Groundfloor Review – Build a Real Estate Portfolio
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For the longest time, real estate investing had been considered ideal only for those with a high net worth. But portfolio diversification is important, and if you consider adding real estate to your portfolio, you are already working on the right investment strategy. With the rise in crowdfunding platforms like Groundfloor, it has become easier for average investors to own real estate. It can provide an entry point you never knew you needed to invest in real estate.
Crowdfunding allows thousands of investors to contribute to a real estate deal and a prorated investment return. You can grow your portfolio with many other investors by investing as little or as much as you want. Keep reading to know if Groundfloor is the right platform for you.
In this article
What is Groundfloor?
Launched in 2013 by Nick Bhargava and Brian Dally, Groundfloor has headquarters in Atlanta. It is a crowdfunding platform with more than 200,000 active users. Groundfloor takes a different approach to real estate investing and does not offer equity in the property but focuses on high-yield debt. This means it funds real estate loans and helps provide funds for residential single-family and multi-family properties. Groundfloor is available for investors in all 50 states. Still, it will not be possible for the investors to diversify their investments in all states because Groundfloor only has a license to finance loans in 32 states.
Groundfloor will offer loans to real estate developers for properties that banks do not finance. This means the properties are more like private real estate investments in disrepair condition since they cannot secure financing from the bank. The platform will offer loans based on the asset's potential, and since it is a short-term loan, it carries a high interest rate. Its main investment product is the short-term residential real estate debt investment.
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How does Groundfloor work?
Setting up an account and beginning your real estate investment journey with Groundfloor is easy. Here are the steps to follow.
Create an account
To start investing, you need to head to the Groundfloor website and link the Groundfloor Investor Account to your bank. You need to click on Identity and fill in the personal details like legal name, date of birth, and phone number. Once you create an account, you will be redirected to enter the personal information for the third-party payment processor.
Fund the account
Once you have made an account, you will have to fund it. You can do this by adding the funding source for the account. Link the bank account or add the bank account manually. If you link the account, it will allow instant transfer of funds. Groundfloor is like an online brokerage account where you deposit the funds, which will be transferred to the Investor Account. You can also schedule an automatic fund transfer to ensure you can invest when new loans are released on the platform.
Choose the investment
You will be able to see the listing and all the details of the loan, including the loan grade, the investment period, repayment terms, interest rate, loan-to-value ratio, and the borrower's profit. You can choose the loan you want to invest in, and you will receive either monthly interest payments or a deferred payment once the project is complete. You will get the investment back after the borrower pays the principal and outstanding interest.
You can use the Investment Wizard tool to match the available loans with your investment criteria, making it easier to search for and invest in loans. You can look for loans that have certain letter grades or specific locations. It also has an automatic investing feature that allows you to allocate a certain amount of dollars to fund projects that match your risk appetite automatically.
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Groundfloor Features
Automatic Investing
You can enjoy the automatic investing feature with Groundfloor. It will allocate the money to various loans based on the loan grades on the Groundfloor platform, and it will automatically invest the money based on the same. But you will only be allowed to allocate the money for the loan you already invested in. It also allows reinvestment of the interest payments you receive from the investment.
Debt Investment
Two types of investment crowdfunding platforms offer-equity and debt. Groundfloor allows you to make debt investments and receive payments on them. The loan works just like any other traditional loan. You offer funds to the loan for a real estate investor, who will make regular interest payments to you. This property will also work as collateral.
Groundfloor Loan Grades
Groundfloor has a unique investment approach, allowing you to invest while keeping your risk appetite in mind. You may want to invest in the highest interest-rate loans, but it may not be right. It grades the loan from A to G. A has the lowest expected risk of loss and pays the lowest interest rate, while G has the highest expected risk of loss and pays the highest interest rate. The current rates on Groundfloor are as follows:
- Grade A: 5%
- Grade B: 6%
- Grade C: 8%
- Grade D: 9%
- Grade E: 12%
- Grade F: 14%
- Grade G: 15%
This is the minimum amount Groundfloor will offer the borrowers for a grade.
Groundfloor loans graded A have a low loan-to-value ratio; since the risk is low, the interest rate is also low. Loans have the first lien on the underlying asset; when something goes wrong, the lenders who have invested in A loan will be paid first. On the other end, there are G loans. They are high-risk and have a high interest rate to compensate for the risk. The lenders investing in G loans are second in position, and if something goes wrong, they will be paid after the senior lenders and the Groundfloor lenders.
Limited Recourse Obligation (LRO)
It is important to understand this feature of GroundFloor. Whenever you lend to the projects on the platform, you are not lending to the actual project since Groundfloor has already lent to the borrowers. Your loan will be converted into security registered with the U.S. Securities and Exchange Commission and is known as a Limited Recourse Obligation that you buy shares of.
How much does Groundfloor cost?
Groundfloor is free. Investors pay no fees to be a part of the platform. However, Groundfloor will make money by taking a spread on the loans. It is the difference between what it pays investors and what it charges the borrowers. It also has a fee for people who borrow money from them. There is a $250 application fee for house flippers and another $1,250 in closing costs after the loan funds. It will also charge borrowers underwriting fees between 2.5% and 4.5% of the loan amount.
For investors, it is a great platform at no fees.
Who is Groundfloor best for?
New investors
Diversification is important for generating wealth; it takes time and research to choose the right assets to invest in. If you are a new investor and want to tap the real estate industry, Groundfloor is an ideal platform with minimum investment and no fees. You simply need to have an investment strategy to get started.
Small investors
Real estate investment requires a lot of money, so it has always been restricted to individuals with high net worth. So, the cost will eventually add up if you are investing in REITs (real estate investment trusts) or a private equity fund. But Groundfloor offers a cost-efficient way of investing in real estate with a small minimum amount. You can start with $10 and watch your investment grow.
Who shouldn’t use Groundfloor?
Short-term investors
Real estate investment is meant for the long term. You will have to hold the investment for at least a year or until the completion of the project so that you can generate a rate of return. It might not be for you if you are in it for the short term. The term is short but still not as liquid as stocks.
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Groundfloor pros and cons
Pros
- Low minimum investment amount. One of the top Groundfloor pros is the low minimum investment. You can begin your investment journey for as low as $10.
- Open for all investors. Real estate investment is not accessible to all but Groundfloor makes it possible for accredited and nonaccredited investors to add real estate to their portfolios.
- No fees. There are no investor fees on Groundfloor which makes it ideal for individual investors.
- Automatic investing. Groundfloor supports automatic investing and it also allows reinvestment of the interest payments you receive.
- Supports IRA investment. You can make a Groundfloor investment through your IRA.
Cons
- Lack of diversification. You cannot invest in commercial real estate, which leads to a lack of diversification. Your investment will remain restricted to residential real estate.
- Illiquid. The investment is highly illiquid. They are short-term loans but you cannot exit the investment until the project is complete.
- No guarantee on returns. There is no guarantee on the returns, and in case of a default, you would end up with a loss.
- Foreclosure risk. If there is a foreclosure on Groundfloor, it can be expensive and the process could take a year or more.
Fundrise vs. competitors
Crowdfunding Platform | Open to Non-Accredited Investors | Investment Minimum | Fees |
Groundfloor | Yes | $ 10 | $0 |
Fundrise | Yes | $ 10 | 1% |
Streitwise | Yes | 500 shares | 2% |
DiversyFund | Yes | $500 | 2% |
Fundrise
A direct competitor of Groundfloor, Fundrise is another real estate investing platform open to accredited and non-accredited investors. It has a low minimum investment of $10 and 1% fees. It will invest in eREITs and eFunds, making it easier to earn a little extra cash and enjoy passive income without owning real estate property. The money will be automatically invested in a portfolio mix of commercial, equity debt, and industrial projects.
Streitwise
Streitwise is another platform that offers an opportunity for building a diversified portfolio. It is open to accredited and nonaccredited investors, and you can start by purchasing 500 shares. But the investment works differently. You will buy the shares of a REIT owned by Streitwise and its owners, and the company will then use your money to invest in different real estate projects.
DiversyFund
Like Groundfloor, DiversyFund has a low minimum investment and is ideal for small-scale investors. It does not have high management fees, but the money you make from your investment is automatically reinvested. This means you receive the payment only after the five-year holding period when the property is sold.
FAQs
Is Groundfloor legit?
Yes, Groundfloor is a legitimate company and has already paid more than $12 million to investors in interest since its inception.
Is Groundfloor FDIC insured?
The money you transfer to Groundfloor will be held in the bank and is FDIC insured up to the federal limit, but after it is invested in loans, there is no FDIC insurance.
Is Groundfloor a real estate investment trust (REIT)?
Groundfloor is not a REIT and does not work like one. You will not be investing in a pool of real estate projects, but you will be investing in individual loans to the borrowers on the platform.
What are the returns on Groundfloor?
Groundfloor does not guarantee returns, but you can look at the historical performance to get an idea about the performance of the crowdfunding platform. The average return to date is 10%, and the interest rate varies from 4% to as high as 25%.
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The bottom line
Groundfloor allows you to add an alternative investment to your portfolio without paying a huge amount. It is ideal for individuals with low-risk tolerance who are not willing to pay high fees. However, there is no one-size-fits-all platform in the industry. You must consider your investment criteria, risks, and goals before deciding. There is no fee on Groundfloor, but the investment is highly illiquid. It also offers an opportunity to invest through retirement assets, so you can defer tax and avoid taxation on the gains. Always perform due diligence before making any decision.
With real estate, you can achieve your personal finance goals by investing in an asset class that generates higher returns and is ideal for your long-term goals.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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