August 1, 2017

JF1064: Why Would You Invest in Debt? Allow Brett Crosby to Explain!


If you’re looking for another way to passively invest, listen in to this one. Along with being an active real estate investor, Brett co-founded a platform for investing in real estate loans called PeerStreet. Find out how to invest in the debt side of real estate. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Brett Crosby Real Estate Background:
-Co-founder & COO of PeerStreet, a platform for investing in real estate loans Advises and invests in startups and is an active real estate investor
-Previously Director of Product Marketing at Google Co-founded Google Analytics, helped launch: Mobile Ads, Google+ and Drive Ran global growth for Chrome, Gmail, Docs, Drive, etc.
-Co-founded Urchin, acquired by Google in 2005, turned that into Google Analytics
-Based in Manhattan Beach, California
-Say hi to him at
-Best Ever Book: The Giving Tree

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Brett Crosby. How are you doing, Brett?

Brett Crosby: I’m doing great, thanks, Joe. I’m really happy to be here.

Joe Fairless: Nice you have you on the show. A little bit about Brett – he is the co-founder and COO of PeerStreet, which is a platform for investing in real estate loans. He advises and invests in startups, and is an active real estate investor himself. He was previously a director of product marketing at Google, and you can say hi to him at his company’s website, which is in the show notes page. With that being said, Brett, do you wanna give the Best Ever listeners a little bit more about you background and your current focus?

Brett Crosby: Happy to. Thanks Joe, and thanks everyone for listening. So a quick bio on me – I was the co-founder of a company called Urchin Software Corporation; some of you who were involved in the web fairly on might remember, it was a web analytics business. We were acquired by Google in 2005 and turned out product into Google Analytics. I built that up and I stayed at Google for about 10 years, launching and growing products until my co-founder, Brew Johnson, reached out to me – he was a buddy from college – and he said “Hey, I’ve got this great idea, the timing is right, and you’re the guy to do this with me. Let’s go!”

After a bit of getting used to the concept, I decided that he was actually right and we should do this together, so I left Google – not an easy thing to do, by the way – and joined Brew to co-found this company, PeerStreet. A two-second thing about PeerStreet – we’re a platform for investing in real estate debt; we’re democratizing an asset class that has existed for a long time, but was very hard to invest in and you had to have a very concentrated position in those investments. If it worked – great; if it didn’t work or there were problems, the investment was a pain in the neck, so we’ve taken out as much of the hard work in this asset and it was much easier to invest, much smaller positions ($1,000 minimum/investment). You could spread those investments out, and we’d handle and work out situations or any problems. So that’s the kind of crux of my background.

Joe Fairless: So basically there’s a loan and you crowdfund the loan so that your customers are able to invest into that loan, alongside with your company?

Brett Crosby: Yes. PeerStreet is effectively a two-sided marketplace. On one side we have individuals, accredited investors who can go invest directly in loans; on the other side we source our loans from existing private lenders, and the asset that they generate are these short-term loans with the underlying asset being real estate – the first position leans on real estate – and the borrowers are typically fix and flippers or buy the rent people that need a short-term bridge loan. So typically, these yield between 7%-12% annualized, they typically last about a year or shorter. We focus on a more conservative swathe of the market, so our max loan-to-value is 75%, but our average platform-wide has been about 65%.

Joe Fairless: How do you differentiate from other crowdfunding platforms?

Brett Crosby: The biggest way we differentiate – there are a lot of nuances and a lot of ways to answer that, but the biggest way is our business model. By the way, in most forms of debt, you can go straight to the borrower in a fairly straightforward way. In this particular asset class, these short-term bridge loans on real estate – these are often called hard money loans, and stuff like that, but having a local presence and understanding your local real estate when you’re underwriting the deal is very important. Our approach has always been, instead of going and trying to compete with these local lenders, let’s provide a platform that actually increases their access to capital, and technology, and actually empower these local lenders to make smarter decisions and work with them.

What that allows us to do and the reason that’s an important nuance in the business model is it allows us to scale, because by tapping into these lenders, each relationship we establish gives us much access to many more loans; then we can curate those loans and make sure that they’re high-quality. We use a tremendous amount of technology and data to curate the loans and make sure they can choose the highest-quality loans, and stress test those loans against various scenarios, with the forecast in the submarket, to a very micro data within the various submarkets where our lenders are operating. Then we also send someone out to look at the property and then we do a full underwrite ourselves, we double-check everything, and then we’ll actually purchase the loan and put it up for sale for investors.

I’ve got 7 and 9 year old daughters, they don’t really understand investing in loans at this stage, so what I tell them is like “Well, forget loans, just think about apples – we buy from farmers by the bushel, which is how they wanna sell them, and we sell by the slice, which is how consumers wanna consume them.” If we think about our model that way, then you’re like “Oh yeah, there are marketplaces all over the place, and it makes sense.” There’s stores, there’s all kinds of markets out there, and that’s effectively what we’ve built.

Joe Fairless: You mentioned earlier that you stress-test the loans against different scenarios – can you elaborate what a stress test is and what you look for?

Brett Crosby: First thing that we do is vet the lender and make sure they’re high-quality; we look at their track record, background checks, the whole nine yards on the lender. When we’re comfortable with the lender, we’ll start looking through their loans, and on a one-off basis, the first thing we do when we get a loan is look at the submarket and the data in the submarket to see what does that look like; what does that submarket look like to the real estate owned by banks, which way is it trending, are homes selling faster or are they slowing down? Is the market rolling over or is it still growing? Then we look at the forecast, similar data, to say “What does the forecast of this region look like for the duration of this loan?”

Then we stress-test the loan – we kind of look for the worst-case scenario over the last 20 years, and for the most part that’s 2008, but you have little nuanced pockets within the country that have different worst-case scenarios. San Francisco, for example, the dotcom crash was particularly bad there. Other places are affected more by press of oil (in Texas, etc.) So looking at the data on a micro-level is very important. The stress test is [unintelligible [00:08:27].17] worst-case scenario over the last 20 years again, and you check the duration of the loan and you kind of remap that, what would it look like? Is your LTB in a position to actually protect you in that worst-case scenario?

Joe Fairless: I mentioned earlier that you’re also an active real estate investor… What do you invest in personally?

Brett Crosby: That’s a great question. I personally invest in rental properties. Often times they will be houses I’ve lived in that I’ll rent out. I have duplexes and triplexes that I rent out. Then we’ve got another home in Del Mar that we use for ourselves, but also short-term rent that from time to time… Things like that.

Joe Fairless: And what has been your most profitable or best cash-on-cash return investment property and can you just run us through the case study?

Brett Crosby: Yeah, actually, to be honest, my wife handles them… [laughter]

Joe Fairless: Fair enough. Which one looks the prettiest to you? No, I’m kidding. [laughter]

Brett Crosby: Yeah, exactly, that’s about the best I can answer… [laughs] What I do know is that we have a property in Mission Beach in San Diego which is a triplex, and that one returns extremely well for us. Also, we have another house that we bought originally – it was our first, kind of starter home [unintelligible [00:09:48].15] beach house in Pacific Beach, in San Diego. And it had this big lot, it was actually zoned for two houses; that one worked out very well because we were only buying the property once (when you’re buying the first house) so we’ve built a second house in the back and then split the property. That one ended up so far very well; we’re actually in the process of selling that one to do a 1031 exchange into something else… One of the units there.

Joe Fairless: Are you keeping one and then you sectioned off the other, you built it, you’re selling that and 1031-ing that one?

Brett Crosby: Yeah, that one will be a fantastic return, if that works how we think it’ll work. Also, we had a house up in Hillsborough that we bought – I think we bought it in 2010 – and we kind of rebuilt that house and redid a lot of stuff. That one worked out very well for us, too. It’s almost like our own fix and flip, but we live in it for a while, and then sell it. We’ve done a ditch amount of that, as well.

Joe Fairless: You were previously a director of product marketing at Google… What are some things you learned there that you’re applying at PeerStreet?

Brett Crosby: Wow, a tremendous amount of stuff, but I would say the biggest, most significant thing is how to not just go into an industry and try to just kind of compete with everyone in the industry, but take more of a tech approach. That’s how we kind of came up with the business model for PeerStreet. The concept with PeerStreet is that our presence in the ecosystem actually improves all the other participants’ businesses, and if you play that forward, it goes beyond just the people who either invest in our platform, or the lenders that we work with and help them with more capital and technology, but it actually flows down to the borrower and allows for more capital to the market, so you can actually have more borrowers getting access to capital. Then even non-participants in this model benefit, because what the borrowers do with their loans is, for this asset class, they’re going in and finding crummy properties in the neighborhood and fixing them up and then selling them. So even if you just live in that neighborhood, number one, you can get a nicer house if you were to buy one of their houses, but if you do nothing else, if you just sit there, it generally should help improve your community, improve your neighborhood by having the infrastructure revitalized around you and increasing the comps and stuff like that, not to mention local jobs that it produces, income for local stores and all of those sorts of benefits.

We just see that the end borrowers in the work that they’re doing, especially if they do a number of projects, can have a very significant impact. When we look at our presence in that ecosystem, taking an approach that really does something positive for all the other participants is something that I’ve learned from technology. We did it back at Urchin, and we used that technique a lot at Google, as well.

Joe Fairless: And that’s certainly a lesson that every investor and entrepreneurs could take away, where if you identify an approach that does something positive for all participants, then you’re likely on to something.

Brett Crosby: Yes, that’s right. It’s one thing to make a buck, but if you have a mission behind it and you’re trying to do something positive that improves society, improves other businesses and other people’s lives, it becomes a lot more meaningful and powerful, not just for you as the business owners, but also for your employees and the people that you ask to participate in whatever you’re building. I think understanding that story and believing in it and developing a business that actually has those types of characteristics – I really do believe that’s important, having that sort of mission.

Joe Fairless: Brett, what is your best real estate investing advice ever?

Brett Crosby: Well, the best advice I ever got was “Brett, you should join me as the founder of this.” [laughter] But the other advice I would say is “Be the bank.” That’s sort of like “The casino never loses.” The bank is always the one in the best spot; they’re typically in the first position to win. Obviously, they can have seconds and things like that, but usually they’re in the best and most protected spot, and most people when they think about investing in real estate, they’re thinking about the equity side. Part of that, historically, is that the debt side really wasn’t available for most people to invest in, and that’s something we’re changing. The mortgage-related debt market is one of the largest financial markets in the country, let alone in the world, but there’s been very little direct access for individual investors to access it. So that’s one of the kind of longer-term visions that we’re trying to change with PeerStreet. We’re starting in this very specific asset, but effectively you could take this model and apply it to longer-term debt as well. If you do that, you take a lot of the opacity out of the system and confusion about what’s going on there – which is why guys like Michael Burry have invested in this business. I don’t know if you know Michael Burry from The Big Short; he was played by Christian Bale in the movie.

Joe Fairless: Oh yeah, now that you give me a movie reference, yes, I know now.

Brett Crosby: Exactly. Yeah, so be the bank, and that’s basically what we’re allowing people to do. You can invest and sit in a position that a bank would typically sit in in a loan.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Brett Crosby: Sure, let’s do it.

Joe Fairless: Okay, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:15:03].11] to [00:16:03].09]

Joe Fairless: Best ever book you’ve read?

Brett Crosby: Without having context this is a hard one… I’m gonna say The Giving Tree, by Shel Silverstein. As I’ve mentioned, I’ve got young daughters, and every time I read that book, it’s so touching to me… I love it.

Joe Fairless: The last interview I did today – because I do multiple interviews in one day – was Charlie And The Chocolate Factory. There’s some sort of theme of kids’ books today. What’s the best ever deal you’ve done?

Brett Crosby: The best ever deal I’ve done was I invested in a company called Climate Corporation. The founder of that business was the corp dev guy who bought Urchin on behalf of Google; he worked at Google, he became a very good friend of mine. But a year after he bought my company, he said “Hey, I’m leaving to go start this company.” I was like, “Wait, you just bought me and said it’s a great company to come work for, what are you doing?” [unintelligible [00:16:51].08] and he’s like “By the way, you should invest in it.” I was like, “Really? Okay…” He explained it to me and I was like, “I have no idea what you’re talking about, but okay, I’ll invest.” Fortunately, that was a 40x type of investment, so it was very positive.

Joe Fairless: Yeah, that’s 40x positive, so that’s very good. On the flipside, what’s a mistake you’ve made as a business owner or real estate investor?

Brett Crosby: On the real estate investment side, the biggest mistake I’ve made is actually not [unintelligible [00:17:16].06] into escrow in a house and thought we had a pretty good plan for rehabbing a place, and the more I got into it – we had limited access, whatever – the more I realized this needed to be torn down; it was a startover kind of thing, and we didn’t have that kind of time horizon. We needed to get it done faster than that, so I ended up losing my deposit on that, which was fairly painful, I have to say.

Joe Fairless: What is the best every way you like to give back?

Brett Crosby: It’s a great question, because I do believe in this a lot.  I was a political science major and international relations major at USC because I believe in social change and the ability to improve people’s lives etc., but what I realized in that process was that going out and camping out on the White House lawn, with signs or something like that is probably the worst way to create change… And the best way is to actually go out and create change yourself. That’s what I’ve tried to do as an entrepreneur, whether it’s stuff I’ve done before Google, products I’ve launched at Google, or even with PeerStreet. I think we have a huge opportunity to improve the American housing infrastructure and improve neighborhoods, one house at a time. That’s how I like to give back – create jobs and do projects that matter for a lot of people.

Joe Fairless: Being the change that you wanna see in the world, right?

Brett Crosby: That’s right.

Joe Fairless: How can the Best Ever listeners get in touch with you or your company.

Brett Crosby: Well, they can go to, or they can reach me on Twitter, @Brettc, or LinkedIn is a great place to reach me as well.

Joe Fairless: Lots of lessons from your overall business model with PeerStreet, to the lessons you’ve applied from being a director of product marketing at Google, as well as your own startup prior to that, where as we talked about earlier, taking an approach with a business that does something positive for all participants, then you’re on to something. Also, we kind of mentioned this in passing – or you did – but it’s a really cool case study where you bought a lot that was zoned for two lots, you split it, built on one, and are selling it and you’re keeping the other, and you’re likely gonna make a pretty good profit on that.

So a lot of different discussion points that we went over, and I’m really grateful for our conversation and our time together today. I hope you have a best ever day, Brett, and we’ll talk to you soon.

Brett Crosby: Thank you, Joe, and thanks to all your Best Ever listeners.


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