Eight years after the sub-prime crisis, news of a new startup bringing institutional real estate exposure to individual investors may be met with some scepticism.
But Michael Burry, the hedge fund manager who foresaw the housing market’s nosedive and was immortalised in the movie “The Big Short,” clearly doesn’t think so.
Instead, he was an early investor in a new real estate peer-to-peer lending platform called PeerStreet.
PeerStreet, co-founded by Brett Crosby and Brew Johnson, is applying the P2P lending model to real estate, giving investors access to high quality private real estate loans.
As investors diversify assets in a low interest rate world, Crosby and Johnson seek to take an asset class that was traditionally only available to institutional investors, like banks and hedge funds, and make it accessible to a wider audience of accredited investors. To qualify as an accredited investor, an individual must have an income of at least $200,000 per year or along with their spouse a joint income of $300,000 per year, in each of the last two years.
Peer-to-peer (P2P) lending is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. With lower overheads and smaller fees, these lenders offer consumers a chance to get loans quickly and easily compared to banks and other financial institutions that have tightened consumer lending policies after the financial crisis. While online lenders often lend to those who may not qualify for bank finance, they also run the risk of higher defaults.
The modern peer-to-peer lending industry in the US really started with the launch of Prosper and Lending Club in 2006, and is forecasted to reach over $150 billion by 2025, according to a report by PWC.
PeerStreet works with local, private, non-bank money lenders from 17 states across the US to source real estate loan investments. PeerStreet’s loans are all for business-purpose, non-owner occupied properties.
“Typically, the borrowers that work with our lender partners are real estate entrepreneurs who are purchasing properties for investment, with the intention to make improvements to the homes and then sell them,” said Crosby.
Alternatively, a borrower may be purchasing a property and looking to stabilise it by getting a tenant in place so that they can refinance into a traditional mortgage. “They only need short-term financing and banks typically don’t offer attractive options for them, if any,” said Crosby.
The loans are underwritten by PeerStreet using advanced algorithms, big data analytics, manual processes, and on the ground due diligence to filter and select the ones that are high quality. These loans are then funded by accredited investors on the online platform.
Crosby previously founded web analytics company Urchin Software, which was sold to Google in 2005. He stayed on at Google for ten years, building out mobile, advertising, and Chrome and co-founded Google Analytics.
Crosby grew up in Orange County, California and met fellow co-founder Brew Johnson when they were both studying at the University of Southern California.
Johnson was a real estate attorney who eventually approached Crosby with his idea of using technology to make real estate financing accessible to the individual investor. Thus PeerStreet was born.
Accredited investors can choose investments one-by-one or use an automated investment tool that matches an individual’s investment criteria to loans in the portfolio.
The minimum investment amount is $1,000. Usually the loans are crowd funded to the total amount, and PeerStreet claims investors can earn double digit returns.
The loans are typically short-term in nature, ranging from 6 to 24 months and are made across the country, on different types of real estate projects, with different originators, and different property types, in order to create a wide diversification of potential investments.
The company opened to investors in October 2015 and has funded over $75 million in real estate loan investments on the platform, returning over $25 million to investors thus far.
While peer-to-peer lending has recently faced scrutiny in the wake of the scandal at Lending Club that called into question the integrity of the model, Crosby points to the robust and conservative underwriting platform that Peer Street employs. There have been zero defaults thus far, but the startup is still in its infancy.
For now, “the sky is the limit,” said Crosby to Business Insider.
Their goal was to provide everyone access to these high quality private real estate loans, but current regulation means that the startup is limited to only opening up the asset class to accredited investors. “If and when regulations change, and it becomes less cumbersome to provide everyone access to our investments, we would definitely like to open up to a more all encompassing investor base,” said Crosby.