Most people intuitively know real estate is generally a great investment.
Until recently, even people lacking that intuition knew real estate was a hard asset class to participate in. It was cost prohibitive and you needed connections to hear about the best deals.
That is no longer the case. Platforms can now bring real estate to the masses. They screen the opportunities and provide them to investors, along with enough information to allow those investors to make informed decisions, with the smart ones knowing that if they wish to succeed long-term, they need to bring great opportunities and transparency to investors.
PeerStreet aims to last.
PeerStreet co-founder and CEO Brew Johnson described PeerStreet as a Lending Club for real estate. It has a similar structure and pays similar rates, but comes with a better asset which provides more security for investors.
PeerStreet investors also benefit from the fact the founders have chosen to focus solely on debt where they have first position, Mr. Johnson added. They do not enter into equity or mezzanine positions.
There are certain traits a platform better have to attract the number of investors needed for long-term success. The founders actually need to know real estate. Sounds obvious, but there are many platforms in the marketplace whose founders have little or no real estate background.
The sites have to have fluid technology. Onboarding must be rapid and thorough. Investors must be able to quickly access investment data, while feeling safe it is secure.
There are also a host of legal issues that need to be addressed.
Addressing these issue together usually requires a team of bright people with deep knowledge of these complex issues. Not at PeerStreet, co-founder Brett Crosby said.
“It is rare for people to have the legal, technological, and real estate background, but Brew is that rare unicorn with all three backgrounds.”
Mr. Johnson earned his law degree from UCLA in 2001 and has worked in both real estate and for internet platforms.
Brett Crosby is no slouch either. He is the Founder and former Head of Marketing of Google Analytics and was Google’s Director of Consumer Marketing for a host of products, including Chrome and Gmail.
Mr. Crosby said one of the biggest lessons he took with him from Google was in the approach to creating platforms. At Google Analytics the team frequently worked with third parties, bringing them in to help with integration and professional services.
“It helped the entire system,” Mr. Crosby said. “We all grew.”
Mr. Crosby also adopted the fishing boat strategy. The most efficient way to catch plenty of fish is not to cast your line in the water. If you want to scale you go after the boats, which in the case of real estate are the loan originators.
“They provide value, understand the local market, and have great borrower relationships,” Mr. Crosby explained.
Data is very important. First you have to have access to it. Then you have to know what to do with it. That takes both tools and talent.
But for analytics to be fully utilized it needs a human element, Mr. Crosby said.
“The human brain can do things and recognize patterns machines miss. You need to have people who have experience with bad loans and bad deals take over.”
“The industry needs to transform,” Mr. Crosby said.
Mr. Johnson said PeerStreet started out by identifying problems with the traditional mortgage financing system and worked on solving them.
In this they benefited from the wisdom of an experienced group of advisors and investors, including Dr. Michael Burry, who was one of the first to identify the subprime mortgage problem, Mr. Johnson said.
“When you have identified issues and see risks and apply that learning to marketplaces like ours, you are inherently taking lower risks,” he added.
The result is a platform focused on service and high quality assets, the pair said.
That combination has produced solid results within a short time frame. A busy summer propelled PeerStreet’s total investments to $34 million across 71 properties, including a $6.56 million loan on a Southern California property. The average net yield is 7.7 percent.
Mr. Johnson and Mr. Crosby circled back to several key hires they made early on that have helped drive PeerStreet’s early success:
- General Counsel Sara Priola has more than 10 years of real estate law experience.
- Commercial Originations and Asset Management Head Marc Heenan was First Vice President for Commercial Real Estate at OneWest Bank.
- Head of User Experience Brian Channell spent a decade leading UX teams at Yahoo.
- Head of Technology Alex Perelman is an engineer with an MBA from UCLA.
PeerStreet may also have another unicorn. Head of Product Management Brendan Kao served in a similar role at Amazon and other tech companies. he earned a JD from NYU and a Masters in Computer Science from MIT.
When you come across talented people with such diverse backgrounds, grab them fast, because if you do not, someone else will, Mr. Crosby advised.
“It is important because engineers do not always get the bigger business picture. Our team gets it on a deep level and know exactly the business purpose they are building for.”
This year began with a successful $6.1 million seed round. In addition to Dr. Burry other investors include Guggenheim Partners, Wealthfront President and CEO Adam Nash, and City National Bank President Chris Warmuth.
Because PeerStreet is not on a constant search for borrowers and investors, they can focus on creating a marketplace for lenders to participate in, Mr. Johnson and Mr. Crosby said. The experts making loans are vetted and have clear expertise, so the focus turns to selecting the best loans from those experts to undergo PeerStreet’s manual underwriting process.
Back to the experienced human element.
“It isn’t a good idea to take the human element out of the space,” Mr. Johnson repeated. “With real estate debt there are plenty of legal issues requiring manual appraisal of the property. Then you use historical data and existing market conditions to stress test loans.”