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Is PeerStreet really safe to invest your money with?
What are the potential risks involved?
Are there any other better alternatives?
How PeerStreet Works
PeerStreet provides a marketplace to invest in real estate loans.
These real estate investment loans are sourced from a nationwide network of private lenders as well as brokers.
So, PeerStreet offers these lenders a secondary market to sell the loans that they have originated to investors like you and me.
There are many reasons why these lenders want to sell these loans.
One of the biggest reasons is that these lenders want to reduce their risks and get their capital back.
PeerStreet has made it very simple for you to invest in these real estate loans.
All you have to do is browse and select from investments offering different yields, terms, and LTV ratios, across either residential or multifamily properties.
The term of investments typically ranges from 1 to 36 months.
The minimum investment is $1,000.
You also have the option to use its Automated Investing feature to reserve your spot in real estate investment loans that meet your criteria as soon as they go live.
You then have 24 hours to review each opportunity before committing.
By the way, your investments in loans are not insured by the FDIC, as they are not considered bank deposits, nor are they guaranteed by PeerStreet and are subject to risks, including the entire loss of principal.
Risks Of Investing With PeerStreet
So, what are the potential risks of investing with PeerStreet?
First of all, your investment is NOT backed by the underlying property.
When you make an investment on PeerStreet, you are basically lending money to PeerStreet in the form of an unsecured commercial loan.
Do take note that investors DO NOT own the underlying property and their name is not on the property title or loan documents.
Also, these Notes are not guaranteed or insured by any governmental agency, any third party, or by PeerStreet.
So, if the borrower doesn’t pay PeerStreet on the loans that you invested, PeerStreet is NOT obligated to make any payment on the mortgage-dependent promissory notes (i.e. to you).
If borrowers do not repay their loans or PeerStreet stops servicing of the loans, investors could lose all or most of their investments.
Also, the entity that is holding the legal title of the property may not be bankruptcy-proof. As a result, their creditors, regulators, and/or state or federal governments may seize their assets. In such an event, your investments might lose all their value.
Secondly, your investments are very illiquid as there is no public market for you to sell them in case you urgently need your money back.
This is another reason why I prefer stocks to illiquid investments such as real estate, wine, and art.
If you decide to invest in these real estate loans, you should be prepared to bear the financial risks for an indefinite period of time.
Thirdly, the property valuation methods used by PeerStreet might not be accurate.
It’s also possible that PeerStreet’s review of the property value might be based on incorrect information or overly optimistic opinions.
When this happens, the risk of default increases, and the risk of loss to investors will also be great.
On top of that, you should be aware that payments or distributions to investors depend entirely on the performance of the underlying investment.
If an Underlying Investment fails to generate payments or returns, payments or distributions to investors will be reduced or stopped.
If the underlying investment houses tenants, any prolonged vacancy or fraudulent leases, or tenant’s failure to pay rent would result in decreased returns or even loss on your investments.
Furthermore, the long-term rates of return or loss will be on any of the underlying investments are unpredictable due to factors such as interest rate changes, a decline in property values, the level of consumer confidence, and the rate of unemployment.
Any estimated or projected returns on the PeerStreet website are just for illustrative examples only.
By the way, according to PeerStreet, it has no obligation to update the information presented on its website and thus does NOT guarantee the accuracy of such information.
So, any decision you make should NOT rely on the financial assumptions or estimates displayed on the PeerStreet website.
This is a big red flag for me.
It just gives me the impression that it does not really care much about investors’ interests.
Also, the investor agreement that you sign with PeerStreet restricts your right to pursue remedies individually in connection with an alleged breach or default.
In addition, PeerStreet requires any claims against it to be resolved through binding arbitration rather than in the courts.
The arbitration process may be less favorable to investors than court proceedings and is likely to limit your right to engage in discovery proceedings or to appeal an adverse decision.
Furthermore, PeerStreet is an early-stage company with a very short operating history.
It was founded in 2014, and it has been losing money ever since and expects to incur operating losses in the near to mid-term.
It’s also possible that PeerStreet might never become profitable.
Thus, its operations involve huge risks such as bankruptcy risks if it cannot raise operating capital from venture capital firms or through other means.
In the event of PeerStreet’s bankruptcy, you might not be able to recover any of your invested capital.
Even if there is any possibility of recovering your investment, it might be considerably delayed and substantially less than the amount that is due.
Lastly, there are some conflicts of interest between PeerStreet and Investors.
Peerstreet is incentivized to fund as many real estate investments as possible to maximize its fees because it derives most of its revenue from listing, origination, and servicing fees generated through making and arranging real estate loan investments.
So, it may incentivize PeerStreet to charge higher fees, provide additional services or sell investments with low-quality loans, regardless of the negative impact on investors.
How much does PeerStreet charge?
It charges a servicing fee on each loan offered for investment on its platform.
This servicing fee is a “spread” between the interest rate payable on a loan and the interest rate you receive as an investor.
In other words, Peerstreet takes a small cut in the interest rate that you are supposed to receive on the loan that you invest in.
Generally, the servicing fee is in the range of “0.25% – 1%”.
Is It Worth To Invest With PeerStreet?
So, is it worth it to invest in real estate loans with PeerStreet?
PeerStreet launched “Pocket” which allows you to earn 4.00%* interest on your cash when you join their online real estate investment platform.
You can deposit daily, but you can only withdraw once a month (with two weeks’ notice).
The interest rate sounds very attractive.
However, you need to know that PeerStreet is not a bank and Pocket is not a bank account.
Your Pocket account is not FDIC-insured.
So, if PeerStreet goes bankrupt, there goes your money.
There are many banks as well as credit unions offering equally attractive if not higher interest rates on their savings products.
What is more, these high-yield savings accounts and money market accounts are FDIC-insured.
So, is it still worth investing in highly speculative and risky real estate loans?
Given you can get practically risk-free returns of more than 4% from banks or credit unions, it does not really make sense to take huge risks to get an additional 2 to 3% on your money.
The risk-reward is just not attractive to me at all.
Better Alternatives To PeerStreet
High-yield Savings Accounts From Banks
High-yield savings accounts are one of the safest investments that you can have if you are looking for a high-yield return.
Plus, interest is credited to your account every month.
Below is a list of banks that currently offer higher-than-national-average yields on savings accounts.
It’s very simple and fast to open a high-yield savings account. Most importantly, your money is federally insured up to $75,000.
So, there is almost close to zero risk as you can get when it comes to high-yield investments.
|Bank High-Yield Savings Accounts||%AYP|
|Western Alliance Bank||4.23%||Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access|
|Liberty Savings Bank||4%||Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access|
|State Exchange Bank||4.2%||Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access|
|Third Coast Bank||3.7%||Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access|
|Continental Bank||3.65%||Min $1 deposit, Daily Compounding, Interest credited monthly, Federally Insured, 24/7 online access|
|CIT Bank||3.6%||Min $100 deposit, No monthly service fee, Mobile banking, Federally insured|
High-yield Money Market Accounts (From Banks & Credit Unions)
High-yield money market accounts are just as safe as savings accounts because it’s federally insured.
The key difference between money market accounts and savings accounts is that money market accounts might allow you to write checks and give you debit cards.
Most money market accounts only require a minimum of $1 deposit to open.
|Money Market Accounts||%AYP|
|SkyOne Federal Credit Union||3.75%||Min $1 deposit, Federally Insured, 24/7 online access|
|Lemmata Saving Bank||3.95%||Min $1 deposit, Interest credited monthly, Federally Insured, 24/7 online access|
|America First Credit Union||4.15%||Min $1 deposit, No Fees, Interest credited monthly, Federally Insured, 24/7 online access|
|Patriot Bank||4%||No fees, Daily Compounding, Federally Insured, 24/7 online access|
|MPH Bank||4.15%||Min $1 deposit, No Fees, Interest credited monthly, Federally Insured, 24/7 online access|
|Great Lakes Credit Union||4.2%||Min $1 deposit, No Fees, Interest credited monthly, Federally Insured, 24/7 online access|
|Blue Federal Credit Union||4.15%||Min $1 deposit, Daily Interest Compounding, Federally Insured, 24/7 online access|
|Atlantic Federal Credit Union||4.2%||Min $1 deposit, No Fees, Interest credited monthly, Federally Insured, 24/7 online access|