Real estate investing is often touted as a great way to build wealth. One of its primary advantages is the idea of leverage. You can buy a piece of property with as little as a few percent down (with FHA loans), creating massive amounts of leverage.
One of the primary disadvantages is liquidity. Selling real estate is expensive and time consuming – especially when compared to selling a stock.
If you opt for other ways of investing in real estate, you run into the issue of holding periods. When we researched real estate crowdfunding platforms, some of the holding periods were as long as five years. Developers want to borrow money but they don’t want to have to refinance within a year – it’s just a pain. So a lot of platforms have holding periods of at least a year or two.
What if you want to invest in property but want a shorter holding period?
That’s where Groundfloor comes in. Groundfloor is a new kind of real estate investing platform that offers short-term, high-yield real estate investments. And since they don’t require accredited investor status, it’s an excellent platform for investors who are new to the process.
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About Groundfloor
Groundfloor is a real estate investing platform that specializes in property flipping. If you’re reading this review, you’re probably already familiar with the concept from popular TV programs on property flipping on HGTV. An example is Property Brothers, where twins Drew and Jonathan Scott help people buy dilapidated properties, then completely renovate them into dream homes.
That’s the basic concept behind Groundfloor, but it focuses on property flipping from an investment angle, rather than creating dream homes.
The platform brings together house flippers and real estate developers – who buy, renovate, and ultimately flip the properties – and investors who are looking for high returns on providing the loans that make those renovations possible.
If you invest in fix & flip loans, the company claims you can earn returns averaging 10%. That matches the performance of stocks, as measured by the S&P 500, and is many times higher than the best rates you can earn on safe, fixed-income investments, like certificates of deposit.
Groundfloor is based in Atlanta, and began operations in 2013.
Groundfloor for Individual Investors
If you participate in Groundfloor as an investor, it will be strictly in the form of debt. You are lending a developer money.
The platform does not currently allow for equity investments, as some real estate crowdfunding platforms do. You’ll be investing in short-term financing provided to entrepreneurs who purchase homes, renovate them, then sell them – or “flip” them – for profit.
This is one of the characteristics that makes Groundfloor different. With most real estate crowdfunding platforms, your investment will be tied up for several years until the underlying properties are sold. But since most are held for income, they may not be sold for several years. With Groundfloor, properties are bought, renovated, and sold quickly, so your investment will only be short-term.
Groundfloor is a platform where you can earn high returns without tying your money up for years at a time.
Though the company advertises “We can nail down over 10% returns for you,” it’s actually possible to earn even more. 10% is the average.
Groundfloor works similar to peer-to-peer lending platforms, like Lending Club, in that the loans they make are at various risk rates. Lower risk loans carry lower interest rates, while higher risk loans provide higher returns. They grade loans between A and G, with rates ranging between 5% and 25.5% per loan. You can choose the risk level – and return you want to accept.
Though Groundfloor investments do involve risk, they have the advantage of being secured by the underlying real estate. And to help mitigate that risk, the company uses high underwriting standards, including industry-leading practices and a proprietary underwriting system. They even pre-fund most of their loans before making them available to investors.
Groundfloor Investments
Like most real estate crowdfunding platforms that offer investments in individual properties, you’ll have an opportunity to browse and select the specific properties you want to invest in.
Each property includes a description of the basic terms, including the interest rate, the projected term, and the loan-to-value (“ARV”). But notice that the loan-to-value is typically between 40% and 70% – that means the property flippers themselves have substantial cash investments in the property, which lowers your investment risk.
All property deals are subject to a thorough vetting process by Groundfloor, to determine the risk and expected return on each. Properties must ultimately be non-owner-occupied, and be limited to one to four-family homes, as Groundfloor investments do not include apartment buildings or commercial properties.
Your actual investment is in what is known as a limited recourse obligation, or LRO. It’s a debt security issued by Groundfloor. Once a property project is fully funded, you will purchase a portion of an LRO for a specified amount, starting with just $10. The LRO will be repaid from the cash the borrower uses to repay the loan upon completion.
By virtue of the LRO, you become a creditor to Groundfloor. They will repay the security when the borrower finally repays the loan you invested in. You will receive both principal and interest on your loan investment once the project is completed and the loan has been fully repaid by the project developer.
Groundfloor for House Flippers & Real Estate Developers
If you’re a property flipper or real estate developer looking for financing on your next project, Groundfloor is an excellent platform to work with. After all, flipping is what they specialize in.
For a project to qualify for financing through Groundfloor, it must meet the following eligibility requirements:
- The subject property must be residential, one-to-four family.
- It can’t be owner-occupied.
- The loan amount requested must be between $75,000 and $2 million.
- The borrower must operate under either a corporation or an LLC, with both active and in good standing.
- Any financing provided will be in the senior lien position.
In addition, the property must be located in a state in which Groundfloor actively lends. Though loan investors can participate from any of the 50 states, financing of projects is limited to certain states. For example, Groundfloor currently does not fund projects in California, New York, Oregon, and several other states.
When you make an application for financing, you’ll be asked the following questions:
- How many fix & flips have you completed?
- Do you have a property identified?
- How much do you need?
- How did you hear about us?
Naturally, projects will be favored if you already have experience successfully flipping properties.
Groundfloor Requirements and Features
| Available accounts | Both taxable and retirement accounts. Retirement accounts include traditional, Roth, SEP, and SIMPLE IRAs, as well as Solo 401(k) plans. |
| Investment terms | The typical Groundfloor investment runs between six and 12 months. |
| Smart Platform | You can track the progress of the investment as well as get updates on the progress of the loan and the renovation work on the Groundfloor Smart Platform online dashboard. |
| Minimum investment | The minimum initial investment is $10, which is also the minimum investment to purchase any individual LRO. Much as is the case with peer-to-peer platforms and other real estate crowdfunding platforms, you’re not purchasing entire loans for investment, but small slivers. Those slivers are the LROs in the case of Groundfloor. |
| Income distributions | With Groundfloor, you have two options for income distribution. You can opt to have deferred payment terms, where both principal and interest are paid at the end of the project term. You can also select monthly payment terms, where the borrower makes monthly interest payments. |
| Customer contract | Available by phone or email, Monday through Friday, from 9:00 am to 5:00 pm, Eastern time. |
| Groundfloor fees | None! That’s another feature that makes Groundfloor unique in the real estate crowdfunding space. |
| Platform security | Groundfloor uses bank rate security to protect your information, encrypting transferred data with an AES 256-bit symmetric key. |
| Transparency | Groundfloor operates under Reg A+ securities law, so they are required to disclose a lot of information to the SEC about each deal, which increases overall transparency for investors as well. |
How to Sign Up with Groundfloor
You can sign up for Groundfloor directly through the web platform.
You’ll be required to provide the following information:
- Your full name
- Email address
- Phone number
- Zip code (though Groundfloor is available to investors nationwide)
- Answer how you heard about Groundfloor
- Confirm you are or are not an accredited investor
You will then need to create and confirm a unique password. You will be required to connect your Groundfloor account with your bank account. This is so that you can both fund your investments, but also automatically transfer funds back to your bank account upon receipt of loan principal and interest.
You will create an Investor FBO Account before you can begin investing. This will be your funding account for investment purposes. Though it is a non-interest-bearing account, it is FDIC insured since it’s serviced by Wells Fargo Bank.
When you sign up with one of our links, you will get a $10 bonus after you make your first investment.
Groundfloor Pros & Cons
Pros:
- You don’t need to be an accredited investor to participate in the platform.
- Loan investments are carefully screened to minimize risk. For example, Groundfloor makes sure property flippers and real estate developers have a significant equity investment in the property before funding a loan.
- You can invest with Groundfloor for as little as $10, and spread a $1,000 investment across 100 different loans.
- Groundfloor charges no fees to investors for participation in investments on the platform.
- If you’re a house flipper or real estate investor, Groundfloor is the perfect financing option, since property flips are what they specialize in.
Cons:
- Interest on your loans is not paid until the end of the project term. At that point, interest will be repaid with loan principal.
- Though the loans you invest in with Groundfloor are more liquid than most other real estate crowdfunding platforms, you’ll still be unable to access your funds until the end of the project term.
- As is the case with all crowdfunding investments, there are risks of loss of principal if the deal goes sour, or the property ends up in foreclosure.
- Groundfloor has a “No Advisory Relationship” policy, so your investing activities on the platform will be entirely self-directed.
Should You Invest through Groundfloor?
Property flipping is one of the most profitable ways to invest in real estate, in addition to being short-term in nature. That makes it a perfect real estate-related investment, but especially for those new to real estate investing, or those with small investment portfolios. Groundfloor makes the opportunity even more attractive with minimum initial investments as low as $10.
The $10 minimum investment has another major advantage – it gives you the ability to diversify your investment across many different properties. As a new investor, you can emphasize lower-yielding investments that also carry less risk. As you gain experience and increase your portfolio size, you can move into higher-paying, higher-risk investments. That will give you the ability to create a balanced portfolio providing consistent double-digit returns.
One important feature that Groundfloor doesn’t offer is a monthly or quarterly dividend or interest payments. These are typical of real estate investment trusts and even many competing real estate crowdfunding platforms. But the absence of the regular cash flow is largely offset by the relatively short-term nature of Groundfloor investments. With typical income paying real estate investments, you often have to tie your money up for many years.
Otherwise, Groundfloor is an excellent opportunity to add at least a little bit of real estate – which is a tangible asset – to a portfolio otherwise comprised of paper assets, like stocks and bonds. Just be careful to limit your real estate position to a relatively small allocation in your overall portfolio. Property flipping is a very specialized type of investing, and does involve a measure of risk. You’ll want to be careful not to be too heavily invested in it.
If you’d like more information, or if you’d like to invest with the service, visit the Groundfloor website.
Groundfloor
Strengths
- Low investment minimum ($10 per loan)
- Any investor qualifies (no need to be accredited)
- No fees to investors
Weaknesses
- Interest is paid at the end of the term
