In-Depth Real Estate Investment Reviews
Groundfloor aims to provide a way for retail investors to earn by investing in real estate debt, but does it live up to the hype? We dove deep into their offering to find out.
The Bottom Line
Groundfloor provides decent returns in an accessible and easy to use product ideal for first-time real estate investors, but investors looking for higher returns may want to look elsewhere.
Pros & Cons
Since Groundfloor offers real estate debt investments, investors needn't know much about real estate investing at all
Investors can get started from just $10
While you can't withdraw an investment early, Groundfloor investment terms are not typically longer than two years
Average returns of over 10% is not spectacular, but it's solid
The loans Groundfloor investors finance don't give investors access to a property's cash flow or appreciation upside
Most investments operate on deferred payment, meaning investors are only paid out when the loan is paid back in full.
Groundfloor does well to make investing easy, but its debt structure means investors don't leave knowing more about how to earn more leveraging real estate.
Figuring out where to invest your money is hard enough. Stocks, bonds, and even crypto all have their places in the modern portfolio, but the most misunderstood asset class has always been real estate.
Over the last few years, several companies have appeared claiming to make it easier for people to invest in real estate by removing down payments, increasing liquidity, and breaking properties up into fractions. In such an environment, knowing who to trust and what you're really agreeing to when you invest is more difficult than ever.
by digging into key areas investors need to know about before going all in: How easy it is to invest, how much you can earn, and how you can get your money back once you've made the gains you wanted.
Full disclosure - we're Lofty, and we're one of those fractional real estate investment companies. We believe that a rising tide lifts all ships, and that providing an unbiased look at other fractional real estate companies through the lens of our industry expertise will help serve both investors and the companies serving them.
Groundfloor is a real estate investment platform that allows users to benefit by investing in real estate debt rather than ownership equity like most other real estate platforms.
They partner with building developers and active real estate investors to help them fund their projects. These projects become the properties Groundfloor investors can fund, and investors can earn income on the interest Groundfloor charges to the developers.
Rather than positioning themselves against other real estate investing options, Groundfloor compares its interest rates to banks, attempting to lure conservative savers away from low interest savings accounts and towards lower risk investments backed by real assets.
Groundfloor works on a crowdfunding basis, facilitating multiple investors to come together to fund a loan taken out by a property developer. To make this work, Groundfloor transforms the loan into an investment security (an LRO, or Limited Recourse Obligation) by amending it into their overall securities offering and then qualifying that amendment with the US Securities & Exchange Commission. Once qualified, the loan then becomes available for investors to fund on their investment platform.
After investing, investors are provided with monthly project updates. Some loans pay monthly interest along the way, while deferred payment loans pay all accrued interest only at the end. of their term.
Finally, once the work is completed and the home is either sold on the market or refinanced, the final distribution of any remaining interest due and the investor’s share of principal is paid out.
Groundfloor offers retail access to real estate debt financing. Investors provide capital to Groundfloor, and Groundfloor then offers that capital to qualified real estate developers in the form of short-term loans to help them complete renovation projects.
Income comes from the interest rates the developer pays to Groundfloor on the loan they took. This differs from the more common equity investing, which allows investors to fund an ownership stake in a real property and pays back through cash flow from rent payments and property appreciation when the property sells.
Since Groundfloor is open to non-accredited and accredited investors alike, anyone can invest through Groundfloor.
They've recently opened Groundfloor beyond American borders, too. Investors based outside the U.S. can create an international account through the primary sign up flow.
However, there are a few barriers if you're not based in the United States. International investors must email [email protected] to transfer funds into their account, and the minimum transfer amount for internationals is $5,000 USD.
Since Groundfloor is a kind of double-sided marketplace, they acquire properties by offering capital to real estate investors and developers through their "Borrow" product. They do this as a private money lender – a non-bank company that lends money to people to buy or renovate real estate. This allows developers to access private loans that are designed for short-term expenses.
They offer Fix and Flip to Fix and Rent loans. Before offering property debt as an investment option for investors, Groundfloor pre-funds developer loans after a thorough vetting of the borrower's experience, credit worthiness, business plan, and an assessment of the property value, both "as-is" and "as-improved".
Founded in 2013, Groundfloor currently has around $240 million in loans under management. They keep public logs of funded and repaid loans complete with property data, repayment speed, and return rates.
Ease of Use
Before investing, it's crucial to ask yourself what you're really investing in. It's not always as clear-cut as you might think.
There are two core products Groundfloor offers retail investors:
First, we have Groundfloor's original product which we'll call "Groundfloor Original". It provides investors with the opportunity to invest in one or many of the dozens of loans they have currently taken out by real estate investors. Properties are divided into classes, with higher class properties usually promising lower rates of return due to reduced risk, and vice versa for lower class properties. We'll focus most of this review on this product as its more of a real estate investment product rather than a banking product.
"Stairs by Groundfloor" is a new product aimed at helping onboard newer investors into real estate. Instead of providing investors with property options, they position Stairs as a savings tool with higher interest rates than your current bank's interest rate. They likely do this by pooling investment from Stairs users and funding a broad portfolio of real estate loans and capturing a percentage of the generated revenue before passing it back to investors.
This product requires much less work and knowledge than Groundfloor Original, but pays out much lower returns as well.
Groundfloor currently offers loans to developers in over half of U.S. states, and has plans to expand to the entire lower 48 in the near future. This means that investors will soon has access to real estate debt deals from across the entire country.
Starting at just $10, Groundfloor has effectively removed "high initial investment" as a barrier to entry into real estate investment for essentially everyone.
Groundfloor properties come with detailed documentation on the Property Page in the Groundfloor app. There you'll find information on the property, the loan that was offered, and data on how Groundfloor thinks about the loan's risk profile based on the borrower and project itself.
Since debt has less complicating factors than equity investment, the key things to note are the interest rate and the risk factors at play with each project.
It could not be easier. Simply navigate to a particular property on the Groundfloor app and click the big green "Invest Now" button. This will take investors into Groundfloor's check out flow where they can complete their investment.
There's really one core reason for investing in real estate: to leverage your current capital to create more capital. When it comes to choosing investing platforms, their expected yield and fee structure are the two core levers that determine how well they do that for their customers
Groundfloor throws around the number 10% when talking about average yearly yield paid out to their investors.
They also claim that a hypothetical portfolio with equal investments in all their available loans would have paid out an annualized return of 10.72%. That said, this number is based on a Diversification Report published in 2018, and it's unclear why they haven't updated these numbers since then.
Groundfloor grades their loan investment opportunities on a sliding scale ranging from Grade A to Grade G, charging borrowers interest rates between 5.5% to 25.5%. The interest rate assigned to a loan and displayed on the loan detail page is an annual rate, and Groundfloor pays investors the same rate they charge their borrowers.
There are also several procedures in place to help protect investor's money after it has been lent our to developers. This includes project updates and monitoring. That said, they don't publish any information about how many of their borrowers have defaulted on their loans. They do elaborate on how they react to a loan default, however. If a borrower can't pay back their loan, Groundfloor moves to foreclose on the property in question, sells it, and pays investors back minus any costs incurred in the foreclosure process.
They don't say how much foreclosures can cost them (and their investors) when it happens, though.
Investors in Groundfloor loans are paid out according to the individual loan terms. Some pay out monthly, and some are "Deferred" and aren't paid out until the loan is completely paid off by the borrower.
Interest begins to accumulate from the date of initial investment, though loans not fully funded within 45 days return capital to investors with no interest accrued.
Due to the magic of compound interest, real estate investments perform better in the long term when cash flow yield is paid out more frequently and reinvested by investors. Groundfloor's deferred loan pay outs mean that investors miss out on a bigger portion of compounding interest than they could if they received their payments more often, like monthly or daily.
As Einstein said, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it."
Perhaps Groundfloor's primary differentiator and value proposition is that they don't charge investors anything for using their service.
Instead, they charge borrowers a 2-6% fee for the service of originating the loan. This is charged outside the scope of how Groundfloor display's their loan information on their Property pages, so investors needn't worry about having to factor fees into their investment decisions.
They also charge borrowers closing costs of $1,250, and an additional $250 application fee to request admission for funding.
While we lack a crystal ball that can tell us how real estate markets will act in the long term, we can make some assumptions to help understand the true return of an investment in Groundfloor funds.
If we take Groundfloor's historical interest rate return values of 10.5% at face value and assume interest is compounded yearly (to strike a middle ground between monthly and deferred payouts), an investment of $10,000 would compound in the following way:
→ End of Year 1: $11,050.00
→ End of Year 2: $12,210.25
→ End of Year 3: $13,492.33
→ End of Year 4: $14,909.02
→ End of Year 5: $16,474.47
After five years, a 10.5% IRR on a $10k investment would earn you $6,474.47 in additional yield.
If you'd invested that same $10,000 into corporate bonds (which are even more illiquid) and drawn Moody's long-term average (6.53%), you'd have earned $3,824.59 in yield - about $2,600 less than your Groundfloor investment.
If you'd invested that same $10,000 into a fund mirroring all 12 equity REIT sub-sectors (real estate investment trusts) over the last 10 years (13.2%), you'd have earned $9,142.84 in yield - almost 1.5x more than your Groundfloor investment.
If you'd invested that same $10,000 into the stock market and drawn the S&P 500's average yield over the last decade (14.7%), you'd have earned $10,581.68 in yield - $4,000 more than your Groundfloor investment.
One of the most important things to keep in mind when deciding which real estate investment platform to use is to ensure you understand how easy it is to sell your stake when you want to.
In short, liquidity is a way to measure how much control you have over your money after you've invested it. Traditional real estate is illiquid because selling buildings is difficult and time consuming. On the other hand, cash is as liquid as it gets since you can exchange it for goods at any time.
Holding periods for Groundfloor investments are directly related to the length of loan term Groundfloor has signed with the borrower.
Typical terms seem to start at just over a year, but investors can access shorter, in-progress loans if a shorter term is desired.
There's nothing about premature withdrawal penalties on Groundfloor's website, so it's likely it's not an option. Investors should therefore pay attention to the Remaining Term on a loan before they invest.
Groundfloor doesn't allow investors to recover their capital if they want to withdraw it early, but they do give investors lots of options with relatively short lock-up periods at the initial investment stage.
The Final Verdict
Groundfloor does a lot of things right. They provide investors with a low minimum, no fee path to access decent returns backed up by real estate. Their documentation is good, and their product is relatively simple for investors. They make it easy to understand the potential return of investing in a particular loan.
There are a few things to keep in mind before moving forward, though.
First, investors must know exactly what a Groundfloor investment is. It's not real estate, but a loan that helps someone renovate a property. This means that investors aren't exposed to rent cash flow or property appreciation, since the property's ownership never changes hands. This means potential gains are capped by the terms in the original agreement, and are typically lower than equity earnings could be.
In addition, most of Groundfloor's loans have a deferred payment plan, meaning Groundfloor wont pay out anything to investors until the end of the loan's term, assuming the loan is paid in full. This hurts an investor's ability to compound gains through time, reducing long term gains.
Lastly, investing in debt doesn't help investors learn about investing in real estate. Debt is it's own category, and the real estate angle is tangential at best.
We rate this opportunity a 4 out of 5. Decent returns, favourable terms, and fairly good liquidity.
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