If you’ve been writing about investments for as long as I have, it’s easy to think you’ve seen it all when it comes to being pitched new products and services. So, when I was asked by my editor to do a Groundfloor review, I had to admit to myself that I’d never heard of this exciting real estate crowdfunding platform.
Therefore, before I can discuss the pros and cons of Groundfloor, I’ve had to do a little leg work to figure out the company’s modus operandi. That’s fancy talk for how it does business.
It turns out that Groundfloor provides short-term, high-yield debt to house flippers, who use the funds to buy, renovate, and exit a residential property. Think Kortney and Dave Wilson of the hit HGTV show, Masters of Flip.
The Groundfloor process involves two steps.
First, it underwrites a loan for a residential project. The loan is then converted into limited recourse obligations (LROs). The beauty of its platform is that both accredited and non-accredited investors can invest as much or as little as they want of the debt for a project.
In essence, you’re building a portfolio of high-yield, short-term debt investments that have averaged 10%-plus returns over the past six years.
While the Groundfloor platform isn’t for everyone, it does level the playing field between accredited and non-accredited investors. For me, that is a definite benefit. Here some other pros and cons to consider.
The Pros of Groundfloor
My wife and I would love to flip houses where I live in Halifax, but we don’t have the time with work and all.
By providing us with a conduit to invest as little as $10 per project, we can live vicariously through project developers who’ve borrowed funds from Groundfloor to purchase and renovate non-owner occupied residential properties with one to four units, townhomes, and condominiums.
Another thing I like about Groundfloor is that it has a decent track record. Founded in 2013 by Brian Dally and Nick Bhargava, the company has managed to secure more than $250 million in real estate investments from over 75,000 users. These funds have been used by real estate entrepreneurs to purchase and renovate more than 1,500 projects in 30 U.S. states.
Of the 44 current investments available, eight are multi-unit properties, and the remainder are single-family homes with interest rates between 7.5% and 13.0%. So, the deal flow is reasonably high, allowing investors to pick and choose where they want to invest.
Lastly, if you invest in low-cost exchange-traded funds, you’ll love the fact that there aren’t any fees to investors. The borrowers pay all the fees. And if you want to put the debt investments in an IRA account, Groundfloor has waived those through the end of 2020.
The Cons of Groundfloor
The folks on HGTV make the flipping process seem so easy and problem-free. What they never discuss are the financing aspects of the projects they show on TV. It’s always a happy ending with plenty of profits.
However, the real world doesn’t work that way. When investors are getting 10% or more on their debt investments, there’s a reason for this: RISK. According to a study by ATTOM Data Solutions, the average returns for house flippers in 2019 hit an eight-year low.
“This happened as the cost of buying properties continued to rise faster than gains on resale,” ATTOM Data Solutions’ Todd Teta said in March.
TheRealDeal reported that $32.5 billion in financing went into buying and flipping 246,000 single-family homes in 2019. Yet average profits on those flips fell 3.2% over 2018.
So, while Groundfloor investors might see more opportunities to invest in private real estate debt because of the increased activity, it’s likely that reduced profits could translate into higher defaults in the future.
That being said, since its founding in 2013, Groundfloor has had just 1% of its loans go into default.
At the end of the day, if you’re not into house flipping, Groundfloor is probably not a suitable investment.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.