The real estate market has seen a huge boom over the last year, thanks to historically low mortgage rates and a rise in long-term remote work in a wide range of fields. This is especially true for owner-occupied and investment properties, which in hot markets can be rented to tourists on a short-term basis for high returns.
And, real estate purchases aren’t the only property-related transactions that are booming. Real estate crowdfunding, which lets investors pool their collective funds together and lend companies the money for real estate transactions via private REITs. This type of alt-investing can be a great way for companies to crowdsource funds for large real estate purchases, as traditional lenders aren’t always open to offering this type of funding.
Real estate crowdfunding can also be great for investors, who stand to make a high rate of returns on this type of investment. But, while real estate crowdfunding can be lucrative, it isn’t generally offered by your traditional brokerages. If you want to get into real estate crowdfunding, your best bet is to take advantage of what a real estate investing platform like Groundfloor can offer you. Groundfloor offers easy access to short-term, high-yield real estate debt investments to the general public — and you can start investing on this platform with as little as $10.
The Groundfloor platform offers a number of other user perks as well, and may even offer what you’re looking for if you’ve been considering adding real estate to your portfolio. Read on to find out how this real estate investing platform can help you conquer the world of real estate investing without the laborious accreditation requirements or large financial commitments you’ll face with other platforms.
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What is Groundfloor and who is behind it?
Groundfloor is a real estate investing platform aimed at both borrowers and investors. This platform specializes in offering short-term residential property loans that individual investors can fractionally invest in to real estate developers and independent home builders. Borrowers can use the money from these loans for new construction or renovation projects. Once the projects are complete, the borrowers either sell the property to repay the loan or refinance the loan money and keep the property to be leased out to tenants, while investors in the projects receive a return on their investment.
This company was first established in 2013 and is headquartered in Atlanta, Georgia. This platform is used by both borrowers who are in need of funding for real estate projects and by novice and high-volume investors alike to make short-term, high-yield, short-term real estate DEBT investments.
The minds behind this business are some of the best in the business, starting with CEO Brian Dally, a Harvard MBA and law grad, who has worked for startups in Silicon Valley, Boston, and London prior to helping co-found Groundfloor alongside Nick Bhargava, who has a financial services background.
While Groundfloor is hardly the only real estate investing platform available to investors, it does offer some unique perks to both investors and borrowers. For starters, Groundfloor was the first company to be qualified by the U.S. Securities & Exchange Commission to offer direct real estate debt investments for both non-accredited and accredited investors alike.
The investments on Groundfloor also have shorter terms than the competition. Most real estate investment platforms that allow investors to own an equity stake in real estate property via eREITS or other types of funds tend to have long investment terms. In general, it takes about three to five years to see returns or repayments from competitors.
That’s not the case with Groundfloor. The investment options on this platform are based on secured, collateralized real estate debt, and all have shorter terms. The average investment time from investment to return and repayment on Groundfloor is generally about 12-18 months. That short turnaround time is a huge perk for investors, who may not be able to tie up their money for years on end.
That’s not the only upside to a shorter investment term, either. In general, shorter investments tend to carry less risk for both the company and the investor, and that pays off in spades. According to Groundfloor, the platform has been able to generate consistent 10% returns for its investors for at least the past six years, and investor repayments are generally received in six to nine months on average.
All of these unique perks have led to a steady investment by users interested in helping to fund real estate projects. Since 2018, a total of 5,000 shareholders have invested over $16 million in the platform to help fund real estate projects.
Some of that popularity may be due to the low buy-in that Groundfloor offers. While other REIT or real estate crowdfunding platforms require at least a few hundred dollars minimum to invest, Groundfloor cuts that buy-in price to just $10.
That, coupled with a high rate of return and easy-to-navigate investments, have kept the investor money flowing for borrowers on this platform.
Features and benefits
The main benefit of Groundfloor is that the platform offers the chance for real estate entrepreneurs and investors to invest in the residential fix-and-flip and new construction markets. This is done investing in the loans that Groundfloor offers to real estate developers. The draw of these loans is the option for borrower-friendly terms, like deferred payment options, which can give developers more control over their cash flow.
When borrowers fund a construction project through Groundfloor, they’ll get a hard-money loan for each project. The money is fronted by Groundfloor initially to the borrower, who receives the funds after their application is approved.
Once the loan is originated and the money is distributed to the borrower, the loan is transformed into a security known as a limited recourse obligation (LRO). Then, the loan is placed on the platform and made available for investment.
After the loan is available on the platform, investors can choose to invest in the projects that fit their specific parameters, $10 at a time. When an investor invests in an LRO, they are essentially “sold” a piece of the loan that was made to the borrower to finance their project.
These types of loans tend to be safer than offering money for personal loans or other types of loans because the real estate loan is backed by the tangible property that the loan is funding. Plus, the projects that these loans are funding are all projected to produce a profit, which will be used to repay the loan quickly. That makes the risk much less great than it would be with many other types of investments, including stocks or alt-coins.
As mentioned, the average time to recoup both the initial investment made with Groundfloor and the return on the investment averages between 12 and 18 months. That’s a much shorter term than you’d get with a competing platform like DiversyFund, which requires investors to tie up their money for five years, with no dividends or interest paid out during that time.
Plus, there are other benefits to using Groundfloor to invest in real estate. These include:
- A $10 initial investment: At minimum, other real estate investment platforms require at least a few hundred dollars to get started. Groundfloor, on the other hand, lets you start investing with as little as $10. Not only is that attainable for most investors, it’s much, much lower than the $1,000 to $25,000 minimum that is required by most private REITs. It’s important to note that the minimum investment with Groundfloor is also a lot lower than the price on most reliable stock shares.
- Choices and control: Rather than using investor funds to invest in projects that Groundfloor deems a fit, the investors on the platform have choices of what to invest in. They can choose the LRO that fits their requirements and choose how much to invest in each project. That gives investors total control of what their money is funding.
- Monthly interest payments: The borrowers on the platform pay a monthly interest fee, which is of benefit to the investors, who stand to make at least some return on their money while waiting for repayment of the loan.
- A fractional system for investors: The main reason why the investment requirements are so low with this platform is because Groundfloor allows for fractional investments. As touched on above, the loans are basically divided up and funded by the totality of the investments, so there is no need for investors to come up with a large sum of money to solely fund a project.
- Open to both accredited and non-accredited investors: Unlike most traditional REITs, Groundfloor does not require investors to be accredited before they can invest. This can be an extremely useful feature for lower-volume investors, who may have trouble meeting the accreditation requirement set by the SEC for individual investors.
The SEC requires a net worth of more than $1 million — not including your residence — or an annual income of at least $200,000 per individual for at least two years to become accredited. What that means for the average Joe is that it is extremely hard, if not impossible, to become accredited. That can limit investment options, but luckily, there’s no need to worry about that with this platform.
- A culture of transparency: Transparency is the name of the game with Groundfloor. The company regularly publishes detailed information regarding their portfolio performance, along with monthly overviews of loan repayments and asset management activities. All of this information is available right on its blog, which means it’s easy for both potential and current investors to access.
- Diligent and thorough asset management: GROUNDFLOOR employs proactive asset management processes to help ensure that projects stay on track. Their team carefully monitors each and every loan from start to finish, measuring project progress against the stated plan and budget to help identify and catch any potential or anticipated problems, and they remain in close communication with borrowers to ensure timely follow up and completion of deadlines. GROUNDFLOOR is clear that their goal is not to never have a loan default; in fact, they often proactively place loans in default to encourage the borrower to get the project back on track.
- Automatic investment options: One of the best perks of this platform is the automatic investing feature, which allows you to set the options for how much you want to invest in each loan — and how much you want to invest in each loan grade. Once you’ve set the parameters, Groundfloor’s system will automatically make investments for you based on your criteria once new loans become available.
Even better? This feature can be used with automatic transfers and to reinvest the principal and interest payments you receive on your investments.
Average return to investors
As with most real estate crowdfunding investments, the returns made on Groundfloor investments can be extremely lucrative. According to Groundfloor, the platform has been able to generate consistent 10% to 10.5% returns for its investors. That figure has remained consistent over the past six years.
Plus, Groundfloor originates 60 to 70 loans a month, which means there are numerous opportunities each month to invest in the LROs that fit your needs. In total, over $12,600,000 in interest has been paid out to investors on this platform since its inception.
The return on this platform is based heavily on the grade of loan you invest in. Grade A loans, for example, offer returns of about 6% on average — as they’re the most safe bets you can make.
Grade G loans, on the other hand, are more risky. With that risk can come reward. With Grade G loans, you’ll generally be offered returns of up to 25%.
The typical rate of return for each loan grade is as follows:
- Grade A: 6%
- Grade B: 8%
- Grade C: 11%
- Grade D: 14%
- Grade E: 18%
- Grade F: 21%
- Grade G: 25%
While there are opportunities for a healthy return on your investment with this platform, there are also potential drawbacks. These include:
A higher rate of default: The general nature of hard-money lending — which is what Groundfloor does with borrowers — means that there is a higher rate of default than you’d see with your typical residential loans. That isn’t unique to Groundfloor; it’s a drawback of hard-money lending across the board.
That said, about 2% of the properties Groundfloor has funded through its portfolio have gone through foreclosure in the past. That is much higher than the national foreclosure rate during that time, which was about 0.6%. So, there is some risk with this type of investment, whether you’re using Groundfloor or another platform or REIT.
Groundfloor returns the pro rata net proceeds of such recoveries to investors. This has been necessary in only approximately 1% of the loans they’ve originated, and because of their lien on the underlying property, this has translated into a loss ratio of just 0.62% of total invested principal.
They also stress diversification and this is one reasons they have that $10 minimum – it allows for the ability to vastly diversify across multiple projects.
No mobile app: There is currently no mobile app associated with Groundfloor. They have one slated to launch this year, but for now you’re stuck with their mobile web presence if you want to manage your account on the go.
The potential for a long foreclosure process: If the borrower stops paying on their loan, Groundfloor attempts to negotiate with them before jumping into the foreclosure process. If the negotiation fails, the foreclosure process has to happen, which is expensive — and long. It can take months to make its way through court. After the property is foreclosed on, Groundfloor will then oversee the rehab and sale of the property.
The risk for high LTVs on properties: While the return on these investments can be lucrative, the reality is that there are properties with higher loan-to-value ratios on the platform. These types of loans can be risky, as investors may not recoup the money expected in the sale of the property.
Cost associated with Groundfloor
There are no costs for investors on the platform. Groundfloor makes its money by charging the borrower fees instead. The fees are based on the loan grade — the riskier the loan, the higher the fees — and the costs range between 2% and 4.5% of the loan’s principal.
Anyone with at least $10 in their pockets and interested in loaning money for real estate fix-and-flip deals can take part in this type of investment, which means that there’s a significant draw to investing on this platform.
Other than the initial investment requirement of $10 and any additional money you invest, the only costs are on the borrower end of this equation. You won’t have to foot the bill for management costs or other hidden fees, either — but the borrowers who use this platform will.
How are Groundfloor’s investments sourced?
As with most traditional lenders, Groundfloor’s borrowers find them — not the other way around. Groundfloor is a direct lender offering crowdsourced capital for short-term residential real estate loans, and the borrowers who want to obtain financing through this lender simply need to apply and be approved.
Groundfloor currently offers 6, 9, and 12 month loans to real estate investors for 1-4 Unit properties. Borrowers and properties must currently be located in the following 31 states or territories to qualify:
- Washington, DC
- North Carolina
- New Hampshire
- New Jersey
- Rhode Island
- South Carolina
Groundfloor is attractive to borrowers because it offers up to 100% loan-to-cost borrowing, depending on experience and true deferred payments. The closing turnaround is short, too. It can take as little as three weeks to close on a loan through this lender — which is another perk that keeps borrowers flocking to this source of funding.
Who is this platform for?
In general, the Groundfloor platform is a great option for all types of investors — especially those who are interested in real estate crowdfunding and the perks it offers to investors. It’s also great for borrowers, who may have an easier time obtaining funding when compared to traditional lending options.
This platform isn’t a traditional REIT, so it’s also great for investors who want to invest in real estate but can’t meet the accreditation parameters set by the SEC. The number of platforms that allow non-accredited investors to buy into REITs or real estate crowdfunding are limited.
It’s also a smart move for investors who don’t have much to gamble with. The minimum investment of $10 is attainable to nearly everyone, which is part of what sets Groundfloor apart from the other investment opportunities.
Investors may also find this platform useful if they’re new to real estate investing and want to dip their toes in before making any major moves. With such a low requirement, this platform can help novice investors feel secure in this type of investing before taking a dive into a much more costly venture.
Is Groundfloor safe?
All investments can be risky. While Groundfloor can offer 10% returns on your investment, it can also cost you. If a borrower defaults, or if a property is sold for less than expected, your return may not be as high as expected. Or, in cases of foreclosure, it can take much longer to see your initial investment money returned to you.
That said, Groundfloor is a generally safe way to invest in real estate. You’ll need to hedge your bets on smart investments, but you have full control over where your money goes on this platform, and there’s ample opportunity to diversify with their low minimum of just $10. You’ll be given the information on the loan grade, and you can choose what you’re comfortable with — and what return you’re aiming for.
That grading system and the control of your investments is, more than anything, what determines how “safe” this platform is for you. You’ll have to decide whether your money is safe with a high-grade loan, or whether you’re willing to bet it all on more risky loans to reap the potential benefits.
How Groundfloor differs from the competition
The main difference between Groundfloor and the competition is that Groundfloor allows non-accredited investors to put money into real estate transactions. There aren’t many options out there that allow for this — not in the real estate investment capacity anyway, and certainly not when it comes to private REITs.
The other noteworthy difference is the low minimum investment required by this platform. For just $10, anyone interested in real estate investing can become a part of this platform. That’s a unique feature, one that could help level the playing field between novice or low-volume investors and the big guys.
Couple that with the high rate of return, the lack of fees, and the control you get over your investment strategy, and you may find that this platform is a real standout against the competition. Where else can you start out with a $10 investment with no additional fees tacked on?
In a sea of crowdfunding platforms, Groundfloor is a real standout. This real estate investing platform offers a high rate of return and total transparency, which is certainly not standard in this industry. Plus, the shorter investment terms of 12 to 18 months, along with monthly interest payments to investors, can mean a quick turnaround between investment and payoff. If you’re willing to take on more risk for the higher returns, this platform could be the right move for you.
On the other hand, if you’re going to need access to your money in a shorter time frame, or if you’re worried about the risk of defaults, you may want to think twice about using this platform. While it can be a great move for some, it can prove too risky or too long-term for others.
Either way, just make sure you do your homework and understand the risks and benefits of this, or any other real estate crowdfunding platform, before investing.