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The Good, Bad, and Ugly of Alternatives—And Why Groundfloor Is Different

 📰  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 fintech's and written about investing, the markets, and personal finance.

Method Man of the Wu-Tang Clan once famously said: “cash rules everything around me.” As it turns out, he’s right—but cash alone won’t get you where you want to go.

That’s the main reason why people invest their money in stocks and bonds, seek out the highest-yielding bank accounts and CDs for their cash, and sleuth around for ‘money glitches.’

The COVID-19 pandemic, and the era of easy money that spawned as a result of it, availed investors of many money glitches and growth-y opportunities with beefy returns—and one of the ‘opportunities’ that really hit its stride amid the chaos was the rise of alternatives.

Odds are, if you’re reading this, you’ve flirted with a few of these alternative marketplaces—and you might even have money stewing in some of their offerings. You might be speculating, experimenting, or seasoned with these platforms, but still might not know what the big deal is.

Let’s touch on asset classes, why alternatives are becoming so popular, and what you should know about these new platforms.

An Abbreviated Intro to Assets

Everybody by now knows a thing or two about stocks, bonds, and cash. Even if you’ve never had to sit through a personal finance class, you probably have a mix of these three things, and that’s because they really do rule everything around us.

These assets are generally thought of as ‘traditional’ assets—and part of why they’re so traditional is because they’re so old. However, another reason why they’re now seen as ‘traditional’ is because they are so accessible.

The stock and bond market is now broadly covered by diversified exchange-traded funds (ETFs), which have permeated every corner of American financial life. Everybody with a 401(K), an Individual Retirement Account, or a brokerage is exposed to both markets—and even people keeping cash in their bank account are a benefactor of bonds.

 

As a result of their wide availability, stock (equity) and bond (debt) markets have become really cheap to access. Fee-free brokerages like Robinhood have made it possible for you to invest in stocks from as little as a dollar, while issuers of funds have dropped the fees that they charge in an effort to stay competitive.

However, things like the stock market have gleaned a reputation for being too volatile. Even if you have little experience with finance, years like 2000, 2008, and 2020 probably surface some memories. And if not the years, then words like ‘Dotcom bubble’ and ‘Financial crisis’ might jog your memory.

 

Increasingly, people are looking for other ways to put their money to work—ones that might be preferable for the risk, time that they’ll stay invested, or other benefits.

That’s where alternatives come in.

Alternatives are—as their name suggests—alternatives to widely-available assets like stocks and bonds. Some popular examples of alternatives include real estate, farmland, art, venture capital/private companies, and crypto.

Though alternatives have been around for a long time, it has really found new life online thanks to Regulation A and Regulation CF, two regulations which allow companies the ability to raise money from non-accredited, everyday investors.

What do companies use Reg A and CF for? Well, for just about anything: companies have used both Reg A and Reg CF to fundraise for their startup or to offer shares of other investments or collectables like fine art, wine, and the like.

In effect, Reg A and CF have availed companies (like Groundfloor) of the opportunity to offer asset classes which have historically been unavailable to everyday people. This is how Groundfloor is able to offer investors access to the lucrative real estate debt market.

Interest in alternatives in Reg A is novel—and new. Groundfloor was one of the first lenders which used Reg A, which is now being used by dozens of alternative platforms. In spite of that, it is still a growing space. There is opportunity, but the barrier to entry can be higher for investors than they’d face in stocks or bonds.

Knowing what we know about traditional markets and alternatives, you might be wondering—why would you invest in an alternative? After all, traditional markets have proven successful over hundreds of years and charge virtually no fees anymore…

While that might be true, alternatives offer something different for every portfolio. The ‘king’ reason behind people’s investment in alternatives is the ability to build wealth without worrying about the market, but there are others which we’ll touch on below.

Why Alternatives?

If stocks do so great, why alternatives?

Alternatives—think: real estate, fine art, private credit, venture capital—have gained a reputation for making wealthy people wealthy. The messaging in advertisements for many alts platforms sings to the same tune. You’ve probably heard companies say that you can “invest like the 1%” or that their platform offers the opportunity to “invest in an asset class only the wealthy can access.”

However, in general, what alternative platforms have to say is mostly bogus. Your goal as an investor is to maximize fees for returns.

The question you have to answer is whether an alternative will do better than… well, the alternative. Consider just a few of the criteria that investors need to consider when weighing alternatives to stocks, bonds, or cash:

  • Time horizon — when do you need your money?
  • Returns — what can you expect to make over that time horizon?
  • Fees — how much you pay over the life of your investment (and how you pay it)
  • Risk — how much risk are you taking on?

In some cases, investors might find that alternatives are worth it because they think the aforementioned factors might be more favorable. This is actually one reason why investors use Groundfloor for short-term, high-return, no-fee, favorable-risk investing.

However, before we touch on why Groundfloor is a preferable alternative investment, we want to introduce you to the broader ecosystem of alternative platforms and investments. Unfortunately, not all alternatives are as transparent as Groundfloor.

Not All Alternatives Are Made Equally: Weighing the Good and the Bad

The alternative investing business has grown with great fervor, particularly during the COVID-19 pandemic, as a mix of ‘easy money’ and more venture capital support for fintech's and alternatives platforms kickstarted an effort to “securitize everything.”

However, alternative investments are nothing new—the digital alternative which has grown in recent years is just the latest and more accessible version of it. With its rise in popularity have come some good spots and bad spots…

The Good

The best part of alternatives is that they offer investors just that: an alternative.

Access to more asset classes is supposed to offer investors more opportunities to build wealth, generate returns in spite of what the market is doing, and beat inflation. Alternatives, in all their unique flavors and packages, have actually had some success in doing that.

Some alternative assets have done very well over long time horizons—high-quality farmland, real estate, venture capital, and private credit have beat inflation and generated meaningful returns. In fact, alternatives like real estate and gold outperformed U.S. stocks and bonds in 10 out of the last 20 years.

In a comparable way, some alts platforms have created value for investors in a fairly short period of time, and they’ve truly opened up the doors to asset classes which have historically been inaccessible.

However, that comes with one really big asterisk: the quality of your purchase really matters. During the pandemic, you could throw money at any stock and make money—but the same could not, and will not, be said of many alternative investments.

The Bad

I think many people would agree: it’s good to have many options. However, just because there’s more options doesn’t mean that there are more ‘opportunities.’

Sure, it’s great that people can now invest in privately-held companies through crowdfunding, toss money into venture firms, and buy shares of up-and-coming names through special purpose vehicles (SPVs) or syndicates. However, the correction in venture capital in 2022 and 2023 has sobered up many investors.

The same can be said of the slew of alternatives now available to people. You can invest in farmland, real estate, and fine art. However, underneath the shiny frontends of ‘commodity funds’ and alternatives platforms are complicated and lengthy filings that even experienced investors—let alone everyday people—sometimes struggle or fail to read.

For most online platforms, the complicated filings tend come in any number of flavors: Form 1-A, Form C, 1-K annual statements, or Offering Circulars. The name or medium of the form is not especially important, but the contents are: these forms tend to color great context about what an alternative or crowdfunding platform is offering for investment, the financial state of the investment, the fees, and pages of risk factors you’d probably like to know about.

 

Just take Groundfloor’s Offering Circular from 2019 for example. This filing is important, necessary, and required of the company to sell investments. And, frankly, it’s filled with all sorts of useful information. If not for the due diligence on every loan originated by Groundfloor, investors would either have to read this 150+ page document to understand what they’re buying—or fly blind.

The reality is: not all alternative platforms are as transparent as Groundfloor. Some private alt companies are less forthcoming in sharing the nuggets from these filings on their product, or in the marketing that they use to sell people their investments.

As a result, the rise of alternatives platforms online have given the average American the autonomy to invest in risky assets without guardrails. The optionality is great for literate investors, but many Americans do not have the literacy or the resources to conduct due dilligence before writing checks.

That means, in effect, that some alternatives are a black box for money—and complicated deals which have been historically reviewed by lawyers, analysts, and experienced investors are now being screened through the opportunistic lens of everyday Americans.

The Ugly

Though we have more places to put cash away, that doesn’t mean that you’ll be getting a return. Many people are allured to alternatives investing by alarmist marketing language and the promotional outlooks of the platforms.

In some cases, it might be costing them a lot of money—even their entire ‘investment.’

Data sourced from Pricing Culture shows that alternatives platforms have struggled to keep the music going. Pricing Culture has built indexes which are now used by companies like Yahoo Finance to show the performance of subsections of alts platforms.

So, how are some of these offerings doing? Let’s take a look at some these indexes’ performances as of April 2023:

  • Total Collectables Index: Up 13% since listing on 6/27/2021; down 33% since the index’s all-time high in October 2021
  • Wine & Spirits: Up 16% since listing on 6/27/2021; down 6% since the index’s all-time high on January 2022.
  • NFTs: Down 78% since listing on 12/12/2021; down 83% since the index’s all-time high on 1/16/2022.
  • Luxury Goods: Down 16% since listing on 6/27/2021; down 29% since the index’s all-time high in October 2021
  • Art: Down 11% since listing in October 2022
  • Trading Cards: Down 7% since listing on 6/27/2021; down 37% since the index’s all-time high in October 2021
  • Luxury Cars: Down 10% since listing on 06/28/2021; down 15% since the index’s all-time high in February 2022

This data is by no means exhaustive, but the insights from Pricing Culture are some of the first efforts to put a number by the price movements on these burgeoning platforms. As you can see, sometimes alternatives and collectible assets don’t always appreciate.

Thankfully, many alt platforms offer liquidity for investors to exit their investment in a timely manner—but many platforms have restrictions on exiting your investment, low liquidity, or even no option to exit. In any case, these restrictions might be turning unknowing investors into bagholders, who are stuck paying excessive fees.

The Unknown

It’s hard to quantify the past, present, and future of alternatives. However, one thing is for sure: alternatives are now more readily available to investors than they ever have been. That can be both a blessing and a curse.

The blessing? Optionality. The curse? That the average investor is now expected to do above-average research to make sure that an investment is indeed an investment and not just a money sink.

You should always conduct your own due diligence, but in general, when evaluating any private investments or alternatives, here are just a few things I look at:

  • Summary Financial Information: Every company selling something has to make a statement of their underlying business’s health. For example, in Groundfloor’s offering circular, they have to share how much revenue they’ve made, how much profit they’ve generated, and any expenses they incurred. This is incredibly useful—and you can often just use your browser to search for these kinds of statements.
  • The Reputation or Track Record of the Business: The reputation or track record of a business can be deceptive over short periods of time, which is one reason why the digital alternatives business is such a tough cookie to crack. However, you can glean a lot by reading about users’ experiences with the product, a company’s reports on their investments, and doing a Google search to read up on the business.
  • The cost of investing: Investment companies want to sell you opportunities for one big reason—they can make a lot of money doing so. Though Groundfloor has no fees for the end user, a lot of platforms do. Understanding the cost or fees you incur by “investing” in an alternative is super important because nobody cares about the returns that they make before fees. They, rightfully, care about what they make after the fees come out.
  • Risk factors: You can open most regulatory filings and ctrl+f or cmd+f “risk factors” to quickly get a glance at the ugly and uglier for most alternatives. There’s often a lot to comb through.

The availability of alternatives, generally speaking, seems to have been quite lucrative for crypto exchanges, alternative and crowdfunding platforms, and the people who string together complicated regulatory filings. However, whether or not this wider availability of alternatives has been good for the everyday investor is harder to discern, in large part because there’s not enough data.

Regardless, one of the most important qualities in any investment is the quality of said investment—and the same can be said for alternative platforms.

Why Groundfloor’s LROs Are the Best Kind of Alternative

Though alternatives can be complicated, Groundfloor has built one of the most transparent alternative products out there. One which allows investors to choose their preferred mix of risk and return and offers short-term exposure to the high-value real estate lending market.

In fact, Groundfloor was the first issuer qualified under the amended Regulation A law which allowed alternative investing to become so pervasive. Its first-mover status helped open up real estate lending to even more people. Groundfloor has since gone on to surpass $1 billion in retail investment volume!

LROs (Limited Recourse Obligations) are loans generally taken out by developers and builders working on residential properties such as houses, condos, and multi-family houses. These loans usually help pay for renovations, refinancing, or fix-and-flip projects—which means that LROs are short-term and high return. Most Groundfloor loans are offered on 12 and 18 months terms, with interest rates from 7.5% to 15%.

Once the loans do hit the marketplace, investors can browse LROs for loan grade, risk, location, return, term, and other factors. Each property has a profile which includes details that investors can read to consider before investing. And the best part? You can invest from $1,000, there are no fees, and your loan is backed by the property.

📰 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.

Noah Weidner

Meet Noah, a fintech expert who gained a solid reputation by writing about Robinhood during the pandemic. In addition to lending his editorial voice to leading fintechs, he's been a proud user of Groundfloor for almost two years. Initially attracted by the platform's ease-of-use, impressive track record, and leadership in the alternatives space, Noah believes Groundfloor is a digital investment alternative that stands out from the rest. Stay tuned for his insights on where Groundfloor fits in the modern investment landscape.

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