295: How to Invest in Real Estate for Only $10

SHOW NOTES FOR EPISODE 295: HOW TO INVEST IN REAL ESTATE FOR ONLY $10

While attending Harvard, Brian Dally became fascinated with the opportunities afforded by the Internet.  But, unlike Mark Zuckerberg, his fascination was not so much based on social applications but more on the business and finance applications.  In this podcast episode, Brian shares how he was able to develop an online real estate investing portal that gives the average investor access to the types of financial returns previously only available to high-end investors.

What You Will Learn

• What is a “Disruptive Technology” and how can it help consumers?
• Why the 2007-2008 recession helped spur a new type of investor
• How regular investors can now access the types of financial returns only afforded multi-million dollar investors
• What is one of the biggest mistakes that most investors make?
• Why many people don’t lend out hard money
• How you can earn 8-12% by investing in 100 different real estate projects at once for only $1,000

About Our Guest

Brian Dally

Brian Dally is the co-founder and CEO of GROUNDFLOOR, a real estate investing and lending platform that opens private capital markets to all. Under his leadership, GROUNDFLOOR became the first and only company qualified by the SEC to offer real estate debt investments via Regulation A that are available to non-accredited investors.

Brian’s 15 year career building disruptive technology startups spans stints in Silicon Valley, Boston, London and the North Carolina Triangle region. 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 from the University of Virginia.

More About Brian

• Grew up in Winston-Salem, North Carolina
• As a kid, he wanted to live anywhere in the world but where he grew up
• However, he returned to North Carolina as an adult and has been living there for the past 15 years
• In high school and college he played around writing software
• In the 1990s, he got bitten by the Internet bug
• While he was attending law school, he took on his first website project just as a way to learn how to write software for the web
• He has been working on Internet businesses ever since
• Went from Austin to Chicago to Silicon Valley to London launching new tech start-ups, finally ending up in Atlanta to launch GROUNDFLOOR
• He saw a lot of opportunity in an area he loved so he pursued it

Creating Disruptive Technology Start-Ups

• Brain first heard the term “disruptive technology” while he was attending Harvard Business School
• The person who popularized the term was a guy named Clay Christianson, one of Brian’s professors at Harvard
• The term means “a technology that, at first, does not appear to be very threatening by incumbents.  It’s viewed as being under-powered and that it doesn’t do very much.”
• For example, it’s like how Amazon was viewed when it first came on the scene.  Everyone thought Barnes & Noble would kill Amazon early on.  Amazon was a “disruptive technology” because everyone looked at it like it wasn’t a threat.
• But the truth about most disruptive technologies is it they do one job very very well.  And that job grows and expands and becomes more important over time.  And it becomes more important than people would have every expected over time.
• That’s what he found very exciting about the Internet.  It’s an open platform where people can innovate quickly.
• Technology to many people may seem like insignificant little toys, but time has shown how tech can grow into important factor that can have a significant impact on our society.  And it has proven so in every industry over the last 20 years.
• When he started GROUNDFLOOR,  people doubted that the Internet could be used to finance much of anything but today people think differently and are asking “how much more can it finance and what will it look like?”

Republic Wireless

• In the beginning, Brian and his partners called the Big Four wireless companies “Big Cell”
• In his preliminary research, he found that most people didn’t like being locked into the Big Cell contracts only to get wireless phone service that was very expensive fraught with problems.  But people grew to rely upon on it and, the more reliant they became, the more frustrated they became
• American consumers today have never had more power and information to change the landscape than ever before
• The people he researched said, “yes, we need access to regulated spectrum and cell towers while you’re driving around town, but 80% of the time we are around WIFI networks that we can access and that are good enough to do the job most cell phones were designed to do.”  They said, “wouldn’t it be amazing if you could pay one tenth of what the Big Cell was charging but not be locked into their contracts?   We could enjoy our phone service on WIFI most of the time but can fall back on the Big Cell technology and cell networks whenever we need it.”
• So, back in 2011, he build a very powerful concept founded on that premise upon which Republic Wireless became today — another “disruptive technology”
• It was the most successful thing he had built in his career up until now with GROUNDFLOOR

The Founding of GROUNDFLOOR

• Brian had spent 10 years in the wireless industry and he was looking for a new industry to move into
• He felt like what he saw in the wireless industry was true in other industries
• In 2010, he started interviewing people, asking them “what products and services do you use that you really need and find value in that are frustrating to you by the way they being provided?”
• He made a long list of these products and services and “finance” kept coming up.  The finance crisis in 2008-2012 impacted many people negatively – people felt that the game is rigged against them when it came to saving and investing, that public markets are no longer trusted, that intermediaries that you utilize in order to over come that are expensive or can no longer be trusted or are frustrating or not accountable
• Brian became interested in how the Internet could be used to overcome some of those problems and do the job better in helping us save more and invest better with less risk
• Many people are frustrated that they must take on so much risk for so little reward BUT it isn’t true if you happen to be one of the 4-5% Americans who has already made it and is a client of Goldman Sachs, where he financial world is your oyster.  But for the rest of us, we’re left with something that is a lot less compelling
• Brian had a personal interest in that he bought his first mutual fund when he was 15 years old and he has had an affinity for investing

Investing in Real Estate

• In the beginning of their research, they made a list of 20 different categories of investments, some of which were real estate, that they felt a product could and should exist
• But they found, in talking to people, that people felt the best investments, with the best benefits and returns, are in real estate.  And people really do understand it because between 60-65% of Americans are already investors in the asset class of single family housing because they are homeowners
• People who invested in REITs (Real Estate Investment Trusts) were finding that their funds were tied up and they had no access to those finds

How GROUNDFLOOR is Different From Other Crowdfunding Platforms

• He feels that GROUNDFLOOR puts the “crowd” back in crowdfunding
• The crowdfunding space, in the beginning, was primarily for Accredited Investors, those whose net worths were over $1 million and/or had incomes of $200,000 per year
• He asked, “What about the other 96% of US households who are not Accredited Investors?”
• GROUNDFLOOR is the only issuer that has been qualified by the SEC to offer a “direct participation” security in real estate
• With GROUNDFLOOR, investors with as little as $10 per property or per loan, can invest and build their own real estate portfolio – no one else offers this
• And because they are qualified by the SEC, investors can learn everything they do to screen their investments and how they disclose what they learn.  It’s all in a consistent, rigorously applied formula that they have to adhere to under the regulations that are applied to their qualification

Investments They Offer

• On their platform they offer a range of investments rated on a risk grade from A through G.
  • “A” grade investments are lower risk because a borrower has more experience, less leverage on the property
  • A grade “G” investment may a riskier or more speculative investment, but with a higher yield – often house flips or new construction projects that are loans GROUNDFLOOR has made to a real estate investor who may acquire a property and fix it up and flip it or rent it out, refinance it or build from ground up.
  • Almost all are single family housing projects
  • Have done some multifamily (biggest is a 20-door deal) in selective markets
• The terms are typically a year or less – often 6, 9 or 12 month terms
• The yields range between 8 and 12%, depending on the risk grade
• High yield, short term investments in a category that most people understand, at a price point of only $10, allows people to diversify across a broad spectrum of projects to build their portfolios without a large amount of money and to have multiple maturity dates, making their investment funds available on a regular basis
• When I loan is paid off, your funds go into a FDIC insured account to reinvest or withdrawal

Criteria for Borrowers on GROUNDFLOOR

• GROUNDFLOOR qualifies borrowers on their platform based on the…
  • Plan for the project (does it make sense)
  • Experience
  • Intensity of their project
  • Prospect for the project’s success
  • Collateral in the property
  • Can they achieve an “exit evaluation” that will yield a fair return
• They turn down a lot of loan applications if the business case does not make sense
• They have “institution grade” lending criteria.
  • They do background checks
  • Check credit history
  • Pattern of repayment to lenders
  • Look at the person, the plan and the property (collateral)

Looking at Current Economic Factors

• Every phase of every market presents opportunities for the right investor
• They look at every locality where they lend
• Make sure they understand the dynamics there
• They key is to make sure you are prepared for what is coming
• Focus more at in-town, urban infill projects
• GROUNDFLOOR only does new construction projects in areas where they know there will not be a glut of supply and only with independent builders who are working at a lower volume or scale where they won’t get over-extended
• They did a pilot project for new construction around their hometown of Atlanta to better understand the product, how it will sell well, etc
• Another important aspect of their service is how well they manage after the loan.  They service and asset manage everything they do as well as a business, before they scale something up and start selling some of these projects to investors.  They want to make sure they fully understand how to be successful at it

Biggest Mistakes of Passive Investors

• Putting all your investment dollars in one project or investment, without diversifying
• Conversely, he has found that investors on GROUNDFLOOR, who diversified and invested in 20 projects, averaged between 8-12% returns

Investing Options

• Can invest $1,000 in 100 projects
• Can link to a self-directed IRA and have check writing access to you funds

Advice for Old Dawgs Interested in Investing in Real Estate Investing

• You should have lots of different investments with a variety of risks and return and cash flow profiles

What’s Ahead for GROUNDFLOOR’S Future

• Just celebrated their 6 year anniversary
• Recently took their company public in a stock offering
• last year, 2,300 people invested $4.2 million and now own 14% of the company
• They are opening it up again this year
• Started with only flips, now have more variety of projects and hopefully more to come

Why Many People Don’t Offer Their Own Hard Money Loans

• Miss out on the diversification aspect – spread funds out
• How do you know who to lend to?

Can You Borrow Against Your Investments?

• That is something they are currently looking at

Rap it Up

• Favorite real estate book: Mastering the Market Cycle by Howard Marx
• Favorite general business book: Shoe Dog by Phil Knight
• Most valuable website for success (other than your own): BiggerPockets.com
• Favorite app: Audible
• Favorite Quote: “I hold it at a little rebellion now and then is a good thing.” – Thomas Jefferson
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business?  He would invest in 100 projects in GROUNDFLOOR at $10 each.

How You Can Reach Brain

• Email: Brian@GROUNDFLOOR.us
• Website: GROUNDFLOOR.us

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