at the speed of thought. There are very few people who can talk about this field with both passion and Spock-like logic at the same time. His technical justification for teaming up with Brett to start PeerStreet is simply “We just kept seeing this mis-priced risk, and had to do something about it.”

 

 

 

The PeerStreet Experiment

In the end, I decided that this was worth an Official Experiment, so I planned a roadtrip with some interested friends (including Liz the commercial banker) to visit their office in Los Angeles. I also funded my account with $10,000 and made plans to put it to work during this in-person meeting.

A portion of the PeerStreet team poses on our meeting day. With added Mustaches.

A portion of the PeerStreet team poses on our meeting day, with Mustaches they had provided for the event (they must have figured out that I hate serious pictures).

After a great string of interesting conversations and meeting many of the people who develop the PeerStreet system, I set my account to “automated investing” mode to catch a fresh batch of new investments as they came out on that Friday morning. I had configured my account to invest in $2,000 chunks, into deals that that were on the high side of their conservative risk-return spectrum. I ended up with shares of five properties, similar to this one:

peerstreet-loan-example

 

The short story is that I’ll be collecting interest on this loan at a rate of 10%, until 11 months from now when the loan is suddenly repaid in a balloon payment.

In more detail, what happened is that some time ago, a local real estate fix-and-flip specialist in Florida probably spotted this house for sale at a huge discount. Maybe it was a foreclosure, or storm damage, or some sort of auction for another reason. As an experienced project managing investor, this person needs quick, reasonably priced loans to allow them to buy quickly, deploy a work crew for renovations, and then put the house back onto the market at a higher value. The house fixer turns to a bridge lender (also known as “hard money lender”) for this type of loan.

Bridge lenders specialize in understanding which fix-and-flip specialists will actually make money, because this is how everyone stays in business. They fund the loans in exchange for a slice of legal ownership (a lien) on the house. But to grow their business more quickly, they can bring in money from other investors who are willing to buy a portion of these loans in exchange for some of the earnings. It is this role that PeerStreet (and by extension me, as a customer) plays.

There’s a lot under the hood at PeerStreet – there is automated statistical data analysis, but also real estate and loan experts on their staff who must do some manual verification and independent appraisals before these loans flow into the system. I’m glad I don’t have to do that job myself, but as an investor the experience is quite pleasant.

So Then What Happens?

The idea is, I put in some money and let it grow via these interest payments. As the interest rolls in and loans are repaid, I can choose new projects to fund, or have PeerStreet automatically deploy it for me. Or I can have the interest payments sent to me as a source of retirement income. It compounds over time, and we all get to decide if the investment is a worthwhile competitor to, say, a Real Estate Investment Trust, or stock investing via index funds. If anything unexpected happens, I’ll be sure to document that as well.

How to Keep Track of my Investment

I’ve created a new page called The PeerStreet Experiment, which joins similar ongoing investments I have going with Lending Club and Betterment. I’ll keep this up to date on an occasional basis, and it should  become more interesting as time goes on and we hear from other fellow investors.

How To Invest Yourself

Like many peer-to-peer platforms, PeerStreet is bound by the rules of Securities and Exchange Commission which insist that only “Accredited Investors” (over $200k of income or $1M net worth) can invest – for now, at least. If you fit into this category, you can simply visit PeerStreet.com and create an account. Read everything on their frequently asked questions page to get the full technical and security background.

And if you still have more questions, type them up in the comments section below and we can invite the relevant people from Peerstreet itself to join in and answer.

 

Note: I have no affiliation with PeerStreet and so will not benefit financially if you happen to invest with them. As with all posts, this one was done only because I found the company interesting. If they did have an affiliate program I would probably join it (see the blog’s Affiliate policy), but in this case they do not.

Further Reading: Lend Academy maintains an enthusiastic and technical coverage of the peer-to-peer lending arena.

A May 2017 Update/Bonus

If you’re interested in trying out some investing with PeerStreet yourself, I have negotiated a special offer with the company where they give a double signup bonus to you (two 1% yield bumps), and none to me. They are trying this out as a limited test.

(I still have no affiliation with the company, but figured having the only site where this better offer is available might bring more people to my blog.) – here’s the URL for the double bump offer:

http://www.peerstreet.com/join?ref=1tnupvu

*(or in the case of non-MMM readers, a life of ever-increasing consumption where you feel you’ve made it but just need to push through those last five years until you really have enough).

 

  • PatientSeller May 2, 2016, 10:41 pm

    Will PS integrate with Mint.com, Personal Capital etc.?

    What’s the ballpark Yield Spread from a AAA rated Mutual Fund Residential REIT Yield vs something like B Rated PS Yield? Maybe a 6% Spread? Is that indicative of a Risk Spread from these 2 RE Investment Classes?

    Reply
    • Liz May 4, 2016, 12:21 pm

      Right now I just manually enter it in Personal Capital and update it once a month when I check into my PC. I don’t use Mint.com. Hopefully the PC people will reach out to the PS people soon and get that sorted out.

      Reply
  • Fancypantz May 3, 2016, 6:59 am

    Question for the PeerStreet folks… Are you considering securitization so you can offer up levered returns to individual investors?

    Reply
    • Brett Crosby May 10, 2016, 11:09 am

      Definitely something we’ve considered and may make sense a bit down the road, but not it is not currently available.

      Reply
  • Mike May 3, 2016, 9:29 am

    https://www.roofstock.com/ is another interesting play. It offers a streamlined purchase process and enables existing tenant leases to carry over to the buyer.

    Reply
  • Allen May 3, 2016, 11:15 am

    Brew,

    I am an accredited investor (net worth, not income). I have about $20k inside of a company that is entirely owned by my ROTH IRA that I would like to invest with you guys. However, when I try to sign up as a company I am asked for the value of the company. The entity itself isn’t worth $5 Million (and neither am I). I set this company – SDRA Holdings, LLC – up to invest in non traditional investments (mainly real estate) and enjoy the tax advantages of investing inside of a ROTH with the returns of being in something non traditional. Because I am the beneficiary of the ROTH and the ROTH (as an entity) owns the entity with the money in it – technically it is an extension of myself and accredited. So – how do I invest? I dont want a 1099 in my name because – well because if I make money I have to pay taxes – if I build wealth I don’t. Please help!

    Allen

    Reply
    • Brew Johnson May 30, 2016, 12:16 pm

      Allen, please email us via PeerStreet feedback (if you haven’t already) and we’ll try to sort it out, if we can.

      Reply
  • Bob May 3, 2016, 12:21 pm

    These posts are essentially a “trade”- trading some of the blog’s credibility and “brand” with promotional offers that may or may not work out. It is very obvious that the risk lands upon the small fish, while the big fish takes away its cut.

    I am just curious- there is no real need for more money (you are doing great on your budget and you can’t imagine needing to spend any more than that, as it will not increase your quality of life. Then why? why would you need to promote stuff? What value does having more money that has no use for holds?

    Reply
    • Allen May 3, 2016, 12:30 pm

      Bob – He says he isn’t making money from this. He has been forthright and upfront when he has made money from endorsements in the past. I see no reason not to trust him. He’s a dork (compliment). He likes disruptive technology. This disruption pertains to investing. Hence adequate blog material in its own right.

      Reply
    • Mr. Money Mustache May 5, 2016, 12:39 pm

      Yeah, I’m kind of sad that this post (or ANY posts on this blog) are perceived as such. Bob, did you read the whole thing, as well as my affiliates policy?

      There are a few categories of things I like to write about on this blog:
      -useful techniques/services/products that helps people save or earn money (PeerStreet is one)
      – inspirational stories from readers, entrepreneurs, or other neat people (a secondary purpose of this story and others like my interview with Ryan Carson from Treehouse)
      – reporting on industry/social trends (for example the recent Electric cars post, advocating for better urban planning or making fun of the middle class entitlement mentality)
      – anything else I think would be useful (fitness, food, psychology, whatever)

      Having the blog make more money is never a factor in deciding what to write about. Only in what I put in the advertising boxes at the bottom, or whether I choose to sign it up for any relevant affiliate programs.

      Having more money IS still useful for me: with enough of it I could put bike paths in every city or eliminate coal power entirely, among an infinite number of other things.

      Reply
    • Chris May 12, 2016, 8:22 am

      Based on my read of the article I do not believe that MMM is getting paid a dime (directly or via affiliate earnings) for writing this article. Even if he were, the quality information presented in this article and the follow up brought on by the founders is extremely insightful and deserves compensation.

      Reply
  • Tiffany Alexy May 3, 2016, 6:41 pm

    Pete,

    Thanks so much for writing about this. It’s always interesting reading your perspective on the new trends going on, especially one of my favorite topics – real estate :)

    I’m really hoping all the crowdfunding laws in my state (NC) get sorted out soon, to allow non-accredited investors like myself to invest. I’m certainly no newbie to real estate or peer-to-peer lending, so I’d love to dive in. A few local angel investors have really been championing this for us “muggles,” which has been encouraging to say the least.

    Will definitely have to check out PeerStreet. I think my mom would be interested! We were going to go in on another property together but the Raleigh-Durham area where I live is red hot, so not really many good deals to be found anymore!

    Reply
  • telemarker May 3, 2016, 8:45 pm

    Will they sell me default swaps? I’d like to bet against non-experts doing hard money loans for zero equity, at the end of a historic RE bull market. Serious question.

    Reply
    • Mr. Money Mustache May 4, 2016, 9:47 am

      Nicely put, Tele – I’m reading the novel “The Big Short” right now, where the skeptical genius Michael Burry makes exactly the same bet about the mid-2000s subprime lending market.

      Ironically, if you look at the Peerstreet website, Mike Burry is one of the backers of this company. Specifically because he believes this type of lending is NOT as risky.

      Here’s why I’d both agree and disagree with you: Historic bull market: yes, in coastal California and other areas. But you don’t have to make your PeerStreet investments there, you can do $99k Florida 3-bedrooms that are still underpriced instead. No equity: disagree, since you are effectively in the first-lien position on a project that is often below 50% LTV by the time you include deferred payments that the developer only gets if the project sells. Non-experts: also disagree – we are not the hard money lenders in this case, we are buying the loans originated by (supposedly) established experts with hundreds of projects under their belts.

      These are the reasons I consider the company a reasonable bet. But I still can’t pretend to know the future, which is why I call this an “experiment”. You can watch what happens to my account and laugh at me if I run into trouble during the next recession. Which should statistically be pretty soon now.

      Reply
      • Chris May 5, 2016, 12:41 pm

        I lived in California from 2002 to 2007 and this bubble is nothing like that one. I saw people making $50K/year getting approved for 5 year interest only ARMs to buy a $600,000 condo.

        IMO this bubble is simply an improving economy meeting a housing stock shortage.

        I remember back in 2008 the most simplistic prediction for housing recovery was the one I agreed with. The guy just took the median home price in 2002, projected it out with 3% appreciation and determined it would be about 2015 before home prices normalized. Lo and behold, most major markets are now back to their pre-bust values.

        Reply
    • Liz May 4, 2016, 12:48 pm

      I’m curious regarding what you mean by zero equity. I am considering a Peer Street investment today and the folks who are taking this particular loan paid $225,000 to close the loan (that includes the down payment, loan fees and closing costs). During the credit crisis, the residential mortgage lenders were doing 100% financing, sometimes paying all the closing costs associated with the transaction and thus lending more than 100% of the purchase price on the house. If that’s the kind of loan you got during that time and you hit some sort of hardship, likely you just stopped paying your mortgage since you had nothing to lose. An important nuance to these is that sometimes the lender originating the Peer Street loan will also retain a portion of that loan which can be another signal of their confidence in the deal. You could personally choose to only get involved with deals that have a significant down payment by the investor and one that had the lender retaining part of the loan. All that being said, you make an important point. Not all RE markets have had significant or any run-ups the past few years though so I don’t think it’s completely correct to say that we are at the end of a historic bull market. But that’s the beauty of it, you can do the research and decide which geographic locations make sense.

      Reply
  • David Harrison May 3, 2016, 10:09 pm

    I asked peer street about if and when they plan on being available in Canada and this is the response I got from Michael

    Great question! We definitely see a large opportunity in Canada as well for PeerStreet. You are definitely not the only one to ask.

    I’ll add you to a list of our Canadian interest and be sure to keep you posted on all of the developments that open up in the Great White North ;).

    Reply
  • Dividendsdownunder May 4, 2016, 5:25 pm

    Hey MMM (and others),

    It seems like a great piece of technology that has been invented. The way that it has been created is very clever and brings a type of financing that ‘average’ investors can’t access.

    However, from everything I’ve read I have similar thoughts / concerns as Green Swan, other reader and Daniel Born in particular.

    The delivery of the product is fantastic, but the actual product is still a lot more risky and in a downturn the investor would be one of the first to be at risk and also higher risk. The spread of money across multiple loans may soften the damage, but I expect all loans would have a similar increased chance of risk.

    Cool idea though and in a growing market, it’s nice.

    Tristan

    Reply
  • Geoff May 5, 2016, 9:26 am

    The idea of opening up still depressed markets to people who have no desire to actually own rental properties or flip houses seems like a good one. However, even though it is early on in this type of crowdfunding experiment, I can’t help but think that eventually the demand for the investment itself will be a bigger driver than the need for the loans on the other end.

    Based on some of the comments I’ve read in the past on the Lending Club article it sounds like investors are already having a harder time finding quality loans to fund. Though I think it will be quite a while until this is a problem on the RE investing side of crowdfunding it does make me wonder if borrower qualifications and ratings will be relaxed just for the sake of providing more investment opportunities. Just like the appetite for CDOs as an investment seemed to be one of the biggest drivers of relaxed lending practices during the previous housing boom and ensuing bust, I worry that we are at the very beginning of a similar pattern in crowdfunding.

    Reply
    • Liz May 5, 2016, 10:46 am

      Geoff, I think you make an excellent point. My opinion is that the demand for these types of investments is already very high which is why RealtyShares and Fundrise are offering mezzanine, preferred equity and equity type investments in addition to debt. I can only hope that Peer Street stays true to its purpose by offering only debt positions and staying away from more exotic investments but only time will tell. I am already noticing margin compression in more frothy real estate markets which tells me that the lenders are facing more competition, maybe even from traditional banks. I think that there are still many pockets in the country where housing prices are still distressed from 2008 and there are real opportunities for the types of gentrification that MMM discusses in previous comments.

      It’s going to take some time for the back office folks at Peer Street to find the good bridge lenders in all of these places and get them all dialed in with the technology. I have to imagine they are still only scratching the surface. As much as it seems like lending money can be done via nameless, faceless technology, it is my opinion that the bridge lending market is highly fragmented and much less of a commodity. The folks buying these properties only have a very limited window to purchase the properties and rely upon lenders who can truly execute.

      Over the long run, if this experiment works, it may drive down lending rates in general on bridge loans. It’s not necessarily good for us investors, but maybe from a less selfish perspective, it’s better for everybody in the long run that way?

      Reply
  • Keren May 5, 2016, 11:18 pm

    Love the blog! Thanks for this intro to PeerStreet. Unfortunately, it’s not an option for non-US citizens, similarly to lending club. The options in my small country are limited. For international investors, the stock market is usually as accessible as for US citizens, and no other investment platform is.

    Reply
  • bp May 6, 2016, 6:50 pm

    Has anyone tried Groundfloor.us. Feel like they lure you in with a $100 bonus for a $2500 but there is nothing ever available to invest in. The one or two opportunities that came available sold out in seconds and went live with many investors already. Just feel like it is rigged against the small guy….sigh

    Reply
  • Brian Gibb May 7, 2016, 2:42 pm

    Hi MMM and friends. I became a fan of the site a couple of years ago. I was looking to diversify my investment portfolio and the Lending Club experiment was perfect for me. I have a portfolio worth ~$60K that’s making me just south of 10%. I’m really happy with that diversification and have been looking for my next. Real Estate is where I naturally headed but I don’t have the insight or the time to flip or manage rentals. This new P2P loan is perfect for me and a great example of why this site is so so cool. Thanks, MMM. I look forward to comparing our results on this new investment type.

    Brian

    Reply
  • Markola May 7, 2016, 8:29 pm

    This is my first encounter with P2P real estate lending and the Peer Street model makes a lot of sense. I’m interested because it seems a simple way to diversify beyond stocks and bonds. I’ve read the discussion above about repayment during foreclosures but what about investor liquidity even during good times? If I wanted to cash out would I have to ride out each of the underlying loans’ terms and get my investment back piecemeal, or could I simply liquidate? If so, are there early-redemption fees involved? I’m accredited and own the Vanguard REIT Index and I do value its relatively instant liquidity. Thanks.

    Reply
  • Crass Cash May 9, 2016, 6:46 am

    Thank you very much for writing this! I’ve been looking into investing into some of these peer RE investing sites for a few years, but I haven’t pulled the trigger. I’m going to test it out myself, but please be sure to keep us updated!

    Reply
  • Leslie May 9, 2016, 8:37 pm

    http://nyti.ms/1s94o2s Lending Club is finding itself in hot water now. Money quote: “But on Monday, Lending Club announced that Mr. Laplanche had resigned after an internal investigation found improprieties in its lending process, including the altering of millions of dollars’ worth of loans. The company’s stock price, already reeling in recent months, fell 34 percent”.

    Reply
    • Carver May 9, 2016, 9:34 pm

      Mr. Moneymustache,

      You have so much valuable information to give to readers. However, please stick to what you espouse with Benjamin Graham and Buffett style of investing. I know you are only putting up a marginal amount of money with this speculation, but many readers read you as gospel, and take your advice. Please stick to what you have built with this website and continue to teach the principles of frugality and practical investing. You don’t need to speculate and pretend you are investing. There is a reason you get above average returns on this style of speculation. You play this game long enough and the returns will speak for themselves. I really enjoy reading you through the years and know you have a brilliant mind and great insight to lend us. Keep up the practical teachings my man.

      Carver

      Reply
    • Jac May 10, 2016, 7:59 am

      Yes Lislie, this NYT story on Lending Club is quite telling: http://goo.gl/AeKkfU
      I wonder if there were any Big Shorts on Lending Club stock in the past couple of days?
      How can MMM continue to earn an affiliate fee from Lending Club and tout it to readers
      after all this. Anytime I see a story like this with a founder’s yacht involved, the hair on the back
      of my neck raises up! Know, let’s see if MMM bails on the Lending Club and gets out of all those
      “D” level sub prime loans. There’s something out of wack here when people like MMM chase
      high yields and does not balance out and diversify out the high risks involved. Same applies to Peer Street.

      Reply
  • parisparis May 10, 2016, 3:47 pm

    How is this different than a roll-your-own (assuming you invest in more than one property) mortage-backed security? This is an honest question, not a snarky one. Thanks!

    Reply
    • Brett Crosby May 17, 2016, 12:30 pm

      If you mean “roll your own” equity investments in properties, PeerStreet is very different because you are investing in debt, not equity. These investments are first position liens against the underlying real estate as collateral. Historically, these investments have been very hard to get into and you had to invest large sums of cash in each deal. PeerStreet makes it much easier to invest AND get diversification across many loan investments, which is an additional risk mitigant.

      Reply
  • David May 11, 2016, 10:11 am

    Thank you for the heads of on some of the current investment options. I’ll be keeping an eye on the outcome of your experiment.

    If I have read this correctly: due to the “Accredited Investor” restriction, this particular investment avenue presumably is better suited for someone who has ALREADY (or nearly) reached early retirement. Depending on your personal stash goals.. of course your mileage may vary.

    I only say this because if you already have a net worth of $1M (excluding your primary residence), you can likely retire early already and now explore other wealth-building opportunities like this one. Or if you make $200k/yr for three consecutive years, and have the self control to save most of it, you already have the tools to reach early retirement as well.

    Saving as much money as possible and not buying epic amounts of bullshit is my current plan; leveraging self control and my income for early retirement. Once I get there, I’ll have put myself in a position to take advantage of this.

    Reply
  • Greg May 11, 2016, 10:21 am

    Mr. MMM,

    Another great post!

    Peer-to peer lending and investing could be a great opportunity for small investors during times of financial expansion. I do see some concerns in being able to accurately assess deteriorating credit quality of the borrowers or investing in a declining housing market.

    I am sure you have read the news about Lending Club. Do you still believe in their business model and would you continue to invest with LC?

    Thanks!

    Reply
  • Dennis May 12, 2016, 9:40 am

    As a real estate guy, I get concerned about an industry that is this new (started in 2012). The birth of this business started during a time in which the real estate markets are booming. Therefore a trained monkey could make money in real estate during this time.

    How well will they perform in down markets? Nobody knows as they don’t have an established track record during a down market.

    Also, as you mentioned, this platform opens up real estate for investors who had no access previously. Unfortunately, this platform also opens up real estate to developers with little or no experience as well. Typically successful real estate developers and syndicators start out using their own money and then expand with success or go belly up with failure.

    Now newbie’s without a track record who might have flipped a house or two can open up an account and ask for people’s money. In my mind, the most important consideration for someone investing in real estate is the developer / syndicator’s track record. So if you do decide to invest this way….Don’t just check out the track record of the crowdfunding middle man. Make sure you check out the track record of the person who you are investing in.

    Reply
    • Brett Crosby May 15, 2016, 11:56 am

      Fair points, this is a new space. That said, imagine if you were going to come up with a way to open up this asset class to many more people in a way that allowed them to diversify in a way never possible before. What risk mitigants would you want in place? Conservative underwriting? 1st position lien? A huge volume of deals to pick from then the ability to hand select the deals that were curated by both RE debt pros and the use of technology? Maybe you’d want to look at the forecast in the market and stress test the loan against 20 years of data in the submarket to make sure it could hold up in a worst case scenario? A you’d probably want to make sure the lender has a good track record and same with the borrower. Those are just some of the many things we look at before making a loan available for investment. If you have other ideas, I’d love to hear them. We’re always open to improving our process.

      Reply
  • Brenda May 12, 2016, 11:06 am

    So, there’s a new forum for peerstreet talk. http://www.psforums.org No posts yet, though.

    Reply
  • Elizabeth May 13, 2016, 8:04 am

    This is fascinating. As an early 30-something young family living in Vancouver, BC, we’ve essentially bid good day to any shot at getting in on the local real estate market–our modest salaries as a teacher and nurse seal the deal. I’m wondering if there is anything akin to PeerStreet that does not have as high a barrier to entry, in terms of income and assets?

    Reply
  • Alex Donhauser May 13, 2016, 11:41 pm

    I just have watched the big short so maybe I am a little bit biased but this is how this sounds to me:

    Lets create a system were we provide RE flips money that they don’t have and move the default risk to someone other who don’t do the due diligence because they don’t care … because c’mon its Real Estate, what can go wrong?

    MMM writes:
    “There’s a lot under the hood at PeerStreet – there is automated statistical data analysis, but also real estate and loan experts on their staff who must do some manual verification and independent appraisals before these loans flow into the system. I’m glad I don’t have to do that job myself, but as an investor the experience is quite pleasant.”

    Automated investing mode sounds scary to me.

    I wish you the best
    kind regards,
    Alex

    Reply
  • MsKay May 15, 2016, 12:06 am

    Mama I did it! Just finished Maximum Mustache and am finally caught up, despite all the confusing alphabet soup Americanese Retirement Jargon.

    Thank you SO MUCH for this blog, MMM. I can’t imagine what I would have become if I hadn’t stumbled on the blog, jcollins and WCI before getting my first ridiculous (intern doctor) salary in Jan and continued reading since. Right now I’m about 50% of the way to paying off my Student Debt (my hair was suddenly on FIRE!) and going to opt for the unbelievable match that my employer offers (15% when I contribute a (fixed) max of 7.5%, can you imagine I originally turned that down because I didn’t understand the concept of FREE MONEY???)
    I also eschewed the somewhat automatic “first leave=international travel” policy that every first year intern does because we simply *must* visibly spend all the money (and instead focused on things that make me happier, like helping my family through a really horrible time, including my retired grandmother’s roof collapsing during a really bad storm). Some say I could have done it all–pay off debt, travel internationally, helped out the people I love– but those are people that aren’t contributing to any goals of FI and think the 70 year old senior docs we were trained by are still doing calls by choice. (Spoiler: I spoke to a few. They’re doing it to pay for the mistakes of yesterday and fund their current lifestyles of over-the-top doctor spending.)

    Anyway, thank you for all you do. This site has been a revelation and I look forward to what you have coming in the future.

    Much love from a (newly graduated, newly employed) South African Junior Mustachian! Inkosi ik’busise!

    Reply
  • Martin May 16, 2016, 7:56 am

    I would like to utilize this in a self directed IRA to mitigate the tax consequences. I have taken a cursory look at the link to the SD IRA. It seems there are a lot of fees associated, especially if multiple loans were invested in throughout the year. Can you cast some light on this? Can one fund their Peerstreet account directly from an existing SD IRA and have the investment 1099’s tied back to that? Or is it imperative that a specifics SD IRA be set up for this purpose and how is the integration with the Peerstreet account handled?

    Best

    Reply
  • Rod May 17, 2016, 2:01 pm

    Having previously reviewed a private LLC investment focused on making hard money loans for residential fix & flips, I was surprised to learn that their underwriting criteria of 70% LTV (loan-to-value) was based on the ARV (after repair value) of the property, not the current market value of the distressed property. So I just reviewed the PeerStreet FAQs, and it seems that their underwriting criteria is also based on ARV, which they refer to as “On as-completed value”.

    So, if I understand the PeerStreet underwriting criteria correctly, the LTV at time of purchase could be close to 100% or even higher. For example, using PeerStreet’s underwriting criteria of 65% LTV for a residential rehabilitation, if the current market value and purchase price of a distressed property is $60K, and the ARV is estimated to be $100K because extensive rehab is needed and planned, then the LTV at time of purchase would be about 108% ($65K/$60K), because the stated LTV of 60% would be based on ARV, not current market value based on the current condition of the property.

    I understand that fix & flip borrowers often need to borrow cash to both purchase a distressed property, and then rehab it, but one should be aware that they could be purchasing a portion of a loan that initially has a very high LTV. And if the local real estate market softens shortly after the property purchase, the risk to the lender could be much higher than a 65% or 70% LTV would suggest, since those are ARV LTVs, not current market value LTVs based on the current condition of the property.

    If for some reason I have mischaracterized PeerStreet’s underwriting criteria, I hope that Brett or Brew will please clarify.

    Reply
    • Brew Johnson May 27, 2016, 12:16 pm

      Rod, you’ve identified a very important issue with many lenders that operate in the fix and flip space, but have mis-characterized how we calculate LTV at PeerStreet. But overall, great question and issue spotting. By way of background, in the general market for fix and flip loans, when there is a rehab component to a loan, it is common for lenders to calculate LTV based on estimated future value of the property when the rehab component is completed (i.e, the after repair value or “ARV”). In some respects this makes sense because the rehab should add future value to the property. HOWEVER, at any point where a lender lends to a high current, or “as-is,” LTV, it can be extremely risky if the project is not completed quickly or the market turns while the rehab/construction is taking place.

      We see some lenders make loans that exceed 100% of current value at the time of the loan. This means that the lender (and their investors) are often underwater out of the gates. In a healthy market, lenders can get away with this as values are rising, but if something happens with the project, or values in the local housing market decline, the lender and their investors are likely to lose money. What’s worse for investors, some lenders do not make it clear if the loan is based on a true LTV or a LT-ar-V (loan to after repair value).

      At PeerStreet, loans that have a construction or rehab component currently have a maximum “as-is” LTV ratio of 75% at the time the loan is originated plus a maximum projected LT-ar-V of 65%. The as-is LTV is calculated by dividing the dollars distributed to the borrower at the time the loan is originated by the the current value of the property, so there is an equity cushion of the market turns. The after repair value is determined by using an appraisal that estimates the value of the property after the rehab is completed. Additionally, on every loan PeerStreet provides transparency on the loan amount, size of the rehab component of the loan, current value of the property, the effective as-is LTV ratio and the estimated after repair LTV.

      Reply
  • The Big Short June 12, 2016, 8:10 pm

    I’ve been a long-time lurker and a big fan of MMM, having recommended the site to many of my friends and co-workers. This is my first time commenting.

    The business model of PeerStreet sounds suspiciously like a P2P version of mortgage-backed securities–the cause of the housing crash. Whenever a loan is packaged and re-sold, the originator of the loan loses the incentive to do the proper due-diligence, since they’re paid per-transaction and are no longer on the hook in the event of a default. The end-purchaser of these securities are too far removed from the action to understand all the risks of each individual loan. Even diversification into multiple loans cannot lower one’s overall risk if the pool of loans are all of low quality. Supposedly objective 3rd-party rating agencies cannot be truly impartial since they’re also paid per-transaction. S&P and Moody’s gave AAA ratings to what turned out to be junk loans. Hard to imagine their technology or financial sophistication cannot at least match those of a startup like PeerStreet. Regardless of how much a company may claim moral righteousness, financial incentives drive business decisions. I would be wary.

    Michael Lewis’s book “The Big Short” gives a good, easy-to-understand glimpse behind the causes of the housing crash. It’s definitely worth a read before making decisions about investing with PeerStreet.

    Full disclosure: I am in no way associated with any competitor of PeerStreet. I have no particular ax to grind against PeerStreet nor anyone employed by PeerStreet. I’m just a reader of MMM who sees some alarming similarities between the business model of PeerStreet and the mortgage-repackaging banks. Seems like PeerStreet is bringing complex financial derivatives to the lay investor. We should all learn the lesson of the very recent past.

    Reply
    • Mr. Money Mustache June 13, 2016, 8:43 am

      Big Short – all good points, but if you look into PeerStreet in detail, you’ll see that it is built exactly upon the idea of NOT falling into that trap.

      For starters, most originators (and all of the actual renovators) as well as PeerStreet have “skin in the game” – they only make money if the loans get paid back.

      Secondly, look up what Michael Burry (the skeptical investor who the Big Short was actually about) has to say about PeerStreet’s model.

      Reply
  • david July 4, 2016, 7:32 am

    have you come across any similar offerings in Europe/ UK? I know there are some, but it would be interesting to see if there are articles out there comparing these over here.

    Reply
  • Joe July 16, 2016, 1:35 pm

    Peerstreet seems interesting, but did anyone else get a little worried that they send your investment amounts over email with no options to disable it? Email is insecure and any number of random people can easily read that traffic, which is why most banks will have their own messaging systems that you have to login to access instead of communicating over email. I’m not sure I trust a company with any sizeable investment if they are broadcasting to the world that I earned $100k last month since it shows that they don’t really understand security 101.

    Reply
  • Randy September 1, 2016, 11:21 pm

    Is the monthly interest paid out over the duration that a PeerStreet investment is held subject to capital gains taxes after the principal is returned, or is it only subject to regular income tax?

    Reply
  • Adam Robertson October 6, 2016, 10:41 am

    Made 1st loan in august 2016, it funded thensame month. Borrower didnt make his 1st payment on Sept 1, is now late on 10/1 payment too. Brentwood, CA investment.

    Peerstreet is slow to respond and does not probide clear reason nor is there any indication o my dashboard of why.

    For me its a clear move on

    Reply
  • 4TheBi$cuit October 17, 2016, 2:33 pm

    MMM-

    You probably realize this already, but a similar evaluation of your top pick(s) for these types of investing avenues that accept investments from non-accredited investors (Fundrise, for example) would be very useful (for us pre-FI, non-millionaires).

    Reply
  • Ryan January 5, 2017, 11:05 am

    Seems as if a lot of my loans are going late. So as I go along, I’m thinking about discontinuing my investment as soon as the loans mature or whenever I can get the money after default. Two issues with this type of investing is liquidity and tax treatment. Eventhough loans are short, the money is still locked. With a stock find or public REIT the money is pretty liquid. I do not tend to sell much but I’m a lot more comfortable with the volatility of stocks (I did not sell in the bear market). In a taxable account, monies are taxed at regular rates. Stocks, besides REITs, have favorable taxation on dividends and capital gains. As I was thinking peerstreet would be a good diversifier, I think I can get much more comfortable diversification through stocks.

    Reply
  • Expat AJ February 9, 2018, 2:17 pm

    At the risk of sounding like a paranoid conspiracy theorist, doesn’t the “Accredited Investor” requirement seem like a way to limit the good investment opportunities of lower income/net worth individuals? It’s kind of elitist, like they’re saying “you’re not wealthy enough, and therefore not good enough, to invest like we can.”

    Reply
    • Jason Brady February 9, 2018, 5:23 pm

      Robert Kiyosaki talks about this in one of his books. Basically the issue is people must attain a certain level of financial education and experience in order to make an informed decision about sophisticated and complex investments.

      Would a layperson like me be able to read, understand and evaluate a 200-page private placement offering, without significant study, training and guidance?

      That’s the intent of the Accredited Investor rule. However, Kiyosaki also points out that the wealth and income tests aren’t necessarily effective – someone can make lots of money and be financially illiterate.

      So yeah, perhaps the rule should be updated.

      Reply
  • Dan F March 10, 2018, 8:20 am

    Why invest in real estate instead of just the stock market? It makes life more complicated. Curiosity? Fun? Belief in higher returns?

    Reply
    • Ron C June 21, 2018, 6:26 am

      Could be all of those things. I’d say the biggest benefit is diversification, especially if you’re taking money out instead of putting money in. But sure, more fun and curiosity are probably more likely reasons. Not the best of reasons, but likely! That, and trying to “beat the system” with something that’s out of the ordinary. I’m not generally a big fan of P2P, I think there’s way more risk than people acknowledge.

      Reply

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