Want to earn 10% or more on your money? Become a hard money lender! Typically you need at least $50,000 per loan. Oh, and you’ll have to find borrowers, vet the deals, hire an attorney to review the documents, and so on.
Fortunately, Groundfloor.us has changed all of that. They bring the deals to you, handle all the details, and let you start with as little as $10 per loan!
The moment I discovered Groundfloor I opened an account. Soon I was investing $500 at a time in various loans. I still have investments there. I love almost everything about the platform, and yet… I may call it quits.
I’ll explain why in a moment, but first let’s let’s back up, and answer the question…
What Are Hard Money Loans?
Hard money loans are high-interest short-term loans backed by real estate. The most common users of “hard money” are investors who buy, rehab, and then sell houses and condos.
Banks often won’t loan on speculative “flips” like these, and in any case they can be too slow to close a loan. That’s why there’s a need for hard money lenders.
For example, when we lived in Florida, my wife and I loaned money to a couple who flipped homes. They covered all of the loan closing costs and, of course, signed a mortgage.
We received interest-only payments monthly, at a 10% annual rate. Then the loans were paid in full when a property was sold, typically in less than a year.
We loaned a maximum of 70% of the ARV (after repair value) of the property, and we never lost money. In fact, these were the best investments we’ve made. On the other hand, we never felt entirely comfortable risking so much of our savings on each loan.
We would have preferred to invest a smaller amount into each of many loans. The ability to diversify like that is my first answer to the question…
What Makes Groudfloor So Great?
Plenty of other other crowdfunding websites pool investors’ money. For example, you may have heard of Lending Club.
In a typical transaction there a borrower might get a $10,000 loan at 12% interest, to consolidate credit card debts, and that loan is funded by hundreds of investors like you and I, who can buy into it one $25 note at a time.
Groundfloor is similar, but the loans are secured by real estate. There are usually examples of current offerings on their homepage, and you can sign up for an account (no cost) to see loans that have been made as well as those currently being funded.
What Kind of Deals Do They Have?
Lately there have been about five or six new loans weekly. They tend to get funded quickly — sometimes in minutes, and almost always within a few weeks.
As I write this there is only one loan in funding. It’s a nice-looking home in a Las Vegas suburb. Here’s a quick look at some of the information offered:
- Rate: 11.5%
- Projected Term: 12 months
- Loan To ARV: 70.38%
- Remaining Amount/Days: $210,540 / 19 days
- Investors: 711
- Purpose: Purchase & Renovation
- Loan Position: First Lien
- Total Loan Amount: $573,630
- Repayment Terms: Monthly payment – interest returned monthly, principal due at maturity.
At first glance I would pass on this one because I like the less-expensive homes, but that’s just me. I’m guessing we’re near the top of the cycle, and expensive homes are the hardest to sell when prices start to falter.
But there is much more information given. For example, a certified independent appraisal puts the ARV (after repair value) at $815,000. The borrower will have $88,500 of her own money in the deal (I love to see that), and she has some experience flipping homes.
Over time you’ll see a variety of houses, condos, duplexes, and more. There are a few photos, and you can Google the address to drop in for a street view if you like.
The properties are geographically diverse. I’m currently invested in loans on homes in Florida, Georgia, Illinois, Nevada, and Alabama.
How to Invest On Groundfloor.us
The easiest way is to fund your Groundfloor account is to connect a checking account. That may take a few days but, once done, an ACH transfer is a click away, and the money usually clears in two days.
Once you have money in your account, you can browse the available investments, and when you see one you like, click the “Invest Now” button. Then you’ll choose how much to invest, ranging from $10 to the total in your account, and hit “Confirm Investment.”
Your money won’t actually be invested until the loan is completely funded, which might be hours, days or, at most, weeks. I haven’t seen one fail to fund within the 30 days allowed, but if it happens your money is simply released back to your account.
Once your money is invested you’ll be notified by email. If the loan terms include monthly interest payments, you’ll see those show up in your account regularly, but many loans have no payments due until the whole balance with interest is paid off. In that case you won’t see any activity until the borrower completes the project.
There are updates posted on the website, if you care to monitor the progress. Personally, I don’t care if the new granite counters have been installed or the home is near completion. There’s nothing you can do but wait for the payoff anyhow.
What I Really Love About This Platform
Having the loans backed by real estate makes Groundfloor a step above other crowdfunding platforms. Here are some of the other things I love about it…
Non-Accredited Investors Can Use It – Other real estate crowdfunding websites, like Lending Home, for example, are for accredited investors only, meaning you need more than $1 million in liquid assets or over $200,000 in annual income for the last two years. Groundfloor has no such requirement, and the founders are committed to serving non-accredited investors.
The Low Minimum Allows for More Diversification – I put $500 in each loan, but you can start at $10 each, which allows you to spread your money and risk. In fact, I checked, and if you had simply invested an equal amount into every loan since Groundfloor started, you’d be doing great, even after the few defaults they’ve had.
Geographical Diversification – I suspect some loans will be in trouble when tough times come again, but those tough times hit different areas differently. I like the fact that I can reduce risk by investing in loans on properties all over the country.
Groundfloor Works Hard To Collect – The various reports and offering circulars make it clear that there have been late payments and defaults, but Groundfloor works with the borrowers to get paid in full, or to limit the losses. As of the end of 2017 only 2 loans had suffered a loss of principle. That’s not bad.
They Have The Necessary Information – Some people might like to see more information and photos for each loan, but I think Groundfloor has the key data needed to make a decision. For example, in addition to everything mentioned above, they also note if the borrower has used the platform before and paid off the loans on time (I love to see that).
Great Investment Returns – Who doesn’t like the idea of making 10% to 14% (okay I invested in a couple ultra-safe loans at 8%) on their money — and with real estate backing the loans?
It’s So Easy – The website is well-designed, so my wife and I can lay in bed with the laptop and look at the available loans and click, click, click, we’re invested. It’s also easy to move money back and forth between the platform and our checking account.
Groundfloor Pre-Funds Loans – I like the fact that Groundfloor typically loans the money first, and then offers the loan to us investors a few weeks later. I figure that, since they could be stuck with a loan, they have an incentive to keep their standards high.
What I Don’t Love About Groudfloor
I’m only a few months into this. I’ve invested in a dozen or so loans, either putting $500 or $1,000 in each. It’s been easy, and fun — a treasure hunt to find the gems among the loans.
But one thing I disliked about the investments themselves is that three of them were repaid in less than two months. That’s bound to happen. The borrowers want to flip the properties as fast as possible to reduce the loan cost and maximize profits.
But do you know what 11% interest is on $500 for six weeks? It’s $6.84! All my research (well, 15 minutes anyhow) for that? I guess the lesson is to set some basic decision-making criteria and limit the time spent on research.
Otherwise I have nothing negative to say about my experience so far. But that doesn’t mean I’ll keep using the platform, which brings us to…
Why I May Be Done Investing With Groundfloor
When you loan directly to house flippers you get a mortgage in your name. With Groundfloor you buy LROs, or “limited recourse obligations,” which basically means you get a promise from Groundfloor Finance Inc. to pass on to you the interest and principal from borrowers, according to how much you invested.
It makes sense. As a practical matter, they can’t put 700 investors on a mortgage document, and then try to get 700 mortgage releases signed and notarized when the loan is paid off. So mortgages are in the name of the company.
I have no reason to distrust their intentions, but a lack of direct collateral means we investors rely on the survival of Groundfloor Finance. I’m not sure what happens to my investments if they fold up shop.
They have been around for 5 years now, but they’ve never made a profit. If you dig through the various offering circulars and other documents you can see that they’re losing millions per year.
They lost $1.9 million in 2015, lost $3.7 million in 2016, and lost almost $2 million in the first six months of 2017. In response to a question about those losses, CEO Bryan Dally says:
“…we’re certainly not the first startup to be unprofitable for a number of years during its development and/or scaling phases, nor will we be the last… Were Groundfloor to go out of business, any uninvested funds on hand are FDIC insured and held in your name, not ours. Your investments in Limited Recourse Obligations (LROs) would be subject to a resolution process as any other obligation on our balance sheet. Understanding the “platform risk” is an important part of investing with any platform such as Groundfloor. These risks are detailed in our LRO offering circular and other filings with the U.S. Securities & Exchange Commission.”
“Platform risk.” That’s my real concern.
Groundfloor has raised over $10 million in various rounds of venture funding, and even turned to crowdfunding on their own website to raise $7 million in a stock offering. But if they can’t figure a way to make a profit from the loans, all that money just buys time.
I feel safe for now because they’ve raised enough money to survive multi-million-dollar losses for a couple more years. But I’m skeptical about them ever making enough loans and collecting enough fees from them to cover their expenses.
I really hope I’m wrong. For now I’m letting my investment wind down, but honestly, I would love to keep investing on Groundfloor. In fact, if they do become profitable, and if it seems likely they’ll stick around, I’ll be ready to invest even more with them.
If you have some experience investing on Groundfloor.us please share your experiences with us below … and keep on frugaling!