625: High Yielding Alternative Real Estate Investments

SHOW NOTES FOR EPISODE 625: HIGH YIELDING ALTERNATIVE REAL ESTATE INVESTMENTS

Where can you invest in pre-vetted solid real estate investments and get a 12% return — without being an Accredited Investor and for as little as $10?  In this episode, Harvard MBA and JD, real estate investor, entrepreneur and CEO of Groundfloor Brian Dally, shares how anyone can get great returns with short-term investments and little cash.

What You Will Learn

• How you can earn an average 10% investing in hundreds of different real estate properties
• Is Groundfloor investing better than REIT investing?
• How investors can get funding through Groundfloor without monthly payments
• What the difference is between debt and equity investing
• How you can be the lending banker on high yield real estate investment projects
• Why Groundfloor is committed to make high yielding real estate investing available to everyone
• How you can earn 4-6% in a flexible “savings account” with full liquidity

About Our Guest

Brian Dally

Brian is a co-founder and director of Groundfloor and serves as our CEO. He is responsible for setting long term direction and goals for the company, executive management, financing, and strategic partnerships. Brian’s 20-year career building disruptive technology startups spans stints in Silicon Valley, Boston, London and the North Carolina Triangle region prior to moving Groundfloor to Atlanta in 2013. Previously, he led the launch of Republic Wireless to take on the big four cellphone carriers to international acclaim. As a result, millions more Americans can now afford a smartphone. Brian has a JD from Harvard Law School, an MBA from Harvard Business School, and a BA with Highest Distinction from the University of Virginia.

What Groundfloor Has Been Doing

• There has been considerable growth in the company since 2019
• However, Covid was a difficult time
  • It has had a number of effects on the company but mostly positive in the end
  • They learned a lot
  • What changed for them was that the institutions pulled the rug out of every loan originator he knew
  • 30% of their business was flowing to institutions
  • And it caused them, in March of 2020, along with the rest of their peers, to pause lending
  • It was a wake-up call for them
  • They pivoted their business to be 100% funded by retail investors
  • They launched a new product that enabled people to lend to Groundfloor so they could finance originations again
  • They saw a huge influx of new investors on their platform who woke up to the power of being a debt investor – to being the bank
  • The company weathered that season and turned the corner pretty quickly
  • By summertime, they started doubling their lending every month
    • They currently are lending $20-30 million a month
    • This is four times the lending they were doing before Covid
  • They went from 30 employees pre-Covid to 105 today

Growth and Partnerships

• Groundfloor has been around for 9 years
• They’ve stood the test of time
• And it was good to put the company’s model to the test
• Back in 2019, most lenders were experimenting with things like:
  • Selling whole loans to institutional buyers (Wall Street has a big appetite for what Groundfloor does)
  • Taking other forms of institutional capital and put it to work as a private equity fund, etc.
• Groundfloor was formed differently
  • They sell a security to an individual retail investor that allows anyone to participate in real estate investment loans with just $10
  • That means, if you only have a couple thousand dollars to invest, you can build a very well diversified portfolio with a couple hundred loans
  • Of course, most people invest more than a few thousand dollars
  • It’s a great way for people of all investing profiles to get to participate
• Today, they are lending four times what they did pre-Covid
• They went from 30 employees in 2019 to 105 today
• They now have tens of thousands of investors who power the platform
• They’ve recently took on a big strategic investment from a real estate investing entity that sees the future for capital markets the same way that Groundfloor does
  • The entity is going to put a bunch of money to work on their platform, right along side retail investors
• The company looks very different today in terms of size, scale and capability
• They’ve launched new products that Brian is excited to share
• The whole Covid/pandemic experience caused them to double-down on their mission
• They are financed in a very unique way
  • That’s the reason why they not only survived but thrived!
• They are able to do more with and for investors than they ever could before
• It’s been a very exciting and dynamic period
  • It’s good to be the bank – with a first lien position and a high yield loan
  • It’s also important to have sources of financing that are durable
  • Just because we have a market that moves sideways or becomes turbulent doesn’t mean there’s not good business to do

How Groundfloor Works

• They stand ready to fund real estate investment loans for single family residential new construction and renovation in 30 markets around the country
• They make a loan that’s typically around $200,000 but it could go as high as $1.5 million or as low as $50-75,000 on the low end
• They allow a lot more leverage than you’ll get from traditional sources
• And they have a key feature – they don’t require monthly payments on the credit
  • They let it balloon and collect all the interest at the end
  • That’s a welcome feature for those who partner with Groundfloor on their projects
• For people who are finding deals and want capital, Grooundfloor can be a key strategic partner
  • The reason that’s true is because they’re financed by retail investors
    • They qualified a security through the SEC back in 2015 that allows them to sell fractions of these loans, $10 dollars at a time, to anyone on the web
      • They have over 170,000 register through Groundfloor to invest
    • The pool of capital is deep and broad
      • It has a healthy apatite across the risk spectrum
        • Whether it’s a low leveraged loan to an experienced borrower at 6 or 7%
        • Or a high leveraged loan to a less experienced borrower, with collateral that might not be that well-margined, at 12%
• On average, Groundfloor loans yield investors an average of 10% per year on an annualized basis
  • And what’s special about it is that it is a no-volatility offering
    • Debt is inherently less volatile than equity
• This class of debt repays in 9-10 months, which is a very short term
• If you only had a few thousand dollars to invest and invested that amount in a few hundred loans, over a course of a few months, you’re always going to have yield coming back to you – there’s a lot of cash flow

How Groundfloor Offerings Differ From a REITs

• If you go to a REIT and you lock up your capital in a fund
  • The REIT gets your capital
  • They tell you when you can have it back
    • Their redemption period, if it’s not a public REIT, you can’t get your capital back when you want to
• You get, at your best, an 8% dividend
  • It sounds pretty good until you find out that you’re locked up with the core of your capital for a period of time
    • And you’ll be penalized for withdrawing it sooner than 3 years
    • That is not a good thing, in times like this, to have your capital locked up
• With Groundfloor
  • You’re investing in a portfolio of loans that you choose and you control
  • Loans are being paid back all the time
  • You could peel off 10% of your portfolio every month if you wanted to in steady state
  • And you are still earning 10%, not 8%
• Advantages of Groundfloor
  • You have the benefit of being in a first lien position
  • You have a short maturity
  • You have an exceptional yield that averages out to 10%
  • And it’s very predictable because the loss ratio is very low (below 1%)
• What’s special about Groundfloor
  • It’s a retail investor offering
  • It allows them to serve people who borrow capital from them in a better way than a traditional lender can
  • They have special product offerings like the Groundfloor Note
    • Open to clients who have been with Groundfloor over a year or if you’re an Accredited Investor
    • They are short-term notes – 30 or 90-days or a year
    • They are backed by a pool of loans that they’ve originated and are awaiting sale to retail investors
    • They don’t yield what the loans do because they’re shorter-term and lower-risk
    • It’s a great offering for people who want to park cash for a short-term – one, three months or so
    • It’s for people who don’t want to worry about picking and choosing properties and managing a portfolio
    • It’s more passive, pooled options available on the platform
    • There’s $60 million of capital from investors just in those notes alone
      • That’s what we use to finance the originations that they make every month
      • They use it as lending capital
  • They also have Stairs
    • They packaged it as an app
    • It allows you to invest a little bit of cash – without having to pick and choose properties
    • You don’t have to wait to withdraw money
    • It pays 4% interest
    • You can earn 6% if you sign-up for auto-investing and round-ups
    • You can withdrawal at any time
    • You’re lending it to Groundfloor so they can originate loans
    • It’s like a high yield savings account but it’s not FDIC insured
    • It is backed by a pool of real estate loans – which makes it pretty secure

Looking at the Market

• Brian is a big fan of real estate debt
• This is a market where we’ve seen exceptional price appreciation
• Houses are behaving like meme stocks and cryptocurrencies
• It would be very easy to be a bag holder on the wrong side of that trade. at this point in the market
• He thinks that the supply and demand dynamics tell us that house prices are not likely to plummet, in most market, and we can expect some stability
• But he thinks that we will probably revert to a mean of returns for equity holders in these markets, and that has probably already begun
• If you look at what builders are saying about how many buyers are lining up for projects and what the demand is like
• We’re still undersupplied relative to demand and will be for a long time
• But he thinks that will show up as some sideways price movement, at minimum
• And he thinks that the value just isn’t there to take the equity risk today – unless you are a value-add renovator or builder
  • There you can be rewarded for adding value
• But the idea of just simply speculating or taking a passive position in this asset close – he thinks it’s played out
• The debt investors will soundly thump the equity investors over the next cycle

How is Groundfloor Positioning for a Market Correction/Crash or Other Challenges

• Nobody knows what is going to happen
• If history is a guide, there will be a time when capital will be more scarce
• Groundfloor plans to be well positioned by making sure that they have plenty of capital to arm their strategic partners (borrowers, the investors who put money to work, etc.)
• The reason Brian knows that they will be is because their network is built like the Internet itself
  • One part/node of the the capital network may blow up but the great advantage of a network of anything is that it can withstand that type of disruption
  • It’s true of Groundfloor’s network
  • It was proven during Covid
    • They saw that in real time
      • Retail capital was pouring in
      • The “smart money” was running for the hills
      • The retail investor was right there at Groundfloor
  • The #1 way they are preparing to to make sure that…
    • they are properly capitalized
    • they have a broad enough capital network that is healthy and vibrant and available
  • The #2 way they are preparing
    • Double checking and “putting on belts and suspenders” in the area of asset management
    • They have become very rigorous in how they work with their borrowers to understand what’s happening out there
      • The effects of Covid are still there:
        • Labor shortages
        • Supply shortages
        • Delays in permitting
      • However, a positive thing is that their borrower’s houses sell faster and for more money!
    • Through this period, they’ve become stronger asset managers
    • The key trick with asset management is to really make sure you understand the position of the asset in the market that you’re in
      • Market locale
      • Market dynamics
      • They have built a large enough network of real estate investors in different areas of the country that they are positioning themselves to have enough scale and critical mass to be able to asset manage through challenging periods, like Covid
        • For example, in they launched a Joint Venture in Jacksonville, FL recently where they are very well represented in Jacksonville (as they are in Atlanta)
          • They will be doing this in other markets as well
• They are positioning the company by those two things and for whatever will come their way (pandemics, economic, geopolitical conflicts, etc.)

Blockchain

• Anyone who follows Brian on Twitter (Brian_Dally) knows he’s a big fan of blockchain technology
• He feels the jury is still out on cryptocurrency as a class, in terms of how they will have an affect on decentralized finance that they’re positioned to have
• He sees crypto as a generational change in finance
  • It’s important to how financial enterprises, funds and investments are managed
  • It’s important to how liquidity comes to bear
  • It’s important to how people even think about investing and ownership
  • There’s a lot of prospects for reducing friction in increasing agency
• Brian thinks decentralized is better
• He sees himself there for human agency – he thinks people are smart enough to make their own decisions, custody their own assets
• He doesn’t think a lot of the friction that our current financial intermediaries impose is necessary
• The world will be a better place when we remove as much of that friction as we can
• He’s looked at how they could incorporate cryptocurrency in what they do at Groundfloor
  • For them, it’s a long term road map
  • Right now, they’re looking at real customer problems that can be solved through the application of their new existing technology
• As a Harvard Law School grad, he sees Title as a big issue that he would like to be solved
  • It’s tough to unpack under its current incumbency
  • That’s a big one
• There’s problems that can be solved around secondary liquidity
  • With a distributed blockchain approach, Groundfloor is taking a measured stance toward it
  • He has a personal interest in it

Other Asset Classes

• They know the residential market very well
• They realize that what they do does very well in that market
• They’ve experimented with mutifamily
• They’ve considered experimenting with some commercial
• Anything a bank can finance at low scale, especially a community bank, Groundfloor’s model can finance better
• It’s just a matter of time before they move into other asset classes
  • They have an appetite for that
  • They are just waiting for the right entry points and the right adjacencies in the market
  • As they continue to scale in specific markets (like Jacksonville and Atlanta) and help activate a road map to move into other categories
  • They realize that they have a privileged position as a supplier of debt capital that they can be effective in a lot of categories because of their model

Debt Investing vs. Equity Investing

• Groundfloor is an equity investor
• A lot of people don’t know the difference between debt investing and equity investing
• We’re all conditioned into to thing that all investing is equity investing
• If you’re not a bank or private equity fund or family office, where you haven’t waded into the water by being a hard money lender, you really don’t know what investing in debt is
• It’s very uncommon for people
• But, as people become more oriented to it, they will realize that it should have a place in everyone’s portfolio
  • Groundfloor is dead serious about opening up this world to individual retail investors
  • They feel everyone deserves their fair share of that debt pie
  • They think it can have a huge impact on retirement portfolios, people’s ability to invest and provide for themselves over the long term (through thick and thin)
  • This is why they started the company
  • They have even opened up the company to their customers and it is now 30% owed by their customers

Learn About Debt Investing at the Groundfloor Blog

• They publish a lot of data that is very educational and interesting
• Every month, they publish an asset management report that shows:
  • What properties they have sold
    • Loans they repaid
    • The price that the property actually sold for and they compare it to the price they predicted
  • They are very honest and forthright and also show
    • What were their foreclosures
    • What were their defaults
    • What went right and what went wrong
  • They also publish portfolio data showing:
    • How their portfolio as a whole has performed (published twice a year)
    • How’s it going as a lender
  • They also publish their Diversification Analysis
    • Plots data from every portfolio (over 35,000)
    • On an X Y scatter plot
      • Y is the return, on average, the portfolio has earned
      • X is the number of loans that portfolio invested in
      • It’s great to see how predictable the returns are once you have a sufficiently large number of observations
• The blog is located at: Blog.Groundfloor.us

Where to Find Out More

• Website: Groundfloor.com

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