Do you consider real estate crowdfunding an investment option? Then you’ve probably noticed that most platforms restrict participation to only accredited investors.
But, no need for worries because Groundfloor is available for you. Just check out the Groundfloor review and explore to understand how it works.
Groundfloor broke that mold by creating a platform open to anyone with just $10 interested in borrowing money on real estate fix-and-flip deals.
What is special about Groundfloor compared to other real estate crowdfunding platforms is that it offers a marketplace where both non-accredited and accredited investors can participate directly in real estate investment loans for a fraction of the time.
What is Groundfloor
Groundfloor is a real estate crowdfunding platform that offers investors the opportunity to finance house flipping projects. Before a project goes live on the platform, Groundfloor reviews the project and signs the credit.
In simple terms, Groundfloor specializes in home mortgage lending for borrowers who use short-term debt to buy, repair, and either refinance as rent or resell for profit.
As a crowdfunding platform, Groundfloor essentially provides hard cash loans for individual projects and then sells portions of those loans to investors, who are paid interest on the money they borrow to fund the project.
A hard cash loan is a loan that is backed by a “hard” asset – tangible real estate that is expected to make a profit to repay the loan quickly.
Is Groundfloor Legit or Scam?
The deal offerings on the Groundfloor platform aren’t as detailed or transparent as they are on other crowdfunding sites, and their business model has led to some complaints from investors that Groundfloor’s due diligence is below average.
Your credit default rate would tend to suggest that more rigorous due diligence could make up for the credit defaults. Of course, if you support the high volume of deals that Groundflow puts out, you will have more deals that don’t work as planned.
How Does the Groundfloor Work?
Groundfloor lends money to borrowers and then sells portions of those loans to investors who have a share of the profit (or loss). Typically, the borrower himself is an investor looking to turn a house over. (Buy a rundown house, fix it and hopefully sell it for a profit)
They make their money by charging the borrower 2% – 4.5% of the principal of the loan. There are no fees for investors, which is a nice feature.
If all goes well, the borrower pays the investor small interest payments every month and, in the end, makes a final, large balloon payment of the entire capital.
When the borrower of a loan stops paying, Groundfloor tries to negotiate. If that fails, they manage the foreclosure process, which can get costly.
It can also take months (in non-judicial states) to years (in judicial states). Thereafter, the refix and the sale of the property will be monitored.
If the net proceeds are greater than owed, the investor will get back their principal and interest owed, and possibly even an increase in penalties. However, if they are not enough, the investor takes a loss on the investment. During this time, the investor generally receives neither interest nor capital back.
Who Can Invest with Groundfloor?
The niche on the Groundfloor is said to be one of the few real estate crowdfunding websites that welcomes non-accredited investors. And Groundfloor sells one of the lowest minimum investment in the real estate crowdfunding industry.
Note, that you can only invest in one type of asset class on the ground floor. The low minimum therefore carries the risk of investing in house flips, which are considered by many to be the riskiest loans to invest.
What is the Minimum Groundfloor Investment?
There is no fee to invest in ground floor and the minimum investment is $10. This low minimum means that it is easy to spread your investment risk across a wide variety of projects with limited risk of loss per loan and without undue exposure to the Groundfloor platform.
Of course, investing $10 won’t bring much return. According to management, most people invest an average of $3,000 in the first month, $8,000 over 12 months, and $20,000 by the third year.
What Does the Groundfloor Cost?
The ground floor charges borrowers a fee of 2% to 4.5% of the loan capital, $1,250 for closing costs, and an application fee of $250. Hard lenders typically charge a similar range of upfront fees as a loan origination fee, so borrower costs are not out of the ordinary.
What Should you Expect?
According to Groundfloor, loans offer an average annual return of 10% with typical maturity of six to twelve months.
Groundfloor’s product is based on risk loans to real estate entrepreneurs that are taken out and maintained by Groundfloor.
The key to a successful ground floor investment is diversification. Investors who have diversified their portfolios into a large number of loans can achieve high total returns even when they lose.
How Can you Sell Groundfloor Investments?
The investments on the Groundfloor are short term. They lend a house pinball machine for three, six, nine, or twelve months while the renovations are complete.
After that, they either sell the property or refinance the loan into a more traditional mortgage (if they intend to rent the property for monthly cash flow), repaying the investors.
Is there a Groundfloor App?
There is no Groundfloor app. But, the Groundfloor website is optimized for mobile devices. It is suitable for all functions, both for investors who want to borrow money and for house flippers who want to get funding for their next business.
The website is also currently the only platform where non-accredited investors can invest in individual debt securities. Traditionally this has only been available to accredited investors, so it’s nice to see they open up this option to retail investors.
This is how the Groundfloor website works:
- Create an account. It’s free to sign up for a Groundfloor investor account and it only takes a few minutes.
- Deposit your account. You can only invest $10 to get started.
- Search the marketplace. Explore Groundfloor’s marketplace to find projects that match your investment goals.
- Invest. Decide how much you want to contribute and transfer money to a project.
- Monitor. Monitor your investments through your ground floor dashboard with scheduled developer updates.
- Repayment. As soon as the loan you funded comes due, withdraw your amortization funds or re-invest in a new project.
Is it Safe to Invest on Groundfloor?
While the Groundfloor platform is legitimate with sufficient deal flow, understanding the risk of your investment is important. There are two main reasons why traditional banks do not provide hard cash loans:
- The short-term character limits the profit potential.
- The risk of default is higher than with traditional mortgage loans.
A lot can go wrong on a fix-and-flip project, and many of these problems cost a lot of money to fix.
It is important for investors to understand that while it is easy to build a diverse portfolio of downstairs loans across geographic areas and loan terms, Groundfloor offers investments in just one asset class – house flipping – and this is one of the riskier real class real estate – Asset classes.
What are Groundfloor Pros and Cons?
• Pros: The volume is good (14 open investments during our survey). Lowest minimums in the industry (just $10). No investor fees. The only single bond location for non-accredited investors.
• Cons: Very high unhardened default rate (4.7+ more than the best approved options); many loans in justice-only states; many loans with high LTVs, no bankruptcy protection; the rating system does not always reflect the unhardened default. Investors say that the platform does not accurately flag bad loans in the first two months.
Conclusion
If you’re willing to take a higher risk for slightly higher returns, Groundfloor might be a great investment for you. Investors who don’t need liquidity and are keen to experiment should check out this platform.
This is a passive way to get into the fix-and-flip action of real estate investing. However, make sure you understand the risks of crowdfunding platforms and do your due diligence before investing.
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