Where Groundfloor Fits Into Your Overall Investment Portfolio
📰 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 four dangerous words in investing: “this time is different.” A lot of wealth has been made and squandered by this saying. That’s because, at the end of the day, history rhymes. However, that’s not to say that the last few years have been anything less than exceptional.
The chaos of the COVID-19 pandemic, which upended the global economy in 2020 and wreaked havoc on the lives of billions for the three years that followed, has left the world in a meticulous situation.
At least on this side of the pond, U.S. interest rates have risen to 5%—the highest in a generation. Stocks are down from all-time highs, investors have turned to short-term income from Treasuries and Certificates of Deposit, and the average American might be feeling anxious about the economy and the markets.
Sure, you could do what the retail crowd has done very well over the last few years and “buy the dip”, or you could put your cash aside in safer bets. However, for investors looking for an opportunity to blend the two, Groundfloor might be a healthy alternative.
Let’s discover where the U.S. markets are and where Groundfloor might fit in your portfolio…
What’s Going On In the U.S. Markets?
The COVID-19 pandemic prompted an unprecedented response from global governments, including the United States, which ran off billions of dollars worth of stimulus to float corporations, local governments, and individuals to shore.
However, the stimulus that got America’s economy to shore has also brought about generational inflation—and regardless of its source or causes, the response by America’s central bank has called for some of the steepest interest rate hikes in decades.
It looks like it’s working. Inflation has appeared to peak and interest rates are expected to do the same by the middle of 2023. However, it’s yet to be seen what the impact of this campaign could be on the broader U.S. economy.
The response in the markets and in your bank is a little more immediate, though:
- With interest rates this high, many high-yield savings accounts are now paying more. While large banks are mostly hogging that interest for themselves, people banking at smaller banks, credit unions, and neobanks are getting a meaningful yield—sometimes as high as 5%. That won’t beat inflation, but it sure will help you hold on to more of what’s yours.
- Equities were quick to react to the Federal Reserve’s decision to raise interest rates. Stocks fell into a bear market in 2022, a reaction to the aggressive interest rate hikes. However, major stock indexes like the S&P 500 and Nasdaq-100 have been showing signs of recovery.
- Many bond funds have been facing a surprising exodus of funds—a unique factor given the market. Investors often expect bonds to rise in value when stocks are facing decline. However, the more desirable short-term income investments like Certificates of Deposit or Treasuries have made lower-yielding bonds less desirable. As a result, bonds and stocks both faced a bear market.
- Wild times in the housing market continue, with many Americans priced out of buying a home. And though investors are interested in investing in publicly-traded or illiquid REITs, they’re leaving money on the sideline given concerns about asset prices are starting to come back to Earth. Some investors are willing to flirt with the risk in real estate, but it’s risky in this market..
These circumstances are not all that distant from past recessions or market downturns. What makes 2023 an exception is the lack of a technical recession, the odd double bear market in stocks and bonds, a strong labor market, and a decisively confusing housing market.
Then again, even though 2023 is exceptional—there are exceptional ways to respond to its weirdness.
Seeking An Investment (for the End of the World)
Pretty much everybody—and I include the economists who are making policy in my use of ‘everybody’—are a little perplexed about the current state of things. Rest assured, you don’t have to come up with some big solution or thesis for what the next 12 months will look like in order to be in a better financial position.
Truth is, there are very few certainties out there:
- Stocks could continue to rally on, or they might fall if high interest rates have a negative effect on large businesses.
- Bond funds might start to look more desirable once interest rates start to come down, making their yields competitive again.
- Real estate prices could fall after a wild few years, or they might soldier on given a shortage of housing.
- Certain alternatives which performed well during the low interest rate environment of the last three years might not fare as well in a higher rate environment.
Investors should weigh what works best for them and invest consistently. After all, there’s very little value to timing the market; almost all of the value you can soak up comes from time in the market.
However, for investors looking for some more confidence, an income-oriented alternatives platform like Groundfloor might offer a happy place for their short-to-medium term cash.
With Groundfloor, you can invest in limited recourse obligations (LROs) which entitle you to repayment on real estate debt issued by Groundfloor. This debt is often made out to commercial businesses which are doing renovations, fix and flips, refinances, or new construction on real estate projects.
LROs on Groundfloor don’t change in value, which means there’s no market timing to worry about. Instead, you can peruse real estate-backed loans for risk, time horizon, and even geography. Loans originate starting at 7.5% with 12 and 18 months terms, which means you can look forward to a bank-beating return over a right-sized term.
The best part? LROs offer investors a way to profit on real estate without having to directly invest in it.
Where Groundfloor Fits In Your Portfolio
Groundfloor LROs are not a “one size fits all investment”—and they are indeed riskier than most investment-grade bonds, let alone high-yield savings accounts. However, their risks are included with each investment offering.
That’s one reason why you shouldn’t think of LROs like bonds, but as an income-oriented alternative with a favorable risk and return. Whether that risk-return is desirable for an investor comes down to whether or not they believe an LRO’s interest rate and duration is desirable.
It might also help to understand the risk you’re dealing with. Based on Groundfloor’s Q1 2023 Portfolio Analysis:
- Roughly 83% of loans repaid were in good standing in–meaning they were either current or extended on terms, that mean’s they’re paying like usual.
- About 17% of loans repaid were in default, meaning that their project was halted in some regard, but interest was still being accrued on the loan, going back to the investors. These loans collectively resulted in a positive weighted average interest return of 7.51%.
- The loss ratio across these repaid loans has only been 0.40% with 1.8% of loans resulting in some loss of principal.
- Even though that might sound intimidating, some investors assess that it’s worth the risk because Groundfloor investors still end up with something, even if a property does default. 72.4% of the loans that repaid from a state of default resulted in a full return of principal plus interest at the contracted rate or better.
In other words, for investors who spread out money into a large number of LROs, or option for safer ones, it could all balance out. However, the optionality for investors is relatively valuable—you can select your level of desired risk, identify shorter-term investments, and make more than 2x what your bank account would pay you.
As a result, investors looking for an income-oriented investment with great risk-reward might find Groundfloor’s LROs right at home in their portfolio.
My Two Cents on Groundfloor
I joined Groundfloor while playing around with alternatives platforms during the early days of the pandemic and threw some money into LROs to give it a go.
I revisited the platform months later while working on an assignment for a client—and maybe you could color me surprised to see that my actual LRO returns were close to the expected rate: 9.3% for the term, which was just a pinch below the 9.8% expected rate.
That figure was softened by a default in my portfolio, but I was happy with the 9.3% return I got, especially in the zero interest rate environment that we faced in the pandemic. That’s why I made buying LROs a monthly routine. You can set up ‘auto invest’, but I always like to read the report on a property before investing.
In any case, I consider Groundfloor a real gem in the world of alternatives. If you spend enough time researching alternative platforms, you’ll learn that an ‘investment’ isn’t always an investment—many platforms charge high fees to users, offer little transparency into what you’re buying, and offer skewed metrics to motivate you to throw money at them.
Groundfloor is the opposite: there are no fees for users, you get transparency into what you’re buying thanks to the reports on each property, and their monthly blogs offer some color for how the entire LRO portfolio is performing.
You should know: LROs are riskier than Treasuries, CDs, and savings accounts. LROs are an alternative investment which are prone to risk, and they are not insured, so you can lose money. However, given the track record of success that Groundfloor has had over its 10-year history, and my own experience using the platform, I’m very pleased with how Groundfloor has fit into my portfolio.
📰 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.