Our in-depth review compiles crucial details to help you assess whether Groundfloor is legit, ensuring you make informed investment decisions.
What is Groundfloor and how does it work?
Founded in 2013, the platform has made it possible for a broader audience to engage in short-term, high-interest real estate loans. Groundfloor specializes in originating loans ranging from 6 to 18 months, with interest rates between 8% and 14%. These loans support small businesses, couples, and individuals in funding residential real estate projects across the United States, thereby contributing to neighborhood improvement efforts.
The process begins when real estate investors, referred to as borrowers, apply for financing through Groundfloor. This can be for various projects, including renovations and rehabs aimed at enhancing residential properties. Instead of going through traditional banks or hard money lenders, borrowers secure loans directly through Groundfloor, which reviews, underwrites, and assigns a grade to each loan based on risk. Loans are graded from A to G, with A representing the least risky investments with lower returns, and G embodying the highest risk with potential returns up to 26%.
Groundfloor makes these investment opportunities accessible by fractionalizing the loans into $1 increments. This means investors can start with minimal amounts, choosing to invest as little as $1 in various projects. The platform also offers an Auto Investor account, which automatically diversifies an investor's portfolio across hundreds of loans, thus spreading the risk and aiming for reliable returns between 9% and 12%.
Investors earn money when borrowers complete their projects and repay the loans. The interest generated from these loans is fully passed on to the investors. Groundfloor earns through origination and servicing fees, rather than cutting into the investors' profits.
The platform operates under the regulatory oversight of the Securities Exchange Commission (SEC), providing an added layer of transparency and security for investors. Groundfloor has filed an offering circular with the SEC, and each loan offered for investment is detailed in amendments to this circular, following SEC qualification.
After funding their Groundfloor Invest Account, investors can browse available loans, review detailed information about each, and make informed decisions on where to invest. Once a loan is fully funded and the project completed, the principal and interest are returned to the investors, who can then choose to withdraw or reinvest in other projects.
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How risky is Groundfloor?
3/5
— Moderate RiskThe primary risk stems from the nature of the investments themselves—short-term, high-interest real estate loans. Here are some key risks associated with investing on Groundfloor:
1. Credit Risk: The borrowers using Groundfloor for loans may face challenges that prevent them from repaying the loan. While loans are graded from A to G to indicate risk level, there's always a possibility of default, which could affect returns.
2. Market Risk: The real estate market is subject to fluctuations influenced by economic factors, interest rates, and other variables. Changes in the market can impact the value of the properties and the success of the projects funded by these loans, potentially affecting returns.
3. Liquidity Risk: Investments in Groundfloor are not liquid until the loan term ends and the borrower repays the loan. There is no secondary market to sell your investment before the loan matures, which means your funds are tied up for the duration of the loan period.
4. Regulatory Risk: Changes in regulations affecting real estate, lending practices, or crowdfunding platforms could impact Groundfloor's operations and, subsequently, investor returns.
5. Platform Risk: As with any digital platform, there's the risk of operational issues, cybersecurity threats, and the potential for the platform itself to fail or cease operations, which could impact investors.
Investors should carefully consider these risks and their own investment objectives and risk tolerance before investing in Groundfloor. Diversifying investments across different loans and grades can help mitigate some risks, but it's important to be aware that all investments carry the potential for loss as well as gain.
How liquid is Groundfloor?
1/5
— Minimum LiquidityThe liquidity of investments on Groundfloor is inherently linked to the nature of the real estate loans it offers. Since these are short-term loans, typically ranging from 6 to 18 months, the liquidity timeline is determined by the loan's term and repayment schedule. Investors should expect to have their capital tied up for the duration of the loan they invest in. Upon the successful completion of the real estate project and loan repayment, investors receive their principal plus the earned interest.
It's important to note that Groundfloor does not offer a secondary market or platform feature that allows investors to sell or trade their investments before the end of the loan term. Therefore, liquidity before the loan's maturity is not guaranteed, making these investments more suitable for individuals who can commit their capital for the full loan term without the need for immediate liquidity.
This structure aligns with the nature of real estate investing, where the investment's return is realized at the project's completion, and underscores the importance of investors considering their liquidity needs and investment horizon when engaging with the platform.
How volatile is Groundfloor?
3/5
— Moderate VolatilityThe assets on Groundfloor, primarily short-term real estate loans, tend to exhibit lower volatility compared to traditional stock market investments. This is because the value of these loans is less directly impacted by daily market fluctuations and more by the specifics of the real estate project and borrower's ability to repay.
However, the real estate market does have its cycles and can be influenced by broader economic conditions, interest rates, and local market dynamics, which can affect the underlying value of the projects financed by these loans. Since Groundfloor's returns are based on fixed interest rates determined at the outset of the loan, the platform's assets provide a level of predictability in returns, assuming the loan reaches successful completion and repayment.
What is the average rate of return for Groundfloor?
10.72 %
— Moderate ReturnGroundfloor offers a range of returns based on its loan grading scale, which spans from Grade A to Grade G. Interest rates on these loans vary from 5.5% to 25.5%, depending on the grade assigned to each loan, with Grade A being the least risky offering lower returns, and Grade G being the most risky with the highest potential returns. The interest rate shown on a loan's detail page represents an annual rate.
According to Groundfloor's diversification analysis, a model portfolio evenly distributed across all 421 loans repaid to date would have yielded an annualized net return of 10.72%. It's essential to note that Groundfloor does not take any portion of the returns earned by investors, ensuring that all the interest generated is passed on to them.
However, there are maximum investment limits for Lender-Owned Real Estate (LROs), excluding anchor loans. For Grade A to C loans, an investor can contribute up to 25% of the total loan amount. For higher-risk loans from Grade D to G, this limit is reduced to 5% of the entire loan amount. These caps are likely in place to encourage diversification and manage risk exposure for investors.
What is the minimum investment amount for Groundfloor?
$10
The minimum investment required to start with Groundfloor is just $10, making it accessible for individuals looking to enter real estate investing.
What is the investment time horizon for Groundfloor?
6+ months
Investments on Groundfloor typically have a short to medium-term horizon, with loan terms ranging from 6 to 18 months.
This means that investors can expect to have their capital and earned interest returned within this period, assuming the borrower successfully completes the project and repays the loan on time.
However, it's important to note that the exact time horizon for each investment can vary depending on the specific details and progress of the real estate project being financed.
Who can invest in Groundfloor?
International
Groundfloor opens its doors to those residing within the United States and international participants.
It's important for potential investors outside the US to be aware that there is a minimum transfer-in amount of $5,000, a requirement that ensures compliance with international financial regulations and the operational framework of Groundfloor.
Is Groundfloor regulated or audited?
SEC Regulated
Groundfloor operates within the framework of Regulation A of the Securities Act of 1933, which is designed to facilitate smaller companies' access to capital from the public. The offerings under Regulation A are subject to specific rules and regulations that aim to protect investors while providing an avenue for investment in emerging companies and projects.
Groundfloor's compliance with Regulation A means that it can offer and sell securities, but only to residents of states where either Groundfloor or its affiliates have qualified an offering statement under Tier 1 of Regulation A or have made a notice of intent under Tier 2 of Regulation A.
Is Groundfloor insured?
No
Groundfloor does not directly provide insurance on investments made through its platform.
The investments in real estate loans are not insured by any government agency like the FDIC or SIPC, nor are they guaranteed by Groundfloor itself. This means that investors bear the full risk of borrower default or project failure without a safety net typically associated with bank deposits or certain other investment types.
It's essential for investors to be aware of this lack of insurance coverage and to consider the inherent risks when investing in real estate loans through Groundfloor. Investors should conduct due diligence, diversify their investments across various loans and risk grades, and assess their risk tolerance before committing funds.
Does Groundfloor distribute payouts?
Interest
Groundfloor pays interest on the loans investors fund. Interest accrues from the initial investment date until the loan is repaid. For loans to proceed, they must achieve full funding from the investor community within 45 days; otherwise, investors are refunded their initial investment plus any accrued interest.
Investors have the option to invest in loans with monthly or deferred payment terms. For monthly payment loans, interest payments are made monthly once the loan is fully funded and closes, with Groundfloor processing these payments once a month. In the case of deferred payment loans, both the principal and outstanding interest are repaid in one lump sum when the borrower repays the loan.
Each loan has a "Maturity Date" displayed on the Investor Dashboard, indicating the loan term's end. Interest accrues until this date or until the loan is repaid early. If a loan extends beyond its maturity date, investors may earn additional interest due to default interest rates and fees. Groundfloor commits to repaying investors' principal and accrued interest within 7 days of receiving funds to satisfy the loan.
It's important to note that for monthly interest loans, there may be a delay between the initial investment and the first interest payment, typically taking about two months from the funding date to the first disbursement.
How do I get my money back from Groundfloor?
An investor on Groundfloor can expect to get their money back at the end of the loan term, once the borrower repays the loan in full.
This repayment includes both the principal amount initially invested and the accrued interest. The specific timeline for repayment depends on the loan’s term, which typically ranges from 6 to 18 months.
Repayment occurs in two scenarios:
1. Monthly Payment Loans: For loans with monthly interest payments, investors receive monthly interest payments throughout the loan term, with the principal amount repaid at the end of the term when the borrower settles the full loan amount.
2. Deferred Payment Loans: For loans that accumulate interest until the end of the term, investors receive a lump sum payment that includes both the principal and the total accrued interest once the borrower repays.
Groundfloor processes repayments and distributes them to investors within 7 days of receiving the funds from the borrower. Investors can view and access their funds through their Groundfloor Investor Dashboard, from where they can choose to either withdraw their earnings to a bank account or reinvest in other loans available on the platform. If a loan is not fully funded within 45 days of its release, Groundfloor refunds the investment and any accrued interest back to the investor.
What are the annual fees for Groundfloor?
Groundfloor’s fee structure is designed to be investor-friendly, with no direct fees charged to investors at any stage of the investment process.
Instead, Groundfloor generates revenue by charging borrowers an underwriting fee, which ranges between 2% and 4.5% of the principal loan amount. This fee covers the costs associated with underwriting the loan, including the evaluation and processing necessary to bring the loan to the platform for investment.
The absence of direct fees for investors means that the returns indicated on the platform, derived from the interest rates of the loans, are not diminished by additional charges from Groundfloor, making the investment process more straightforward and transparent for investors.
How do I handle my investments in Groundfloor?
On Groundfloor, investors have the ability to actively manage their assets through several key features:
1. Diversification: Investors can spread their investments across various loans with different grades (A-G), interest rates (5.5% to 25.5%), and project types to mitigate risk.
2. Loan Selection: Groundfloor provides detailed information on each loan, including the grade, interest rate, term, and project details, allowing investors to make informed decisions based on their risk tolerance and investment goals.
3. Auto-Invest: For those looking for a more hands-off approach, Groundfloor offers an Auto Investor feature that automatically allocates funds across different loans based on predefined criteria set by the investor.
4. Reinvestment: Investors can choose to reinvest their returns in new loans, compounding their potential earnings over time.
5. Portfolio Monitoring: Groundfloor's platform enables investors to monitor the performance of their investments, track interest earnings, and manage their portfolio in real-time.
Through these mechanisms, investors on Groundfloor can actively manage their portfolios, adjusting their strategies as needed to align with their investment objectives and market conditions.
How does Groundfloor get taxed?
Groundfloor supports its investors with tax reporting by providing necessary tax documents for earnings and losses from investments.
If an investor earns more than $10 in interest income in a calendar year from Groundfloor investments, they will receive a 1099-INT form by January 31st of the following year, in line with IRS regulations. Principal losses are documented on a 1099-B form for each property involved. Additionally, promotional credits, such as referral bonuses or other promotions, are reported on a 1099-MISC form once the $600 threshold is met.
All these tax documents are made available and accessible through the Groundfloor Tax Center, which investors can visit to view their tax information, access their tax documents, and verify or update their account information for IRS submission.
How many investors are on Groundfloor?
The website received an average of 129,000 visits in the last 3 months.
The platform has attracted a substantial customer base, with over 200,000 individuals choosing Groundfloor for their investment needs. This broad user base underscores the platform's appeal and accessibility to a wide range of investors, from novices to seasoned professionals looking to diversify their portfolios with real estate assets.
Moreover, Groundfloor has facilitated over $1 billion in investments, a testament to the trust and confidence investors place in the platform. This milestone not only reflects the scale of Groundfloor's operations but also its effectiveness in mobilizing capital for real estate projects across the United States. The substantial flow of investments through Groundfloor highlights its role in supporting residential real estate development and renovation projects, contributing to neighborhood revitalization and economic growth.
The figures regarding users and capital underscore Groundfloor's success in democratizing real estate investing, making it possible for a wider audience to participate in opportunities previously reserved for the ultra-wealthy.
Who is the CEO of Groundfloor?
Groundfloor is led by CEO and Co-Founder Brian Dally, who brings his vision and leadership to the forefront of the company's operations and strategic direction.
Alongside him, Nick Bhargava, also a Co-Founder, serves as the Executive Vice President of Regulatory Affairs. His expertise in regulatory affairs is crucial for Groundfloor, especially considering the platform operates within the highly regulated financial and real estate sectors. His work ensures that Groundfloor not only complies with existing regulations but also advocates for policies that benefit the wider community of investors. Bhargava's role is essential in navigating the complex regulatory landscape, which includes liaising with bodies such as the Securities and Exchange Commission (SEC).
