The following is a guest post from PeerStreet investor, Liz. Liz was an early PeerStreet adopter, has 20 years of relevant industry experience and connected us with blogger Mr. Money Mustache. This the first guest post on the PeerStreet blog, and will be one of many to come in the future.
How’d you find out about PeerStreet?
After 20 years of working, saving and investing my money, I felt strongly I needed to diversify my investments outside of stock market index and bond funds. I think rental properties are great, but if I were to have done that, I would want something local and the prices in San Diego are so high that I didn’t feel comfortable putting so much cash into one transaction. I kept researching possible one-off first trust deed investments but I couldn’t get comfortable with either the folks issuing the loan, the transaction itself or the operations. Something about it didn’t feel very transparent. I didn’t feel like there were any safeguards in place to protect me as an investor.
A neighbor of mine is a residential real estate agent and I spoke with him about these types of investments and asked if he knew anybody he trusted who did them. He mentioned that one of his old friends from Long Beach, Dan Graham, was involved with this company PeerStreet. Dan called, explained it all to me, sent me a link to check it out, and the rest is history. All of the issues I was having with those other investments were addressed by the PeerStreet team and platform. Random and kind of cool, right?
What’s your background and what do you do professionally that makes you experienced in this type of investing?
I’ve been in the commercial banking world since 1998, first in the middle market arena on the credit side of the house and since 2003, I’ve worked in business development doing mostly Small Business Administration (SBA) loans on commercial owner-user real estate properties.
My background makes me feel more comfortable with this type of investing more than any other, to be honest. I understand all the jargon along with the science and the art of lending since I have done this type of work day in and day out for nearly 20 years. Only time will tell if my experience and lending philosophy works for my PeerStreet choices, but I like that I get to make the choice. While these credits may have some “hair” on them for one reason or another, the hard money lenders do not have incentives to make loans that would ultimately default as any losses can be devastating to their business model. This is in stark contrast to subprime residential mortgage originators who were paid large premiums without negative consequences for making loans that should have never been made. Fundamentally, it’s quite different.
Mr. Money Mustache Following
How did you find out about Mr. Money Mustache? Have you been a longtime reader/follower/Mustachian?
I have NOT been a long time follower of Mr. Money Mustache – though I wish I had found him sooner! Last fall, I did a Google search for “how to teach your child about money.” I read through several different articles but the one that most resonated with me was an article on the Mr. Money Mustache blog. I appreciated his philosophy, somewhat stream of consciousness writing style, pragmatic approach to life, humor and excellent use of curse words. At the time, I clicked through a few more posts, read them, filed them away in the back of my mind as interesting, and went on with my day, but I wanted to know more. I sat down one evening a couple weeks later and went to the beginning of the blog and started reading all the posts in order – I think there is a name for that – The Maximum Mustache. Over the next several weeks, I read through them all with the life-changing realization that once I hit my 4% rule number, I could retire completely if I chose that route.
I would describe myself as a Mustachian in progress. I’ve always been mindful of the money I spend and the long term effect of most choices, but once I started reading the blog, I felt like there were so many places in my life upon which I could still improve.
How was your visit to PeerStreet and hanging out with the Mr. Money Mustache crew?
It was very fun, interesting and enlightening. On the PeerStreet side, I got to talk about life and lending with a variety of the PeerStreet team members and it made me comfortable with both the brains and the true character behind the operations. I have had a lot of questions over the past several months for the PeerStreet folks and was concerned that I had been annoying. It turns out that my feedback and questions had been helpful – so it was great to hear that small time investors/users of the platform (like me), actually are important and that PeerStreet’s primary focus wasn’t on large, multi-million dollar type investors.
I have to admit I was quite intimidated to do this meeting with the Mr. Money Mustache posse. I knew I would be surrounded by some big thinkers and wasn’t quite comfortable being dubbed the PeerStreet expert of the crew. Anybody who has read through the Mr. Money Mustache blog knows that he is both a super intelligent and independently thinking dude, and I expected his friends would be exactly the same. Turns out, they were all more brilliant than I imagined but also humble, laid back and had wonderful senses of humor so I really enjoyed my time.
PeerStreet vs. Lending Club and Prosper
You introduced us to Mr. Money Mustache. Why PeerStreet vs other platforms?
I think it’s best to divide this into two parts. PeerStreet vs. Unsecured peer-to-peer lending platforms, like Lending Club and Prosper, and PeerStreet vs. other real estate investment models.
PeerStreet vs. unsecured lending – PeerStreet has similar returns (when you factor in the charge-offs on the consumer unsecured debt) but the loan is secured by real estate so in the event of default, there is a chance that some, if not all, of the investment gets returned. The banker in me feels more comfortable with this as it is less risky. I could go on – but same returns and less risk – ‘nuff said.
PeerStreet vs. other real estate lending and investment models – PeerStreet currently only offers debt positions on real estate and, as I understand it, it is the intention of the founders to stay true to this model. My opinion is that equity, preferred equity or mezzanine positions in a real estate project “gives” the developer/owner cash to make the actual investment with a capped upside on the amount of return you can earn as an investor. In the event of default with an equity position, you are not likely to get any of your initial investment back and it feels very speculative to me. Some of these platforms also offer debt positions, but the mere presence of the more exotic investments turned me off from those choices. To me, PeerStreet is a little like investing in REITs but I have more of a choice in the investments and can filter on geographic location, type of property, FICO scores and loan to values. This type of granularity in the details is not available with a REIT investment.
Real Estate Debt vs. Consumer Debt
You answered several questions and comments on the Mr. Money Mustache post. Some people were excited some were confused. What was your take?
There were many people who were obviously very skeptical of the business model. PeerStreet is taking a loan originated by a pre-vetted hard money lender, and offering up that investment in this crowdfunding model and taking a small fee off the top to do this. Lending Club also does this with consumer debt. Basically, it’s transferring the loan from the balance sheet of the lender to all of us other individuals with the originator retaining part of the loan in many instances, either in a junior lien position or as a shared first lien position. I feel comfortable with the business model and it seems very reasonable to me. With all the data being collected and tracked, I think that if any of these hard money lenders start to have issues, PeerStreet should know pretty early and then not allow those lenders with issues to originate other investments for them.
I think that those of us who have dipped our toes into other alternative investments will see all-in management and administrative costs well in excess of 1%. The other thing is that those alternative investments may force the investor to tie up funds for 3-5 years, or even more. The minimum amount that you could invest in that kind of entity may be $50,000 or $100,000. Big picture, PeerStreet carries a level of risk like any other investment. The platform, however, allows investors to diversify the money they invest across several loans and the barrier to entry is much lower than on some other alternatives. SEC requires that folks participating are accredited investors but other than that, if an investor has $1,000 to invest, he/she can start earning a stream of interest income.
Partnering with Hard Money Lenders
I think that there are still many pockets in the country where housing prices are still distressed from 2008 and there are real opportunities to improve neighborhoods and communities. It’s going to take some time for the back office folks at PeerStreet to find the good hard money lenders in all of these places and get them all dialed in with the technology but the model is quite scalable. As much as it seems like lending money can be done via nameless, faceless technology, it is my opinion that the hard money lending market is highly fragmented and driven by the value proposition they create in the particular region they serve. The folks buying these properties only have a very limited window to purchase the property 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 these types of 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?
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