PeerStreet Review 2021: Fractional Real-Estate Loan Returns (IRR) After 4.5 Years

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Updated February 2021. I started investing in PeerStreet real-estate backed loans in July 2016. I’ve long liked the idea of hard money loans, but I wanted more diversification as opposed to tying all my money up with one single property. Peerstreet requires you to be an accredited investor. (There are other real-estate sites like Fundrise that don’t require that status.) Here are my overall numbers after over four years, with details below:

  • Total deposits (loaned principal): $35,000 ($60,000)
  • Total interest and fees earned: $3,979
  • 52 loans made and paid off, 8 current loans, and 3 late/default.
  • Internal rate of return (IRR) of 6.92% as of 2/16/2021.

Basic idea: Short-term loans backed by real estate. Real estate equity investors want to take out short-term loans (6 to 24 months) and don’t fit the profile of a traditional mortgage borrower. They are professional investors with multiple properties, need bridge financing, or they are on a tight timeline. As a real-estate-backed loan investor, you lend them money at 6% to 12% and usually backed by a first lien on the property. The borrower stands to lose the equity in their property, so they are incentivized to avoid default. In the worst case, you would foreclose and liquidate the property in order to get your money back. However, this is better than Prosper or LendingClub where it is an unsecured loan and your only recourse is to lower their credit score.

What are PeerStreet strengths? Here are the reasons that I decided to put more a higher amount of money into PeerStreet as compared to other worthwhile real estate marketplace sites:

  • Debt-only focus. Other real estate (RE) sites will offer both equity and debt (and things in between). PeerStreet only focuses on debt, and I also prefer the simplicity of debt. There is limited upside but also less downside. Traditionally, this might be called “hard money lending”.
  • Lower $1,000 investment minimum. Many RE investment sites have minimums of $10,000 or $25,000. At PeerStreet, $25,000 will get me slices of loans from 25 different real estate properties. You can even reinvest your earnings with as little as $100.
  • Greater availability of investments. Amongst all the RE websites that I have joined, PeerStreet has the highest and most steady volume of loans that I’ve seen. I dislike having idle cash just sit there, waiting and not earning interest. They apparently have a unique process where they have a network of lenders that bring in loans for them. They don’t originate loans themselves, they basically buy loans from these partners if they fit their criteria. This steady volume allows the lower $1,000 minimums and more diversification, as well as easy reinvestment of matured loans.
  • Automated investing. The above two characteristics allow PeerStreet to run an automated investment program. You give them say $5,000 and they will invest it automatically amongst five $1,000 loans. You can set certain criteria (LTV ratio, term length, interest rate). When a loan matures, the software can automatically reinvest your available cash. I don’t even have to log in.
  • Consistent underwriting. You should perform your own due diligence in this area, as you can only feel comfortable with automated investing if you think every loan is underwritten fairly. The riskier loans get higher interest rates. The less-risky loans get lower interest rates. The shady borrowers are turned away. I hope they earn their cut by doing this difficult task.
  • Strong venture capital backing. They have a history of increased funding. Series A was $15 million in November 2016. Series B was $30 million in April 2018. Series C was $60 million in October 2019.

Here’s a screenshot of the automated investing customizer tool:

What are PeerStreet drawbacks? A general drawback to real-estate backed loans is that your upside is limited to the full interest being paid back on time, while your downside is much larger if there is a prolonged housing crash. As long as housing prices are flat to strong, everything will probably work out fine because your collateral will cover everything. This is why it is important to have a cushion via the loan-to-value ratio.

In my opinion, one major drawback specific to Peerstreet is lower yields. This is just my limited understanding and I may be wrong, but PeerStreet has a network of lenders bringing in these deals and thus need to be paid some sort of “finders fee”, so the net yield to the investor feels lower than other sites. You could argue that this is also their secret sauce that brings in the high loan volume (and ideally the ability to be more selective), but at some point the rate is too low to justify the risks being taken.

In the current low-interest rate environment, it is also my opinion that too many real estate crowdfunding sites are chasing too few loans, which has been driving down the interest rates offered. I started out being able to find a lot of loans in the 8% to 9% range, but now the more conservative notes are in the 7%-7.5% range. In the current yield environment, my target is an 8% return while also maintaining a loan-to-value ratio of 70% or less.

How does PeerStreet make money? As with other real estate marketplace lenders, they charge a servicing fee. PeerStreet charges between 0.25% and 1%, taken out from the interest payments. This way, PeerStreet only gets paid when you get paid. When you invest, you see the fee and net interest rate that you’ll earn. In exchange, they help source the investments, set up all the required legal structures, service the loans, and coordinate the foreclosure process in case of default. In some cases, the originating lenders retains a partial interest in the loan (“skin in the game”). Here’s a partial screenshot:

peerstreet_fee

What if PeerStreet goes bankrupt? This is the same question posed to LendingClub and Prosper, and their solution is also the same. The loans are held in a bankruptcy-remote entity and will continue to be serviced by a third-party even in a bankruptcy event. From their FAQ:

PeerStreet also holds loans in a bankruptcy-remote entity that is separate from our primary corporate entity. In the event PeerStreet no longer remains in business, a third-party “special member” will step in to manage loan investments and ensure that investors continue to receive interest and principal payments. Additionally, investor funds are held in an Investors Trust Account with City National Bank and FDIC insured up to $250,000.

Tax forms? In previous years, I received both a 1099-INT and a 1099-OID. Basically, both include your gains that will be taxed at ordinary income rates (like bank account interest). Here’s what PeerStreet says:

PeerStreet investors will be issued a consolidated Form 1099 for the income distributed from their investment positions. Investors may receive one or more of the following types of 1099 form:

1099-OID for notes with terms longer than one year (at the time of issue)
1099-INT for notes with terms less than one year (at the time of issue)
1099-MISC for incentives, late fees or other income, if more than $600.

My personal performance. I started with a $10,000 investment in 2016, added another $15,000 in 2017, and added another $10,000 in 2019. Altogether, I also made about $25,000 of withdrawals whenever a loan was paid back and the loan inventory was not attractive. (They pay no interest in idle cash, and I don’t like their short-term options.) Each of my loans was less than 5% of the total portfolio. In order to get first dibs on the good loans, I set up automatic reinvestment when possible.

Here is a screenshot from my account:

As of February 2021, my internal rate of return (IRR) is 6.92% annualized net of all fees and taking into account the periods where my cash was idle. I verified this using my own spreadsheet and it matches the reporting by Peerstreet. Right now, 3 loans are in some phase of the foreclosure process. These loans are all less than 70% LTV, but I don’t know what the final recovery amount will be. In the past, I have had several late loans and all were resolved with no loss of principal (but that is no guarantee of the future). I expect my final IRR to be in the 6% to 7% range.

If you are thinking about this investment, the things I would want you to know are:

  • Real-estate backed loans are highly illiquid and the “maturity date” is just a hopeful number. You can’t just make a few clicks and sell, while the foreclosure process can take years to complete.
  • If you want some degree of reliable cashflow and/or liquidity for your funds, it is important to diversify across multiple, smaller loans.
  • The collateral makes a huge difference. With P2P unsecured loans, being 60 days late usually meant I was going to recover pennies on the dollar. With Peerstreet, I could wait around for an extra year yet still end up with all my principal plus most of the owed interest (if not more due to late charges). I have had many missed maturity dates over the years, but none of my loans have actually resulted in a loss. Usually the borrower realizes that they are better off figuring out how to pay back the loan rather than lose the property. Case Study #1. Case Study #2.
  • My expected net return of 6% to 7% has a good chance to be higher than even many “junk” bonds (and certainly high-grade corporate bonds) in this ultra-low interest rate environment. Being able to earn even 5-6% when corporate bonds are earning only 2-3% is going to attract some attention. Peerstreet is already working on packaging their loans into a fund, which may result in institutional money taking over soon.
  • It shouldn’t be overlooked that my ownership period did not include any prolonged, severe housing price drops.

Case studies. Here are detailed examples from my own investing experience that help illustrate my points:

Other sites that are offering new asset classes are Fundrise (direct ownership of real estate equity), FarmTogether (farmland), Masterworks (art), and Yieldstreet (various). I’ve also invested in LendingClub and Prosper (consumer loans).

Bottom line. PeerStreet offers higher-yield, short-term loans backed by physical real estate. As compared to traditional “hard money lending” on single local properties, Peerstreet allows investors to diversify easily with a $1,000 minimum investment per property, automated reinvestment, and nationwide exposure. In exchange, PeerStreet charges a servicing fee between 0.25% and 1%, taken out of the interest charged to the borrower. The returns you see in the listing are net of their fees. This is a unique asset class and it is important to understand the patience required due to limited liquidity.

If you are interested, you can sign up and browse investments at PeerStreet for free before depositing any funds or making any investments. You must qualify as an accredited investor (either via income or net worth) to invest. If you already invest with them, they now sync with Mint.com.

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Comments

  1. Seems like not enough yield to justify the risk. 7% is the same as the long term yield of the S&P 500 without accounting for dividends. Doesn’t RealtyShares have higher expected yields?

    • These would be more closely comparable to other high-yield bonds. The S&P 500 as an equity investment has historically had multiple 50% drawdowns.

      • Junk bonds have also crashed during recessions and depressions. You would have to spend a ton of research and time on crowdfunding real estate. This is why I ultimately gave up my experiment with crowdfunding loans through Lending Club. The returns were greater than 10% but there was too much risk of default and too much time required to invest.

        Better to invest in the S&P 500 since it has such a good track record. Ever notice how every couple of years there is some new investing phenomenon created that is supposed to be better than stocks? I’m all for diversifying different types of investments, but like Charlie Munger says, “The idea of excessive diversification is madness”.

        • I am certainly not against investing in low cost index funds, as that is the vast majority of my portfolio. I’m actually working on fun money allocations and how it’s wise to have a zero allocation but most of us can’t help ourselves to a little bit of one.

          I do think it’s funny that you promoted index funds with a Munger quote that is part of his criticism of… index funds. 😉 He thinks having a few stocks is just fine if you pick them right. Munger’s personal portfolio is only three things: Berkshire stock, Costco stock, and an interest in an Asian partnership fund run by Li Lu.

  2. I understand it might not be for everyone , but thanks for sharing learnt something new. BTW how you become accredited investor ?

    • As long as you satisfy the income or asset requirements, you are an accredited investor. If a real estate site requires you to be an accredited investor, then they will ask you to certify so upon application. Depending on the site, they may or may not ask for income or asset verification, usually via a scanned brokerage or W-2 statement.

  3. I don’t understand why there is a minimum income/asset requirement at all. Once you pay your money, that’s it, right? It’s not a monthly commitment or anything.

    • No, there is no monthly commitment. There are just some investments like hedge funds that the SEC deems too risky or lightly regulated for all investors. I suppose the idea is that if you meet certain asset/income requirements, you are “sophisticated” enough to do your own due diligence and decide if it is prudent to invest in such things. (Meanwhile, nearly anyone can get a subprime car loan.) The overall trend has been moving towards opening up crowdfunding for more investors, however.

  4. Does peertstreet work with mint.com?

  5. 1 of my loans is already REO. I’m crossing my fingers that they can sell off property soon, and hope to recover at least my principal. i have 3 other loans in default… so not all looking too peachy at this point. Only time will tell.

    At least platform is transparent…

  6. 20k invested in 20 different loans with 8k trapped in defaults and forclusures for 6 plus months. Really don’t understand all the positive reviews of this platform. They must pay good referall bonuses. They will die off in a year or two, just praying I get my money back

    • Thanks for sharing. I currently have about $25,000 in 25 live loans – 24 are current and 1 is late. 14 have been paid off. Would you be willing to send me a redacted screenshot of your dashboard showing which ones are good/bad? I am very surprised that 8 out 20 loans are actually in default/foreclosure (and not just late, etc) given some of PeerStreet’s claim about their performance (such as no investor principal lost ever as of October 2017).

  7. I too am experiencing bad loans on this site. 14K invested since April 2016 with 10 loans. 1 is in default, another is seriously late (over 6 months and in legal proceedings, and I’ve recently been paid about 35% back from construction reserves…will I get the rest back?) and another is late. And these aren’t the first iffy loans I’ve experienced with them (a couple others were late for varying numbers of months and then resolved).

    I have trouble believing that they’ve had zero investor losses.

  8. you mention accredited investor, how does it get verified? and if you actually have less that a min to quality for that title?

  9. Michael S says

    Hi Jonathan:

    I always enjoy your posts and find them very informative. Just a couple comments here. My understanding of the deal structure is Peer Street enters into promissory notes with investors that are dependent for payment on certain loans that have been made by Peer Street to borrowers. Thus, your investment is an unsecured note payable by Peer Street to you, with payments funded by a secured note between Peer Street and the borrower.

    At least this is the relationship described in a Peer Street Private Placement Memorandum:

    https://peerstreet-static.s3.amazonaws.com/docs/ppm.pdf

    Also, in addition to a portion of the interest payments, Peer Street makes money from origination costs (which are probably paid from the loan proceeds) and other fees.

    The fact that the secured loans originated by Peer Street (or its partners) are held in a bankruptcy remote entity probably isn’t particularly helpful here for the end investor like yourself. In the event of a bankruptcy or insolvency proceeding, you would just have an unsecured right to payment on the Peer Street notes, which would be subordinate to Peer Street’s secured debt.

    In my opinion, there are too many of these type of hard money lenders chasing borrowers. The result
    of this competition is interest rates that do not adequately compensate for lending risks.

    Thanks for sharing your personal experiences with these products. I have read with great interest.

    • I’m not a lawyer, so my understanding of this stuff is limited. I would refer to this post by another Peerstreet investor who is a lawyer:

      Either way, this isn’t a clear-cut scenario where you are lending the money, and your loan is 100% secured by the property. It also isn’t (as the comment suggested) a scenario where you’re an unsecured lender against a fintech company that could go belly up at any moment. Your note is tied to the corresponding mortgage and your repayment will be linked directly to the performance of that note. PeerStreet has set up a practical way to handle investments at scale, and I can’t think of a better way to do it.

      Basically, due to SEC rules, this is the best that they have been able to come up with in order to scale this as an investment.

      It’s true, there are a lot more of these crowdfunding sites now than 3 years ago. I also hope that the loean rates go up soon along with the overall interest rate environment.

  10. PeerStreet advertises transparency. They clearly had a good upfront run with no defaults but also have clearly had many defaults since this time. Do they specifically say what percentage of their loans have defaulted? This is key info to know. 7-8% return for a lowish risk, low volatility investment sounds pretty darn good, until you factor in both the default percentage (that will certainly increase in the next downturn) and the fact that you will have to pay federal and state tax on the proceeds taxed as ordinary income, vs dividend tax drag and cap gains on index funds.

    I still think that it has a role for me for up to 10% of my portfolio. Perhaps I will split it in thirds between PeerStreet, Realty Shares, and FundRise.

    I sure do like the automation and passive nature of PeerStreet though. If I could only be convinced that the default percentage is likely to stay very low in the future.

    • I agree, it would be nice if any of these guys disclosed their default rates. I suppose they think it is a competitive disadvantage. If one guy says a 2% default rate, another guy can say “our is less!” or simply stay vague and insinuate that they are better. I encourage PeerStreet or another bigger site to do so, and put pressure on the rest of the field.

  11. peerstreet sucks says

    3 of my loans on peerstreet are 3 months late and 1 is in foreclosure. the platform sucks.

    • UseYourBrain says

      Don’t be silly, that is part of the risk. You should stick with a savings account if you don’t understand the risk.

  12. Is anyone here stuck with “Houston, TX Value Add #4”? It has been almost 1 year since issues started with this loan and the foreclosure process has achieved nothing so far.

  13. I’ve been drawing down my PeerStreet accounts for the better part of a year. My foreclosure rate is too high with automated investing on (> 15% of balances all $1K loans) so the reality of of my actual rate of return including non performing loans is somewhere around ~5% maybe lower?. It’s too much risk and not enough liquidity for only a 5% return.

    I’ve found that Patch of Land offers consistently better risk adjusted rates (maybe fewer middle men?) and they don’t appear to be sacrificing quality for a growth at all costs mentality which PeerStreet seems to be doing IMO. PoL Min is $5K per loan and I review each investment / don’t do automated investing. I haven’t had any defaults/foreclosures yet and have been investing on the platform for over a year, however the manual vs automated investing might make it less of a fair comparison. Also PoL isn’t burning through cash to run their business, so feeling reasonably good about them existing a few years from now.

    • Thanks for the comment. Did you participate in the equity opportunity where you could own a piece of Patch of Land? I thought about it but didn’t pull the trigger. Would be interested to see how it eventually works out though.

      • I didn’t (sorry I’m justing seeing this comment now like 6 months later) . If you want to know more you can email me directly. I did talk to their CEO this fall.

  14. Jonathan, you say, “Starting in June 2018, I stopped reinvesting my proceeds as I felt that the rates being offered were starting to become too low when considering the gap between other bond alternatives.” For those of us just getting started figuring all this stuff out, would you mind explaining what exactly you mean by “other bond alternatives”? Thank you!

  15. Anyone investing with PeerStreet needs to beware. Gave them 2 years. The only way you can get the loans with decent returns is to toggle the “automated investing”. Not near enough parameters in their auto invest feature for this to protect you. In reality they are not there to protect you or your money. Good OPM plan for them.

    50% of my loans have been in trouble. Two are long term with no resolution in sight. Questions to them return standard boilerplate answers. So much that I can cut and paste my own answers nowadays.

    From my perspective, there is a simple solution for a significant portion of their bad loans. If PeerStreet would require the loan originators to have 10% “skin in the game” the ratio of crappy loans would shrink. I have one loan that not one single principle payment was ever made by the borrower.

    The 10% suggestion will not be entertained by PeerStreet. They ignore you even mentioned the idea.

    I started pulling my money out 6 mos ago. No new loans. Have to let the bad ones play out. Long story short – after 2 years I will at best break even and might actually lose money.

    Don’t just run. Run away fast.

  16. Peer Street put too much emphasis on the loan volume but ignore the quality of the loan, either 10% “skin in the game” or bring the LTV down (<70% or even lower) if the originators have multiple "late 60"s or defaults from the borrowers. There are many things Peer Street can do and they are not doing it. 1/3 of my portfolio is late payment or pass maturity date and two are in default. This kind of high rate is alarming to any investors.

  17. DontInvestInPeerstreet says

    I have thousands of $ in investments that are in DEFAULT with PeerStreet. One has been in the foreclosure for a year. Not worth the RISK. I want everyone to make smart decisions and wish I knew then what I know now.

  18. I started investing with PeerStreet the end of 2017. I wanted to do my own test so I dipped in with 10K. Minimum loan is 1K so 10 active loans at a time.

    The only way to get higher yield loans is to turn on the automated investing feature. Another poster addressed this, so I will not. Yes you can place a few parameters on the loans you deem acceptable investments. Emphasis on few.

    In the time frame I have had 14 loans. 11 paid out. Of the 11 paid out there were 17 loan “problems” of various kinds.

    The remaining 3 loans are in trouble with no resolution in sight. One loan in particular did not make one single payment – ever. 17 months of no payment. Repeat – No resolution in sight for the three remaining loans.

    I have read blogs stating 9% and 10% loans. I have never seen anything over 8% and my average is 7%. I stopped investing and started pulling my money out as the loans matured.

    Communication with PeerStreet is met with canned written answers, period. Good luck trying to reason with anyone you get to visit with. The only time I have been able to talk to anyone on the phone was when they were hustling me for my initial investment.

    Here is the meat – I have only realized $1,200.62 interest in the entire experiment and I still have over 2K tied up in legal proceeding. One of the three remaining bad loans was partially resolved and part of my principle returned. No matter, the end result is the same. As it stands today I am in the hole, and I do not expect to see a dime from the remainder of the 3 bad loans. I will likely lose over 2K in principle, a net loss of over $1,000

    In my opinion, the biggest problem with the PeerStreet model is they do not require the loan generators to have any skin in the game. None. Nada. And they do not want to require it either. From their perspective, why would they? They are playing a volume game. That requirement would lessen the number of loans generated. They have enough of our money in play they can make it work even with losses. Those are our losses – not theirs. Other posts have addressed this as well, and I agree with them.

    4 years ago they might have been worth the risk. Today the risk to return is not worth investing with PeerStreet. Far better other investments in 2020. You will make more money looking for lost wallets down on Main Street.

  19. “Update on 1 E Main St Springfield, OH PeerStreet has completed the sale of the note to a third-party purchaser, for net proceeds to investors of $573,281.31 and a final return (including interest paid to date) of 18% of the original investment. ” https://www.peerstreet.com/loans/6445251773/

    I was already trying to wind down all my Peerstreet holdings for over 2 years due to simply too many defaults before I got the email from them with the above statement on Oct 29th this year. It was an established office building, in Ohio nothing really suspicious other than Peerstreet decided to exit at 18%!! of the original investment in the middle of Pandemic depressing office space??? Claiming this was the best deal for their investors. I guess this is what you get when there is not enough skin in the game, incentives are not aligned, they looked for the easiest exit rather than what would be in the best interest of their investors. This is one of several defaults I have with Peerstreet and by far the most egregious default, they chased volume over quality for too long and it’s all coming due. This one investment was more than $3,000 in losses for me.

    • Sorry to hear that. Still sounds strange to me, someone bought this building for 18% of what it supposedly sold for a few years ago? I agree, if Peerstreet even kept 1% of loans as their own skin in the game, I bet the returns would be better. I used to screen for skin in the game, but it got harder over time.

  20. A small update, with some of their changes to automated investing and re-investing small balances, you can make your positions as small as $100 per note if you work the system appropriately. Given the risk/reward, I prefer it spread out across as many properties as possible.

    I do have some investments here, but I’m with other commenters in that I’m not sure the yield justifies the risk. There is too much money chasing too few good loans.

  21. Et tu, PeerStreet? says

    PeerStreet’s “No investor principal lost” is no longer true. One of the loans I was in bombed last month, and only 18% of the principal was returned. That one hurt. I have a screenshot I can send if you like.

    • Yikes! Yes, can you send me a screenshot of the history of the note and maybe the comps? 18% seems like that shouldn’t happen unless some sort of fraud occurred. I got the link from Ben Gregg’s comment, but can’t view these details as I’m not an investor in the note.

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