PeerStreet – Real Estate Investing for Rich Millennials
While your average American doesn’t have much in the way of savings, the younger “millennial generation” is actually saving at a higher rate than any other generation. Those who do manage to save money will find a world rife with all sorts of landmines and people that will happily invest your money for “fees”. More than 80% of those “investment professionals” will then go on to underperform the market and get paid anyway. Incredible as that sounds, it’s a fact that should make most people read the fine print to understand exactly what fees they’re paying for any investment product.
If all of this sounds too daunting already and you want the easy way out, use Betterment. This popular robo adviser offers legitimate investments in ETFs with low fees and all you have to do is just give them your money. They will then invest your dollars in two different asset classes; stocks and bonds. “Asset class” is a fancy label used to describe a broad category of investments like stocks or bonds. Here are some examples of asset classes:
- Hedge Funds
- Real estate
Ideally, you want to be invested across all these asset classes so that you can benefit from diversification. The one asset class that most Americans end up putting most their money into is real estate. When they retire after 30 years of corporate slavery, their house is usually paid for and that’s where the majority of their wealth lies. When it comes to millennials however, home ownership isn’t a priority to them so we need to give them other options for getting exposure to real estate as an asset class.
Traditionally, exposure to real estate via the stock market has been the role of Real Estate Investment Trusts or REITS which are a basket of properties in any number of configurations that produce a yield which is subject to certain tax benefits. There are some great options here, like Realty Investment (NYSE:O), which has been paying a monthly dividend for 565 consecutive months and has increased that dividend for 79 consecutive quarters. This $16.5 billion property company pays an attractive 4.28% yield and is well diversified in many ways:
That’s an incredible track record, and as far as we’re concerned, O belongs in everyone’s portfolio. While REITs are so popular that they’ll soon get their own GICS industry classification, they still lack the sort of transparency that millennials would expect to see. This is where an interesting fintech startup called PeerStreet comes in.
Founded in 2013, Los Angeles startup PeerStreet has taken in just over $21 million in funding from investors that include Andreessen Horowitz to build “a marketplace that provides unprecedented access to high quality real estate loan investments“. Before you start getting too excited, take note that you’re going to need some cash to bring to the table. PeerStreet shows you some dropdown boxes when you create your account and unless you choose the one that says you make $200,000 a year (or $300,000 combined), or the one that says you have $1 million in assets, you’re not going to be allowed in. Those of you who were smart enough to major in a STEM subject are more likely to be squared away here while those of you who majored in underwater basket weaving should probably just stop reading right now.
Once you’ve created your account on PeerStreet, things start to get really interesting in a hurry. Essentially, it’s a collection of property transactions accompanied by extensive detail that make for some truly interesting opportunities. We picked one property at random and decided to tuck in. If you live in the San Jose area, you can actually hop in your car and go there to check it out. Here’s the address and a map how to get there:
How’s that for transparency?
Right away we can see that this is a property that is out of reach for the majority of Americans with a hefty $3.78 million price tag. This 3-bedroom 5-bathroom (!?!) McMansion sits on 5.5 acres in a prestigious Carmel-By-The-Sea neighborhood. If you don’t drive a nice enough car to be seen in that neighborhood without the police being called, you can just check out the property inspection report which contains plenty of pictures like these:
At this point we’re thinking that this sounds like a decent property to get involved with. You could spend an hour thumbing through all the accompanying information made available on the PeerStreet platform (and you always before you think about making any investment) but we’re more interested in learning about the actual transaction on offer which is a “cash out refinance”. This means that the old mortgage (if there was one) is being replaced by a new mortgage (the loan we plan to be a part of). The note is not a traditional mortgage in that the duration is for 18 months and the note pays 7%:
Let’s try to think about this very simply. We have a house here worth $3.78 million and we are loaning out $2 million with the house as collateral. Every month we receive an interest-only payment amounting to 1/12 of a yearly interest payment of 7%. At any time the loan can be paid off early, but if that doesn’t happen then we will receive our original investment back 18 months from now. We now want to understand the risk we are taking here so let’s take a look at what could go wrong.
- Borrower is hit by a bus – This is probably the worst case scenario, but let’s just say that the borrower stops paying back the loan and disappears. At this point PeerStreet would sell the property for $3.78 million and use the proceeds to pay all the investors back. But what if the property market crashes?
- Borrower is hit by a bus and property market crashes – This is where things get interesting. PeerStreet has done a great job here of trying to quantify that risk. Based on a property index which reflects historical prices for that particular area, PeerStreet estimates the worst possible 18-month price decline at -20.58%:
This means that the amount of money we could get from selling our property falls to around $3 million which still makes it very easy to pay off a $2 million loan. In fact, the only point we would start to worry is if property prices fell more than -53% over an 18-month period. This would represent a “black swan” type of event which has a very low probability of occurring. Of course there’s always the risk of PeerStreet going under but then you still have the property as collateral for the loan and you are first in line to receive payback should their property portfolio be liquidated. For providing everyone with this great service, PeerStreet takes a reasonable .75% fee which is paid each month alongside the interest payments.
The first thing to note here is that the price of entry is an extremely attractive $1,000. You’d be joining the 295 other investors who have already plunked down an average amount of $6,169 which brings the loan up to 91% funded. If you then went out and found 9 other properties to invest in, you’d have a nice little diversified portfolio of 10 various property investments that are transparent and relatively simple to understand (provided you took the time to understand the risks as we have done with this example), all for just $10,000.
With the millennial age range being quite broad at 18-35, there are not likely that many millennials who make $300,000 a year or have $1 million in assets. There will, however, be a large number of millennials who will find themselves saddled with large inheritances that will include things like properties. There are also those who get to a $1 million net worth through busting their a33es and working for it. Millennials are smarter when it comes to investing and will likely be selling homes in favor of investing across multiple asset classes, real estate included. When looking for investment products, millennials will gravitate towards fintech companies which don’t use complex terms like interest rates and are most importantly transparent. One out of two isn’t bad in this case.
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