Groundfloor is part of a growing collection of firms that offer alternative investment products. In the case of Groundfloor, you can invest in short-term real estate debt. This opens up a new set of options for speculation, although investors should be careful. Like many firms that specialize in new investment categories, Groundfloor’s marketing emphasizes big gains without mentioning that those double-digit returns come with equivalent risks.
A financial advisor can help you decide how much of your portfolio should be in real estate.
Services and Features: What Does Groundfloor Offer?
Groundfloor is a specialized platform that does not offer traditional securities such as stocks, bonds, options and funds. Instead, this platform offers what’s known as “alternative investments.” These are any form of investment that’s outside the mainstream of traditional financial products. This category of assets is loosely defined, but you can think of it as any product that a bank or broker wouldn’t trade in the ordinary course of business. For example, art, trading cards and commercial real estate are generally considered alternative investment classes. Even though quite a lot of people do own paintings and land, they aren’t something that you would find in a typical 401(k). By contrast, while cryptocurrency was long considered an alternative investment, more and more financial professionals now consider it mainstream.
In this case, Groundfloor specializes in a single form of alternative investment class. It offers a marketplace in which you can buy shares of securities based on short-term real estate debt.
Here’s how it works. Borrowers apply to Groundfloor for a short-term real estate loan, typically between six months and 18 months in duration. They use these loans to buy or improve a piece of residential real estate for commercial purposes. Most borrowers on Groundfloor use this money to flip houses.
Groundfloor extends what’s known as a “hard money” loan. This means that the loan is backed by a physical asset which serves both as collateral for the loan and as the intended vehicle for repayment. For example, when a borrower takes their loan to flip a house they don’t intend to make payments out of their personal income like a traditional mortgage. Instead they intend to repay this loan based on the resale value of the underlying property.
Groundfloor then bundles this debt into a portfolio that its investors (you) can invest in. For example, you might buy $1,000 worth of the debt on 123 Main Street and $5,000 worth of the debt on 567 Broad Street. When you invest, you don’t actually purchase the debt itself. Instead you receive what’s called an LRO, a “limited recourse obligation,” that entitles you to repayment based on the underlying debt.
As the borrower makes interest payments, those are portioned out to Groundfloor’s investors on a pro-rata basis. You receive interest payments in proportion to the amount of any given portfolio you own. When the borrower repays the loan, you receive your investment back.
What It’s Not
Readers should note that sometimes Groundfloor is described as a “crowdfunding” platform. This is not quite right. Groundfloor does not raise money from its investors to fund its original loans. Instead it extends these loans itself, and then offers its investors the opportunity to buy into the existing debt. The more appropriate comparison for Groundfloor would be collateralized mortgages.
This structure gives Groundfloor many advantages over other nontraditional investment platforms. Most notably, it allows even small scale investors to gain exposure to the real estate market. You can buy a share of Groundfloor debt for as little as $10. This platform is also open to both non-accredited and accredited investors alike. This makes Groundfloor one of the most accessible forms of alternative investing on the market today.
At the same time, Groundfloor’s debt-based securities provide a good source of income-based investing. As borrowers make interest payments, those payments accrue to their portfolio as active gains. At the end of the short-term note you receive your capital back, allowing you to invest in a new project without locking your money up for years at a stretch.
Be Aware of Risks
However, it is important to be aware of the risks. Because Groundfloor offers debt-based assets, the greatest risk is that of uncured default. This means that the borrower couldn’t repay the debt and the lender has to try and sell the underlying collateral to recover as much money as possible. This is always a risk in real estate, and it’s a particular danger given Groundfloor’s emphasis on house flipping and renovation. While trendy, flipping is itself a massively risky form of real estate speculation that often ends poorly for the business involved. As a result, Groundfloor’s business model emphasizes the most risky niche in a fairly risky industry.
This leads Groundfloor to have a reported default rate between 2% and 4.5%. This is high by the standards of residential real estate, where mortgages can have a default rate of between 2.0% and 3.0%. Even with the real estate serving as collateral for this loan, this risk makes it a question of if the borrower makes timely payments, not necessarily when.
Fees: How Much Does Groundfloor Cost?
There are usually four types of fees to look out for when choosing a trading platform. You should look out for these when evaluating any investment or trading service:
- Trading fees. Any fixed charge attached to each trade that you make. This can come in the form of a flat fee or what’s known as the “spread.” This is when your broker charges you based on the difference, if any, between the buying and the selling price of an asset.
- Trading commissions. This is when a broker will charge you a percentage based on the volume or value of each trade.
- Inactivity fees. Any fees that the broker charges you for not trading, such as for keeping money in a brokerage account.
- Non-trading/Other fees. Any form of fee for trading on this platform not covered above. For example, a brokerage might charge you for making deposits into your brokerage account, taking money out of it or signing up for additional services.
Groundfloor is free. As far as SmartAsset can tell, this platform charges no fees, costs or commissions to the individual investor.
Instead, Groundfloor makes its money off its borrowers. When the platform extends a loan it charges a series of flat fees, percentage-based fees and closing costs in addition to the interest it charges on its loans. Based on the company’s published statements, it passes all interest payments on to the investors who hold shares of debt. Groundfloor itself makes its money off the fees and costs it charges to its borrowers.
There is no minimum to open an account. You can invest as little as $10.
Effectiveness: How Well Does Groundfloor Work?
Groundfloor is well and poorly designed at the same time. It is clear that this website was built with ease of use at the front of the firm’s mind. Groundfloor has an admirable simplicity to it, born in part out of the fact that it has so few moving parts. Groundfloor reasons that you really only need to do three things on its website: Add money to your account, review your current investments and buy into new ones. And that’s what its website is designed to allow.
Your account page on Groundfloor is mainly just a list of new properties that you can sink money into, with a splash of information about each one. Clicking through any given investment takes you to its details page, where you can find details about the project, the borrower and how much money everybody hopes to make. (That is literally included as an “After Repair Value” bar graph to show you just what a good idea any given investment can be.) Perhaps most importantly, a large and colorful letter grade tells you how creditworthy Groundfloor considers this project to be on a scale from A to G.
It is, perhaps, telling that when this reviewer tested out Groundfloor it did not have a single active project with an “A” credit rating. Almost all were considered rank C or D.
Information, or Lack Thereof, for Prospective Investors
Groundfloor gives you both too much information and not enough. It’s designed with a lay audience in mind. This is supposed to be real estate investing for the masses. However, it has no educational tools to help you understand exactly what you’ve invested in. Project detail pages swarm you with technical information such as the “Loan to ARV” percentage, skin in the game, valuation reports, closing conditions, SEC filing information and much more. But aside from a handful of mouseover tools the platform gives you no help in understating what all of these terms are, no less how you should apply them to your investment choices.
Instead it is relatively clear that Groundfloor is required to present all of this information by law, but largely expects its users to make their choices based on the interest rate, loan term and credit grade. This is a perfunctory basis on which to make a financial decision, and even there the user is under-informed. Groundfloor does little to explain what goes into its letter grading system, and offers no information as to how an investor should weigh these various scores against each other.
Is an “A” considered an absolutely safe investment? At which point along the scale should an investor consider their money at risk? What is the difference between a “B” and the platform’s ubiquitous “C”? None of this information is readily forthcoming.
Nor does Groundfloor provide information on real estate investing in general, market information, analysis either on a per-project or market-wide basis or any other tools for fundamental analysis. This is critical information for even well-informed investors. Retail investors are badly served by its absence. Groundfloor’s entire business model is based on the likelihood that any given commercialized residential real estate project will succeed. When someone is trying to decide whether to invest in a property based in Decatur, Georgia, details like the local retail market and the borrower’s experience in this industry are critical to judging the odds of success.
Yet Groundfloor provides none of this.
Assessing Risk
Now, the risk associated with real estate investment is not in and of itself a dealbreaker for Groundfloor’s business model. This platform advertises average returns of 10% or more, with most portfolios showing about a 10% rate average. Groundfloor’s debt-based structure provides a good form of income investing, while its emphasis on short-term loans means that your money isn’t locked up for years at a time.
However, make sure you approach a Groundfloor portfolio appropriately. This is a risky platform. Its business model is speculative and the assets underlying its debt-based securities are even more so. It provides you with low-cost, low-commitment exposure to the real estate market, but this platform pays little attention to the details and information that its investors will depend on.
Invest accordingly.
Bottom Line
Groundfloor offers shares of short-term real estate debt. This can be a good way of getting some speculative income investments into your portfolio. However, it leaves out much of the information that investors will depend on and fails to explain the information it does provide. This is an easy way into the real estate market, but may not be advisable for the average retail investor.
Tips for Investing
- The speculative segment of your portfolio can be one of the strongest parts of your financial life. It certainly can be the most fun … if you plan it wisely. That’s why working with a financial advisor can be so valuable. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One of the easiest ways to make sure your portfolio’s holdings are allocated so they reflect your risk tolerance, goal and time horizon is with an asset allocation calculator.
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