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Groundfloor Review – Have you given any thought to adding commercial real estate to your existing portfolio of investments? However, have you been hesitant because of the large initial investment needs, the high risk associated with this asset class, or both?
In this Groundfloor Review, you will find out more about a real estate crowdfunding platform that has successfully removed many of the traditional limitations on investing in commercial real estate. One of the safest investments in the real estate crowdfunding market, Groundfloor has a low minimum initial investment requirement and is open to investors of all creditworthiness levels.
Where can I find the Groundfloor?
If you’re looking to invest in real estate via crowdfunding, check out Groundfloor. It’s possible to start investing with as little as $10 to buy fractions of loans. Due to the low initial investment threshold, even a modest sum can be spread across many loans.
Loans on individual properties are pre-funded through the platform, and then investors can purchase portions of those loans. Specifically, you’ll be purchasing limited recourse debt (LROs). Each loan secured by the underlying property is held in first lien position by Groundfloor. You’ll have the freedom to pick and select which projects or loans to finance, as well as the amount you wish to put into each.
The primary focus of Groundfloor investors is on “fix-and-flip” real estate transactions. Sponsors of deals on the platform act as borrowers and buy single-family homes or multifamily buildings with four units or fewer. When the repairs are finished on a piece of property, it is “flipped,” or sold, immediately after the work is finished.
Groundfloor investments are short-term when compared to those on other real estate crowdfunding sites. The normal duration is between three and twelve months, though this might be longer or shorter depending on the agreement. Typically, the investment realization and investor distribution phases of real estate crowdfunding platforms span multiple years.
After launching in 2013, the platform has given investors returns close to 10% annually (10.5% to be exact, according to the company website). It’s a chance to make money off of “fix and flip” projects without taking on the normal risk.
Investors get their loan principal plus interest back all at once. Groundfloor will provide a 1099-INT to each investor at the end of the tax year.
Groundfloor, based in Atlanta, Georgia, has earned an A+ from the Better Business Bureau (the highest possible grade on a scale of A+ to F). Despite Groundfloor having a BBB A+ rating and having been accredited since 2015, the organization has not had any customer complaints during that time.
GroundFloor: Pros and Cons
Pros:
With as little as $10 you can get started investing.
Those looking to invest a little sum can do so because of the minimal minimum investment requirement.
An investor has the option of picking and choosing which transactions to back.
The investors are not required to have a high net worth, unlike other real estate crowdfunding platforms. That allows anyone to use the service without restriction.
The site does not charge investors any fees for making investments.
Groundfloor provides a low-risk entry point into the lucrative fix-and-flip real estate industry.
Unlike on some other real estate crowdfunding sites, investments on this one typically close within a year.
You have the option of either making a single, large investment, or setting up recurring, smaller investments on a regular schedule.
With Groundfloor Notes, investors can pool their money to finance many loans with a single investment.
Accepting investments from all 50 states and countries across the world.
Cons:
Involvement returns are constrained to interest on loan notes due to a lack of equity investment.
Without an equity participation option, Groundfloor’s returns are lower than those of many rival platforms.
Only loans for “fix and flip” real estate projects will be considered as investments. There are currently no additional investment options available.
Investors run the risk of losing money due to the possibility of loan default by borrowers.
Is There Anyone Who Can’t Invest In Groundfloor?
The company, Groundfloor, accurately touts itself as “real estate investing for everyone.” Both accredited and non-accredited investors, including those living outside the United States, are welcome to use the platform to make investments.
Foreign investors must provide a minimum of $5,000, although U.S. citizens can start an account with just $10.
A membership on Groundfloor requires registration. After signing up, you’ll have to link a checking or savings account to your investor account so you may put money into it. Multiple external bank accounts can be linked for funding.
It typically takes three to five business days for a bank transfer to clear once money has been sent to your account. Once the money has cleared your Groundfloor account, you can start making investments.
The unique qualities of Groundfloor.
Crowdfunding platforms for real estate are not standardized in the same way that other financial products and investments are. Investing in real estate is similar, and so is the crowdfunding part. Other than that, every system is different. The Groundfloor is an extremely good example of this.
Here are some of the ways in which Groundfloor stands out from the crowd:
1. Extremely Low Required Starting Capital
Groundfloor has a far lower entry point for investors at just $10, while other real estate crowdfunding platforms demand as much as $50,000 or more. It’s possible to find real estate crowdfunding services with a similar minimum initial commitment, but I’m not aware of any that are cheaper.
2. There is no need to be a “qualified” investor
Groundfloor’s lack of an accredited investor requirement, on top of the low $10 minimum investment, makes it accessible to virtually any investor.
3. No Fees to Investors
Although Groundfloor is not the only real estate crowdfunding platform to not charge investors any fees, this is relatively unusual. One way in which Groundfloor stands apart from other platforms is that it does not impose transaction fees.
Investors can use the Groundfloor platform at no cost. Borrowers are responsible for all fees, which typically amount to between 2% and 4.5% of the loan amount. In addition to the $1,250 in closing costs, borrowers must pay a $250 application fee. Investing returns are the net of all costs paid by the borrower.
4. Individual Retirement Arrangements
Although some real estate crowdfunding sites do permit IRA contributions, this is not the case for all. An IRA can be set up with Groundfloor, allowing you to save for retirement while still investing in the real estate market.
However, Groundfloor assets cannot be held in a traditional IRA. Due to the fact that it is not publicly traded, popular investing brokerages such as Fidelity, Charles Schwab, Ally Invest, and E*TRADE cannot handle transactions with this asset.
You should instead establish a self-directed individual retirement account (SDIRA) that is qualified to contain alternative investments. With the help of IRA Services Trust, Groundfloor can help organizations and individuals open individual retirement accounts.
There is no functional difference between a traditional IRA and an SDIRA; the only distinction is the IRA custodian. All of your annual payments are tax deductible, your investment returns are tax deferred, and you can withdraw your money at any time when you turn 59 12.
5. Initial Investments
Equity investments are a common feature of real estate crowdfunding platforms. The basement does not. Only shares of notes given to real estate entrepreneurs for use in “fix and flip” transactions are available as investments on the platform. If investors could take equity stakes in Groundfloor’s deals, the emphasis on “fix and flip” would receive much more attention. However, the ability to lend money to participants is a novel aspect.
The loans made available by Groundfloor are backed by a pool of other loans made through the platform and have fixed interest rates. The terms of each note are different, but they often expire after 30, 90, or 12 months.
6. Rating Investments
A deal’s risk level and the interest rate Groundfloor offers investors are both determined by this mechanism.
The borrower (deal sponsor) submits an application for finance on Groundfloor, much like they would on personal loan crowdfunding platforms like Prosper and LendingClub. The risk of each loan is evaluated by Groundfloor, and a letter grade is then assigned, from A (lowest risk) to G (highest) (lowest).
Each loan’s interest rate will be determined by its letter grade. A loan with an A grade may pay as little as 5.5% interest, while a loan with a G grade could pay as much as 26% interest.
The level of the borrower’s financial commitment to the transaction is a factor in the final grade. Since a borrower with significant equity in the loan is less likely to default, Groundfloor takes “skin-in-the-game” into account when assigning loan grades. The bigger the percentage of equity the borrower has, the better their rating.
After a contract is closed and a loan is repaid, the money will be deposited into your Groundfloor Invest Account. After 4 or 5 business days, the money is available for withdrawal or reinvestment in additional loans.
7. Limited Investing Window
Investors on most real estate crowdfunding platforms are counted on to see their money through to maturity. True, but unlike with other real estate crowdfunding websites, Groundfloor’s deals can be finalized in a fraction of the time.
Investments made through real estate crowdfunding platforms typically have a duration of five to ten years, but may go on for even longer in some cases. Considering the typical time frame of a commercial real estate investment (many years), this is totally reasonable.
The investments themselves are what set Groundfloor apart. The loans are investments in “fix and flip” real estate ventures, hence the investment durations are often one year or less. This is due to the fact that in fix-and-flip transactions, no holding period is required. Real estate is bought, improved, and resold as quickly as possible for a profit.
Should You Put Your Money on the Groundfloor?
Include real estate in your stock, bond, and cash equivalent portfolio for added diversification. I think this is especially relevant to the situation at Groundfloor. High returns on what are basically short-term notes backed by real estate make investing with the platform a great option to supplement a portfolio with a steady stream of income.
An independent investment opportunity is available on the groundfloor. The ups and downs of the financial markets have little effect on the fix-and-flip business model, which is driven by entrepreneurs in local marketplaces. Even if the stock market falls into a prolonged bad cycle, you may still be able to earn a consistent interest rate.
It’s up to you to decide how much of a risk you want to take on with your investment, because you can put in as little as $10. You can opt for a higher risk/higher return note, or lean toward a lower risk/lower return note according to Groundfloor’s grading system, which determines interest rates and displays the risk degree of each loan.
In addition to accepting clients from all walks of life, Groundfloor provides a great deal of leeway in terms of how you manage your capital. If you’re trying to diversify your portfolio into commercial real estate, this is a good option to consider.
