This post was written by one of PeerStreet’s summer interns, Brendan Raney. For more information about Brendan, read a brief bio here. It is the first of two parts in this blog series.
Before interning at PeerStreet, I had very little knowledge of the market for private money real estate backed loans. What I’ve learned throughout my summer here is that this industry, historically, has been difficult to access and opaque, with little consistency across lender underwriting criteria. Each lender has a slightly different process and these investments were typically only available to a select “club” of investors.
At PeerStreet, the mission is to provide access and transparency to the asset class. Aside from access, in my opinion, one of the greatest risk mitigants that PeerStreet has brought to this asset class is the ability to diversify across multiple loans. If you were lucky enough to be able to invest in this asset class previously, you couldn’t do so in thousand-dollar increments. You would have very concentrated positions in single lenders or single loans. If one of those loans went bad, it was a huge hassle. PeerStreet removes much of that hassle by a) allowing you to diversify and b) by handling the workout situation. It makes it a much lower touch investment, which is a huge benefit to most investors.
In terms of transparency, one of the ways we try to provide investors more clarity is by offering an informative Loan Details page for each investment, which outlines some of the characteristics investors may want to consider when deciding how to allocate their funds. The Loan Details page enabled me, a novice to this asset class, to gain an understanding of these investments, and we think it helps other PeerStreet investors to do the same. Let me explain by highlighting the key points of each major section in our Loan Details pages.
Prioritization and The Capital Stack
The Capital Stack section shows investors where their investment lies in a specific loan structure. PeerStreet offers first-lien positions, which is senior debt on a property, sitting at the safest part of the capital stack. This position is the least risky because these investors will be the first in line to get paid, and take priority to junior debt and equity in the event of default or foreclosure. Because of that, PeerStreet only offers investments in first-lien positions.
The equity position represents the borrower’s cash invested in the property. The equity position is the riskiest piece of the capital stack, as an equity investor would be the first to experience losses. The combined debt and equity equals the full value of the property based on a valuation. If the property value decreases, the owner of the property still must pay required interest and principal, but he or she may no longer have any equity left. An alternative way to think about this section is a visual representation of the loan-to-value (LTV) ratio, which will be discussed below.
Rate Details and Projected Return Calculator
The Rate Details section displays the rate at which PeerStreet purchases a loan, the servicing spread we retain and the rate investors can expect to earn on their investment. This provides transparency as to how our fee structure works.
“Skin in the game” refers to the amount of the loan that is still held by the lender. Our partners fully underwrite the loans using the same criteria they would if they were going to keep the loans on their own balance sheet, and, in fact, some do retain a portion of the loans in the form of “skin in the game.” We display what percentage of the total loan amount that represents here.
Above the Rate Details section, you can find the Projected Return Calculator. Here, you can see approximate dollar returns based on the interest rate you will be earning and how much you are willing to invest. Our interactive graph displays the cumulative total over the term of your investment, assuming the loan remains current and pays off at maturity.
That should give you a solid grasp on the first half of our Loan Details page. There is more to come in Part 2 of this blog post series. As always, if you have any questions, please do not hesitate to reach out to info@peerstreet.com and our team would be more than happy to help.
