It’s official: the S&P 500 Index has entered bear market territory.
As of Monday, June 13th, the stock index’s total return was down almost 22% from its previous peak on January 3rd, stoking fears of a recession from which the economy could take months or even years to recover. The grim news comes on the heels of reports of soaring inflation reaching levels not seen in four decades and of a coming “crypto winter” as Bitcoin lost two-thirds of its value compared to its November 2021 high.
Such events have injected even more turbulence into an economy still shaky from the COVID-19 pandemic and other major global events, leaving investors once again in search of safe harbors to weather the continued volatility. Two years ago, we shared our perspective on how investing in Groundfloor’s private real estate loans can provide such protection; we stand even firmer in that belief today. Here are three key takeaways to keep in mind as we face another period of economic instability and uncertainty.
Diversification is Key
Don’t put all your eggs in one basket. You’ve heard it a million times before, but it’s an investing maxim for a reason. Public stock and bond markets tend to be more sensitive to market conditions and often react swiftly to negative events (such as the onset of COVID-19 or the beginning of the crisis in Ukraine), whereas many alternative asset classes exhibit much less volatility during uncertain times. This is especially true for real estate, and for Groundfloor’s real estate loans specifically. Since our inception over eight years ago, Groundfloor investors have enjoyed consistent, reliable 10% average annualized returns, even over periods of intense market fluctuation.
Debt Investors Have an Advantage
In uncertain economic times, the type of investment you make matters. Equity investments (such as those in the stock market) are by their nature more volatile than debt investments (such as those in bonds or notes). This is because the repayment of debt is a contractual obligation, whereas returns on equity are based on what’s left over. Debt holders are due their principal and interest before equity owners can receive their return; as a result, debt investments are usually more reliable, especially over the short term.
Groundfloor investors benefit from two key features of debt investments that limit risk relative to owning equity in a project. First, you are investing in a security known as a Limited Recourse Obligation (LRO), which is based on loans collateralized by real assets (i.e. the underlying property). Your investment in the LRO is protected by Groundfloor’s ability to assume title to the property if the loan is not repaid, which provides an important recourse should the project run into trouble. Second, you, as an investor, have first claim on any proceeds from a sale or refinancing of a property, and are the last to absorb any losses, due to Groundfloor having a first mortgage lien position on each project. Such protections offer a safe, solid, and secure foundation from which to invest, especially when compared to other high-yielding investments such as stocks or cryptocurrency. And, while residential real estate isn’t immune from market risk, any impacts from continuing economic turbulence would be felt first in equity investors’ portfolios as asset values decline.
Cash Flow Remains King
If we’ve learned one thing from the past two years, it’s that investors want more liquidity and control over their funds during periods of economic uncertainty. When facing the perfect storm of COVID-19, inflation, and other major global events, many people simply aren’t willing or able to keep their money tied up for years on end. Sadly, some investors recently found out the hard way that not all investment vehicles are created equal when it comes to accessing your money; investment funds such as eREITs, for example, can (and in fact did) restrict or suspend individual redemption requests in the face of market pressure, cutting off liquidity when it matters most.
Groundfloor investments, by contrast, are not part of a fund. Your liquidity is not controlled by us, but rather by the performance of the securities that you choose to invest in. As projects are completed and loans are repaid, so are our investors in the corresponding LRO. As a result, you are free to reinvest or withdraw your funds upon repayment of each investment you make, as often as you choose. Since the loans on our platform are short term and typically repay in months rather than years, investors can easily ladder their portfolios to ensure there are always repayments coming in.
So far this year, Groundfloor has repaid investors over $133.2 million in principal and interest, even as other financial institutions have pulled back and other asset classes have fluctuated rapidly. Such consistent, accessible cash flow is especially important as the market continues to shift.
Our team continues to monitor market developments very closely, looking into adjustments to our underwriting models and asset management interventions where necessary, to ensure our investors continue to be well positioned throughout the market ups and downs. As we stated at the onset of the COVID-19 pandemic, we believe Groundfloor is strategically positioned to deliver unique value to our investors, especially during times of uncertainty; our investment products provide an attractive return with a high degree of liquidity in the form of consistent repayments and cash flow and low volatility, especially compared to the performance of other financial markets and asset classes.
For current investors, we hope the above information is helpful as you consider where best to place your investments as we weather these turbulent times. And for new investors, we hope you will consider the safety and security of Groundfloor’s real estate debt products. Whether you’re looking to increase your investment or are just getting started, we’d encourage you to visit www.groundfloor.com to learn more.
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