Although most real estate investments focus on owning properties, Groundfloor gives investors the opportunity to loan money to other real estate investors. Through this app, you can lend to specific projects and have the potential to receive full repayment with interest within an average of nine months or less.
In this Groundfloor review, we'll share what it is, the pros and cons of this investment, who can invest, and how to open an account.
Grow your portfolio through real estate.
- Invest with as little as $10
- Borrow money for short-term residential “fix and flip” projects
- Diversify your investment portfolio without needing millions of dollars
What is Groundfloor?
Groundfloor was founded in 2013 by Brian Dally and Nick Bhargava. Its headquarters are located in Atlanta, Georgia. According to business information database Crunchbase, it has raised almost $17 million in investor funding. Groundfloor offers a unique opportunity to indirectly lend money to house flippers instead of owning real estate. Debt investors generally have less risk than equity investors because debt obligations are usually repaid first before owners are able to receive any profits from a deal.
Groundfloor's crowdsourced real estate investing and lending platform addresses one of the major concerns of other real estate fintech apps. Instead of locking your money into a deal for multiple years with an unknown time frame, the average Groundfloor investor is repaid within six to nine months, according to its website.
Investors can start investing money with as little as $10, so almost anyone can participate on its platform.
|Investment options||Single-family residential real estate
Multi-unit residential real estate
Planned unit developments
|Account types available||
|Distributions||Monthly or deferred until loan is repaid|
|Best for...||Investors who want to indirectly invest in real estate|
How does Groundfloor work?
Groundfloor is a crowdsourcing real estate platform where house flippers and other real estate investors list their projects for others to review and lend. Although most online real estate platforms enable investors to buy into individual projects or a portfolio, Groundfloor gives investors the opportunity to act like a bank.
The company lends money directly to borrowers, and your investments represent shares of that debt obligation. You get to choose exactly which properties you want to participate in and accounts can be opened with just $10.
With a low minimum investment amount, you can learn about how to invest in real estate and how to diversify your portfolio with a relatively small amount of money. Groundfloor's filters allow you to pick investments that align with your goals.
Groundfloor is best for investors who want to diversify their portfolio with real estate, but don't want the higher risks associated with fix-and-flip investing.
Length of loans
Lending with Groundloor is a short-term investment. On average, loans are repaid within six to nin months. With Groundfloor, you’ll know the interest rate before you invest. Your money is not tied up for long and you’re not waiting for an unknown return at some point in the future.
There is, of course, the risk that the person you're lending to doesn’t repay the loan, which means you lose the money you invested.
Similar to other peer-to-peer lending platforms, you can filter opportunities by grades, interest rates, and other information to fine-tune your investment strategy. Groundfloor assigns grades ranging from A to G to each opportunity. These grades represent the overall risk for the loan.
Grade A loans tend to have lower risk, but also lower interest rates. Grade G loans offer higher interest rates (and higher returns), but also experience higher loan losses.
When evaluating opportunities, you can filter by and analyze the following criteria:
- Interest rate: This is the interest rate you will receive.
- Loan grade: This is how Groundfloor graded the loan.
- Loan to ARV (after-repair value): This is the percentage of the loan compared to the expected value of the property once repairs have been completed.
- Loan position: Groundfloor loans typically are in the first position, which means they are repaid first.
- Cushion: The difference between the ARV and the loan amount. Another term for this is equity.
- Loan to ARV score: This is graded on a scale of 1 to 10. For every 10% of ARV borrowed, the score is reduced by one point.
- Quality of valuation report: There are four types of valuation reports that Groundfloor uses. A certified independent appraisal is the highest quality, whereas borrower-provided comps are the lowest.
- Skin in the game: This indicates how much of the borrower's own money is tied up in the project.
- Location: Groundfloor assigns scores based on where the property is located and whether or not the property is located in a judicial or nonjudicial foreclosure state. These rules affect the ability of Groundfloor to foreclose in case of nonpayment.
- Borrower experience: Scores range from 1 to 5 based on how many years the borrower has been involved in real estate development.
- Borrower commitment: This indicates whether the borrower is doing fix-and-flip investing on a part-time or full-time basis.
Types of properties
The properties that you can lend to are generally non-owner-occupied residential real estate. Properties are single family residences, multi-family 1-4 unit properties, condos, townhomes, and planned unit developments (PUDs).
Groundfloor does not offer loans on mobile homes, properties on 3.5 or more acres of land, land lots, or commercial real estate properties.
Limited Recourse Obligation (LRO)
When you lend to one of these crowdfunded projects, you technically aren't lending to the actual project. Instead, Groundfloor has already lent to the borrowers. Then, Groundfloor converts that loan into a security that is registered with the U.S. Securities and Exchange Commission (SEC). This SEC-registered security is called a Limited Recourse Obligation (LRO) that investors buy shares of.
Borrowers pay interest on loans monthly or defer the interest payments until the entire loan is repaid.
If you're interested in investing with Groundfloor, it offers two types of accounts. You can open an individual account that is taxable, or you can invest in a self-directed individual retirement account (IRA).
Because Groundfloord is considered an alternative investment, you must use a self-directed IRA if you'd like to invest your retirement funds. Retirement account options include:
People who invest in loans with Groundfloor are not charged any fees. Instead, Groundfloor makes its money by taking a spread on the loans. The spread is the difference between what it charges borrowers and what it pays investors.
Additionally, Groundfloor charges fees to people who borrow money on the platform. House flippers can borrow money to fix and flip a property or build one from the ground up. There is a $250 application fee plus another $1,250 in closing costs once the loan funds. Groundfloor also charges borrowers an underwriting fee between 2% and 4.5% of the loan amount.
Pros and cons of Groundfloor
- Short-term investment horizon: Most loans are repaid in an average of six to nine months.
- High-yield income: Since its inception, payouts have averaged over 10%.
- No investor fees: Groundfloor makes its money on fees charged to borrowers and the spread between what it charges borrowers and what it pays investors.
- Low minimum investment: You can open an account and invest in a loan with as little as $10.
- Easy diversification: With a small deposit, you can invest in multiple projects to create a diversified portfolio of loans.
- Lack of liquidity: Although Groundfloor investments are short-term loans, you cannot withdraw money at any time you want. You can withdraw money once the loan is repaid.
- Short performance history: The company was founded in 2013 and has only seen upward momentum in the housing market. It is hard to tell how it will perform in a down market.
- Not actually lending money: Investors buy into a Limited Recourse Obligation (LRO), which is a security that owns the loan that Groundfloor made to an investor.
- Loans backed by unfinished properties: If the borrower does not finish the project or the project is worth less than forecast, the loan may not get repaid.
- Lack of cash flow: If you invest in a deferred-interest loan, you won’t receive interest or your principal until the loan is repaid, which could be six to nine months or more.
- No mobile app: Although there isn't a Groundfloor mobile app available today, one is expected to be released in late 2021 for both Apple and Android devices.
Who can open an account with Groundfloor?
Investing with the Groundfloor platform is open to all U.S. investors over the age of 18. You do not need to be an accredited investor to open an account and lend money. Groundfloor is currently open to investors in 49 states. Due to state-specific legislation, Nebraska residents may not invest with Groundfloor.
Individual investors outside the U.S. are also eligible to open a Groundfloor account. After setting up an international account, you must contact Groundfloor customer service to enable your account. Non-U.S. investors must transfer at least $5,000 to open their accounts.
Groundfloor is best suited for investors that want to earn money on real estate without the risk of owning it.
How much can you make with Groundfloor?
Groundfloor says that the average investor has earned 10.5% to date. It has paid out almost $12.7 million in interest payments to investors. The company's website lists recently closed transactions so that you can see real-world examples of what investors have made.
Your individual performance depends on the asset you invest in, how long you stay invested, and your risk tolerance. Groundfloor offers investors multiple categories that you can filter the opportunities to find those that meet your investment criteria. By narrowing down the opportunities that meet your criteria, you have a stronger chance of meeting your goals.
With any investment, there is a potential to lose money. Investing can be risky with most asset classes and there are no guarantees that you will make money or that your investment is returned. Do your due diligence before deciding whether this investment, or any investment, is right for you.
Is Groundfloor legit?
Groundfloor is a legitimate company. In total, Groundfloor has paid out over $12 million in interest to investors since its inception in 2013.
Is Groundfloor a good investment?
Groundfloor could be a good investment for people who want to lend money to real estate investors. The investments are short term and generally last six to nine months. So far, Groundfloor investors have averaged 10.5% in actual returns to date.
How much does Groundfloor cost?
Groundfloor does not charge investors any fees. Instead, it keeps the spread between what it charges borrowers and what it pays you. Additionally, Groundfloor charges borrowers a $250 application fee, $1,250 in closing costs, and between 2% to 4.5% of the loan amount as an underwriting fee.
How to sign up for Groundfloor
Here's how to open a Groundfloor account.
Go to the Groundfloor website and click on "sign up." After providing your name, email address, and password, your account is registered.
You do have to answer questions about whether or not you're an accredited investor. However, you do not need to be an accredited investor to invest with Groundfloor.
Your account is approved right away. You can start investing once you link a bank account, provide your Social Security number, and transfer money from your bank account.
Other investment platforms to consider
After reading this Groundfloor crowdfunding review, you may be unsure whether it is right for your investment goals. There are other crowdfunding platforms available for investors who want to diversify into real estate. Fundrise and DiversyFund are two of the best investment apps because they allow investors to participate in the equity appreciation and rental income of their real estate opportunities.
Fundrise is a crowdsourced real estate platform that invests in both commercial and residential projects. It offers multiple levels of investment designed to fit the needs of differently experienced investors. You can start investing with just $10, then open additional functionality and investment opportunities as your account balance grows.
Read our Fundrise review.
Another real estate option is DiversyFund. It offers a real estate investment trust (REIT) fund that specializes in multi-family properties. Investors can open an account with $500 and have access to the same investments and functionality as someone with a much larger portfolio. At DiversyFund, all investors own a proportional interest in all of the properties within the REIT.
Read our DiversyFund review.