My name is Noah and I got into the world of fintech in earnest by writing about Robinhood during the pandemic for Robintrack.net. In the years since then, I’ve lent an editorial voice to leading fintechs and written about investing, the markets, and personal finance.
I’ve been a Groundfloor user for nearly two years. I joined out of curiosity while starting to cover alternatives as part of my work, but was impressed by the platform’s ease-of-use, solid track record, and leadership in the alternatives space. As part of a multi-part series, I’m touching on where I think Groundfloor fits in the marketplace of digital investment alternatives.
There are lots of places to put your money—perhaps more than there ever have been.
Over the last decade, the internet has made it possible for everyday people to steward their cash, investments, and other assets from the comfort of a smartphone. At first, those assets were traditional—but as companies like Robinhood opened up the convenience of investing in stocks, bonds, and ETFs from your phone, many more companies began unlocking untraditional markets and alternatives.
A digital frontier of investables has sprung up on the backs of this new turning in finance—and now, you can invest in trading cards, vintage cars, luxury watches, artwork, and the like. The problem is, it’s not exactly clear why normal people would choose a Picasso or a Rolex over the S&P 500.
However, it’s a little more clear why the alternative-curious have embraced one asset class in particular: real estate. The alternative investment space now has a number of fractional real estate investment platforms, which operate as quainter, illiquid alternatives to publicly and privately-traded real estate investment trusts (REITs.)
Each platform has its benefits and draws, but one unifying factor in why investors use them is a belief that illiquid assets experience less volatility and generate better returns than publicly-traded peers. That’s for each investor to consider when reviewing possible investments on these platforms, but regardless—billions of dollars are now stewing across hundreds of offerings on these new real estate players.
Seeing as though Groundfloor is one of these popular fractional real estate platforms, we wanted to illuminate where Groundfloor fits in this broader ecosystem of innovative companies. But before we touch on what those platforms are, let’s touch on the suitability of alternatives investing through these platforms.
What Should I Know Before Investing In Fractional Real Estate Investment Platforms?
Among Americans, especially young retail investors, there is a consensus that investing is about getting big returns. This is one reason why retail investors warmed up to high-flying growth names in the early names of the pandemic: the opportunity was great, and so were the returns… until they weren’t.
The truth is: it takes a very particular person to actually beat the market consistently. You’re welcome to invest in individual stocks and approach markets with a ‘high rollers’ mentality, but the eyepopping gains that speculative investors chased in 2020 mostly turned into a wealth boobytrap in 2021 and 2022.
This is why many financial planners recommend investing in diversified funds tracking major indexes like the S&P 500—and most Americans invest in diversified ETFs and mutual funds because of their allure and ease.
However, investors shouldn’t mistake funds for being necessarily safer. And particularly in the world of Reg A+ and alternatives, understanding the fees, potential returns, and holdings of a fund are extremely important. In addition, understanding your own liquidity needs carries high importance as well.
Why? Well, because not all fractional real estate investment platforms are built equally. Let’s touch on some things which are important to consider when investing in any alternatives offering:
Fees
In finance, you’ll find that fees and returns go hand-in-hand. Financial-types have created just about every kind of fee imaginable: expense ratios, management fees, advisory fees, sourcing fees, early withdrawal fees—you name it, the list goes on.
Why do fees matter? Well, because those aforementioned fees eat into your returns.
This is less a problem in the world of traditional equities and bonds because fees are so low. Take the Vanguard 500 Index Fund ETF (VOO) for example: at an expense ratio of 0.03%, investors will only pay $3 for every $10,000 they invest.
The opposite can be said of alternatives, which can be a parade of fees—and that’s because unlike ETFs or publicly-traded REITs, the online alternatives business is comparatively puny. It’s also arguably more opaque and difficult to understand. As a result, fees tend to be higher than in traditional markets.
When you’re dealing with alternatives, it pays to consider this big gap. You are paying for your investment somehow and the difference between a 0.5% fee and a 1% fee might not sound so substantial, but can cost you tens of thousands of dollars in growth.
In general, Groundfloor is one of just a few alternatives platforms which does not charge users for participating in its marketplace. We’ll touch on that below.
Returns
A conversation about fees would not be complete without mentioning returns. In general, the main object of all investing is to build wealth.
Some people have taken this to mean that they should chase opportunistic investments at all costs. However, a more suitable way to look at investing is in the context of inflation.
What’s the big fuss about inflation? Well, though inflation is a healthy byproduct of most economies, it eats into your buying power every year. A dollar in 2019 is not the same dollar today. And you won’t be able to build wealth if you don’t beat inflation, something which is particularly important to consider in a time like 2023, where inflation is above background levels (2-3%.)
So how can you beat inflation? Well, by being choosy with where you allocate your money. Many Americans decide to save money or invest in a qualified account, but options like certificates of deposit (CDs) and treasuries have grown with fervor given the current state of the economy.
Where do alternatives fit in this plan? Well, that’s for you to decide—if you think you can beat inflation and get good returns without taking great risk with your money, investing in an alternative investment might be wise.
However, when ultimately making investment decisions, it’s important to look beyond shiny metrics and good marketing. Evaluating the quality of a fund or asset, the track record of a platform, the contents of a portfolio, your availability to exit or sell your position, and the fees you might see are all important in verifying whether an investment is really an investment—or a paycheck for somebody else.
Liquidity, Risk, and Time Horizon
All investments are risky. However, factors like liquidity, risk, and time horizon are factors which considerably affect the real riskiness of an investment.
On public markets, liquidity is generally quite great—particularly for leading index funds and ETFs. As a result, index funds tracking major indexes like the S&P 500 and Nasdaq-100 are thought of as ‘less risky’ because investors can purchase or sell that asset at will.
This doesn’t mean that timing the market is a wise strategy. Among finance professionals, there’s a saying: “time in the market, not timing the market.” And the reason why professionals live by that is because given trends and historical data, assets are bound to go up over a long enough period of time.
In the world of alternatives, however, liquidity can be quite variable. Investing in an illiquid REIT is not quite the same as, say, buying an index fund tracking America’s largest and most profitable companies. It might not also hold the same quality of assets as a S&P 500 or Nasdaq-100 would.
As a result, you need to consider your options—how quickly you can sell your investment if you need cash, or if you don’t like the way things are going?
In the worst case, there’s few things worse than having money stuck in an illiquid investment which is underperforming the market, or loses all its value. Reg A offerings in particular can be a hazard to your wealth in that high fees, low returns, poor management, or various risks might cause your investment to end up worthless.
Sooner or later, investors learn: taking more risk does not mean getting more rewards—and with alternatives especially, not doing research on an investment could result in total loss of your investment.
What do you actually own?
Above all else, when considering these three aforementioned points, the most important consideration in all investment decisions comes down to what you actually own.
What are you actually investing in and what are you paying for access to? Are you investing exclusively in debt or equity, or a mix of debt and equity? More importantly: is the asset that you’re buying giving you the exposure you want?
For example, it’s one thing to invest in a real estate property in a fast-growing area like Austin, TX with the promise of gleaning the upside of its appreciation. However, if that property is not adequately positioned or aligned with the market, you might not be in a position to benefit. You’d have the right symptoms, but the wrong diagnosis.
In order to better understand what it is that you’re investing in, you might have to scrutinize investment platforms’ documentation and investment literature, read your fair share of Q&As, ask a financial advisor, or ask a friend or colleague making use of a platform for more insight.
Ultimately, an ideal investment will strike a delicate balance between all of the factors we’ve touched on.
That said, now that you have a general guideline of what to consider, let’s touch on the leading platforms in the fractional real estate investment space.
What Are the Most Popular Fractional Real Estate Investment Platforms?
There’s no “one size fits all” definition for what a fractional real estate investment platform is.
However, most people have come to know these platforms better by name. Groundfloor is one of these fractional real estate platforms, along with companies such as Fundrise, Arrived Homes, YieldStreet, and Concreit.
You can think of these platforms as marketplaces where investors can invest in real estate offerings—most of these offerings are illiquid, digital-first funds which invest in real estate properties or debt and place limitations on selling (liquidity) in the fund.
Some investors are fond of these limitations because they restrict the aggressiveness of day-to-day moves, much like the volatility you’d see in the stock market. Some investors even think that they can receive better returns with an illiquid, non-traded product.
However, though these platforms share a lot in common from a nuts and bolts standpoint, what they offer investors is foundationally different.
For example, when you invest on Groundfloor, you invest in debt. Essentially, you help finance a loan for a real estate project.
On a platform like Fundrise, you’re investing in a mix of debt and equity—that means you will own shares in properties, as well as proceeds from debt issued by Fundrise’s fund.
And on a platform like Arrived Homes, you’re usually investing in individual rental properties—that means equity in an individual property.
In these three examples, you can start to grasp the nuance you might face when having to weigh a possible investment—you might be investing in a single property, a number of properties, a highly-diversified fund, or a fund which has exposure to multiple different funds or real estate sectors.
For a taste of the market, its fees, and the time that these platforms recommend investing for, let’s take a look at some of the incumbents in the Reg A+ investment space:
- Concreit’s filing restricts its maximum AUM on its first fund at $50 million.
All of these platforms have become popular with investors, but they pale in comparison to the established, traditional marketplace of publicly-traded REITs and privately-traded funds. However, don’t mistake smaller for worse—many of these platforms have produced favorable returns after fees compared to peers, especially publicly-traded ones.
How Is Groundfloor Different Than Fractional Real Estate Investment Platforms?
Though many fractional real estate investment platforms or publicly-traded REITs put an emphasis on holding equity, or a mix of equity and debt, there are ways to make money besides ‘longing’ real estate assets or debt. In fact, for some investors, financing shorter-term real estate debt might be preferable to tying up your money in potentially risky, long-term, high-fee alternatives.
This is where Groundfloor comes in. Groundfloor allows you to invest in limited recourse obligations (LROs) which entitle you to repayment on debt issued by Groundfloor. In this sense, Groundfloor is a fractional real estate investment platform—but it’s unlikely to be like any that you’ve used before.
When you use Groundfloor, you aren’t taking equity in a property and you won’t be paying any fees. Instead, your money is lent to a real estate buyer—usually a renovator, developer, or private citizen—for a period of time. The borrower pays the fees for origination on that lending to Groundfloor, and Groundfloor services the debt on behalf of thousands of investors.
Consider how Groundfloor is different, and potentially preferable, for investors looking to invest in fractional real estate:
Get Paid Now, Don’t Worry About Charts
The price of traditional and illiquid REITs can trade up and down, but your LROs on Groundfloor will not.
When you invest in an LRO, your money helps developers and builders find the capital they need for housing projects or developments. When your LRO matures, you’ll be paid back at an industry-standard (or industry-beating) interest rate.
Many income-oriented investors find Groundfloor preferable because of its short duration time horizons, the high returns compared to market peers, and the favorable outcomes for LRO holders in case of extensions or defaults on properties.
Choose What You Want To Invest In
At any given time, Groundfloor is funding dozens of LROs—and that means a buffet of possible investing opportunities.
You can build your own diversified portfolio of LROs, which are backed by collateral (housing or developments). Along the way, you’ll be able to select LROs from across the country, choose the kind of risk you’d like to encumber, dig into individual properties for a financial overview, and invest to your heart’s content.
Groundfloor requires a minimum of $10 to get started. However, you’re also welcome to put more eggs in a single basket, or spread out investments across a number of loans available in the marketplace. The easiest way to diversify investments is with the Investment Wizard.
If you’re not fond of investing in individual properties, you can go the easy way and invest in lower-risk Groundfloor Notes, which are secured notes which purchase LROs or help originate real estate loans.
Know Your Risk and Reward Before You Invest
Nobody knows whether or not a stock or piece of real estate will appreciate or decline over the next few weeks, months, or even years. However, when you invest in Groundfloor, you are investing in debt. That makes your investment more like a bond than a stock.
As a result, Groundfloor investors get an expectation for what they get in exchange for investing in an LRO—there are interest rates and ratings on each property, which correspond to lower or higher levels of risk. In general, the businesses which Groundfloor services are engaged in building new developments, fix and flips, refinances, and renovations—which have a reputation for being much riskier than mortgages or other debt instruments.
How Well Has Groundfloor’s Portfolio Done Recently?
Groundfloor offers an attractive return for the risk that investors are taking for investing in LROs. Interest rates on Groundfloor start at 7.5% and go all the way up to 15.5%. And in general, even though these developers are considered riskier in the grand scheme of finance, portfolio performance still leans relatively strong on the whole.
In May 2023:
- Groundfloor had 1,281 active loans The number of repaid loans year-to-date was 407.
- Groundfloor had four losses. This year, Groundfloor has had 16 losses, averaging just 3 per month, which gives a year-to-date loss ratio of 1%. May’s loss ratio was 1.02% with an exceptionally low overall historical loss rate of 0.41%.
- Groundfloor has maintained a cumulative all-time rate-of-return of 9.82%
Bare in mind: this performance data is considerate of the whole Groundfloor portfolio, which includes properties with varied levels of risk.
Groundfloor works with local developers. While some of the portfolio is new construction, the majority of the available investment projects are “fix and flip” types. While any investment comes with inherent risks, Groundfloor only works with seasoned developers who have a history of successful projects.
Groundfloor has an extensive Asset Management team that works with the developers along the different development stages to keep projects on time. In the case where some portion of properties end up extending their loan or entering default, investors can still receive upside on their initial investment. Loans which are not repaid on time will simply accrue higher interest, only raising the payout for investors.
Should Groundfloor take ownership of a property because of a default, the property would be sold to pay back investors—and that makes even the riskiest LROs less of a zero sum game than the higher risk lending activities.
💡 Looking to invest in real estate without breaking the bank? Join Groundfloor today and become the bank! With our unique approach to fractional real estate investing, you have the power to fund the projects you believe in and earn high returns. Minimizing fees, understanding returns, and being aware of the risks is crucial when investing, and we provide you with all the necessary tools to make informed decisions. Take control of your financial future with Groundfloor.
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