Debt Real Estate Crowdfunding Comparison
Real estate is often seen as a cash cow: just think of all the TV shows based on house flipping! However, real estate investment, as it’s shown on TV, is also very expensive. From the up-front costs associated with purchasing property to the surprise funds needed to fix a burst pipe, it might seem like real estate investing is only for the already-wealthy. Yet, PeerStreet and Groundfloor offer the opportunity to earn the rewards that bank lenders garner on mortgage loans.
PeerStreet and Groundfloor crowdfunding platforms offer the benefits of investing in real estate without the hassle of owning properties directly. These platforms are also called Alternative Investing, In contrast with more traditional equity and fixed income investments.
What is real estate debt investing?
When you invest in real estate debt you’re funding someone else’s loan, similar to the way a bank funds a mortgage. That borrower then repays the loan, plus interest, over time, which is how you earn money on your investment.
Investing in real estate debt does not give you any rights to the funded property, so you don’t need to worry about securing tenants for a rental or picking out paint colors for your fixer upper. Instead, someone else (the borrower) handles everything — you just provide the capital.
Real estate debt is a risky investment because the borrower needs to repay the loan in order for you to receive a return on your investment. Like all investments, you can lose money. However, many companies have a plan in place in case a borrower defaults on a loan.
What is crowdfunding?
Crowdfunded real estate debt investing is now a popular strategy for those who want the benefits of real estate investment but might not have the capital. Through crowdfunding, real estate debt is easier than ever to fund.
Here’s how it works: a borrower will approach a company and apply for a $100,000 loan. Multiple investors will contribute capital toward this loan until it is fully funded. You might only have $100 to contribute, for example, while another investor can put forward $10,000. When the borrower repays the loan with interest, investors earn back their initial investment plus interest on that initial investment amount.
Are there any downsides?
One downside to real estate crowdfunding is that many platforms are only available to accredited investors. Accredited investors are those who earn $200,000 or more yearly for at least the past two years ($300,000 for married investors) or investors who have a net worth of at least $1 million. Accredited investors can also be individuals who work in the investment industry and understand the risks of crowdfunded deals.
The reason some real estate crowdfunding deals are only open to accredited investors is due to the SEC’s policies on investment funds. According to the SEC, accredited investors are often more knowledgeable investors, and can thus make sound decisions about riskier investments; they are also able to sustain larger losses than non-accredited investors.
PeerStreet vs. Groundfloor: At a Glance
|Accredited Investors Only||No.||Yes.|
|Fees||Paid by the borrower, not the lenders.||0.25%-1.00% average servicing fee.|
|Returns||Average 10.5%.||Average 7-12% based on historical returns.|
|Liquidity||Low-liquidity. However, Groundfloor offers very short loans (30 or 90 days) in addition to 12-month loans, so investors do not need to tie up their funds for long.||Low liquidity. Your capital will be inaccessible for the length of the loan unless the borrower pays off the loan early.|
|Automatic Investments||Yes. Clients can determine how much they would like to invest across all risk factors.||Yes. Investors also have 24 hours to review the automatically chosen investments, which offers some control over the process.|
What is PeerStreet?
PeerStreet was the first two-sided real estate debt investment marketplace. This marketplace uses the crowdfunding model, which means that an investor’s funds will be combined with funds from other investors to purchase a share of real estate debt. Though real estate debt can be a risky investment, crowdfunding can mitigate that risk by spreading the risk out across multiple investors.
Initial investments provide capital so that borrowers can purchase real estate. As these borrowers repay their loans, investors receive a portion of the payment. When the loan is paid off, investors will have made back their initial investment plus interest.
- Flexible terms
- Varied product offerings
- Fixed-income returns
- Transparent investment opportunities
- Customizable portfolios
While this might sound appealing to all investors, there’s a catch: only accredited investors are allowed to invest on PeerStreet’s marketplace.
Fees and Minimums
PeerStreet requires a minimum investment of $1,000. These initial funds can be spread across multiple investments, however.
A servicing fee may be applied to loans. This fee is usually 0.25%-1.00%, and PeerStreet is committed to transparency so investors always know what their fees will be.
Although PeerStreet offers customizable portfolios, investors won’t find long-term mortgages on this platform. PeerStreet specializes in bridge loans, which are typically paid off in 6-24 months. These short-term rest estate loans are great for borrowers who are looking to flip a home or quickly fix up a home to be turned into a rental property.
While the majority of investments tend to be single family residences, there are occasional commercial or multifamily properties available as well.
You cannot liquidate your investments with PeerStreet. Once you invest, your capital will be tied up until the loan is paid off. Capital may be inaccessible longer if the borrower defaults on the loan, too. Unfortunately, this is one of the risks that comes along with investing in real estate debt! Yet, if a loan is paid off in 2 years, then your money is only tied up for two years, shorter than many longer lock up periods for real estate platforms.
Historically, yields have been between 7-12%. PeerStreet’s careful vetting of borrowers has paid off; the company claims that 96% of loans are paid off on time (as of December 2020).
- Transparency. Investors have a clear understanding of what fees to expect, for example.
- Multiple investment opportunities.
- Automated investing.
- Promising historic returns.
- Low initial investment requirement.
- Illiquid investment. You need to wait out the lifetime of the loan before you get your money back; if a loan defaults, you may not receive anything.
- Investors have complained that PeerStreet does not communicate enough when borrowers are defaulting on their payments.
- Accredited investors only.
Who is PeerStreet Best for?
PeerStreet certainly has many benefits. While only accredited investors can take part in their investment platform, investors who like automated investments and the ability to invest smaller amounts of money will benefit from using PeerStreet.
PeerStreet is best for:
- Accredited investors who want to invest in real estate debt.
- Investors who want low minimum investments.
- Those who’d like the option for automatic investments. PeerStreet gives investors 24 hours to review automated investments, too, so you can opt out of any investments that don’t fit your ideal portfolio.
- Investors who would like to invest only small amounts of money into any given loan. PeerStreet’s $1,000 minimum can be spread out across multiple investments.
What is Groundfloor?
Groundfloor is a real estate debt crowdfunding platform that specializes in high-yield, short-term debt investments. Unlike PeerStreet, Groundfloor is available to all investors and not limited to accredited investors. In fact, Groundfloor was the first platform to allow non-accredited investors to invest in real estate debt!
Through crowdfunding, Groundfloor provides opportunities for investors to fund short-term real estate debt. This debt might come in the form of home construction or renovation projects. Both PeerStreet and Groundfloor make hard-money loans, so they’re backed by the properties the borrowers are purchasing.
What makes Groundfloor fairly unique in this market is its loan grading system. The company evaluates the riskiness of an investment, which is determined based on how likely it is the borrower can repay the loan. While investors can choose less risky loans, which can earn a maximum of 5% returns, they can also diversify their portfolios by funding extremely risky loans, which can earn up to 20% returns.
- Extremely small minimum investments — you can start with only $10.
- Open to non-accredited and accredited investors alike.
- Lots of potential to create a diversified portfolio.
- Loan grading: investors can choose which projects to fund based on calculated risk.
- Automatic investments.
Fees and Minimums
Of all the real estate debt investment platforms, Groundfloor is arguably the most affordable. The minimum investment is only $10, and any fees are paid by the borrower, not the lender. Essentially, investors simply choose how much money they’d like to contribute to a project and then wait for their investment to be returned (plus interest!) at the end of the loan.
Groundfloor offers shorter term, hard money loans for investments such as residential real estate and real estate debt. They currently offer 30-day, 90-day, or 12-month notes. These sorts of notes are best for borrowers who plan to flip a home or those who are trying to make quick money off of a purchase, which means that there is a good deal of risk associated with these notes; however, the short maturity dates mean that investors won’t need to wait long to see if their investments have paid off.
Just like notes through PeerStreet, real estate notes at Groundfloor are illiquid. Investments cannot be withdrawn, so investors will need to wait out the duration of the loan to reclaim their capital.
Groundfloor’s interest rates — and thus the amount investors can earn on their investments — are based on the perceived riskiness of the loan. The least risky loans will pay up to 5%, whereas the riskiest can pay up to 20% in interest. Groundfloor estimates that their average return since inception is just over 10%.
- Non-accredited investors can participate.
- Very low minimum investment.
- Ranking system that makes it easy for investors to determine the potential risk and reward associated with any given investment.
- Investors don’t pay any fees.
- Limited types of investments — loans are primarily made to property flippers.
- Default rate is higher with hard money loans.
- Less transparent than competitors.
- Risk ranking system is limited in that it does not account for creditworthiness of the borrower’s.
Who is Groundfloor Best for?
Small investors looking to diversify into real estate notes would appreciate the platform. Groundfloor is certainly an affordable investment platform due to its low minimum investment requirement and no fees for investors. It also offers a quick turnaround time on loans — as long as borrowers pay on time — which means investors won’t be waiting a long time to see returns on their investments. However, their investment types are limited to quicker hard money loans.
Groundfloor is best for:
- Non-accredited investors. While accredited investors are, of course, welcome to invest, Groundfloor is one of the few platforms that welcomes non-accredited investors.
- Those who want to dip their toes into the world of real estate debt investing, but don’t want to invest a lot of money, pay astronomical fees, or wait a long time to see returns.
- Investors who like to diversify their level of risk within a niche investment type.
- Those who are looking to add real estate debt to a diverse investment portfolio that may be held with a different company.
PeerStreet vs Groundfloor | Which is Best for You?
In terms of risk and reward, PeerStreet and Groundfloor both have good historical returns for instance — they average returns of 7-12% or 10.5%, respectively. This is quite high in terms of return on investment or ROI.
Despite these good average returns, the real estate debt industry does have the potential for loss if a borrower defaults on their loan. Groundfloor helps clients evaluate risk based on their loan grading process, which assigns higher interest rates to riskier loans. Less risky loans may be more likely to be paid off on time, but they also pay less in interest. PeerStreet, on the other hand, vets borrowers quite carefully and has very few defaults as a result.
Groundfloor is the more affordable of the two platforms, with no investor fees and a minimum investment of $10. You may not make a lot of money on a $10 investment, but you won’t lose a lot either!
Even though PeerStreet does charge fees (0.25-1.00%) and has a $1,000 minimum investment, this is still fairly affordable within the real estate debt investment industry. PeerStreet also lets clients split their $1,000 investment across multiple properties, which is a major selling point. Also, returns are quoted net of fees (after fees are paid).
The two platforms do not allow clients to liquidate their investments. On the plus side, both offer short-term loans that might help offset this inconvenience.
Of course, there is one thing that sets these two apart distinctly: PeerStreet is only open to accredited investors, whereas non-accredited investors can only invest through Groundfloor. While this distinction may not help accredited investors make their choice, it does, unfortunately, mean that non-accredited investors will choose Groundfloor over PeerStreet, out of necessity.
In the end, either platform would work well to round out an investment portfolio. While there is some level of diversity in terms of risk within each option, neither offers enough diversification for an entire portfolio. You’ll also need some stock and bond funds to achieve greater investment diversification.
When investing either in Groundfloor or PeerStreet, consider how much risk you’re willing to accept, whether you’re looking for a 30-day investment or two-year commitment, and what sort of real estate notes you’re hoping to include in your portfolio.
Learn About Real Estate Crowdfunding and Investing | Without the Hassle
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