We recently performed an analysis to quantify the effect of diversification on Groundfloor returns. The analysis is based on data for over 2,400 individual portfolios reflecting the allocation decisions made by our investors over time. Here are the results.
The past few months have been busy for the team here at Groundfloor. We’ve been focused on improving the investor experience. And we are pleased to announce the launch of the #1 most-requested product feature from Groundfloor investors - IRA investing.
--- IRAs ---
We are coming out of our alpha testing phase and are now rolling out the self-directed retirement accounts more broadly. The regulation of IRAs and 401k accounts can be complex, so it’s taken us some time to work out compliance kinks with our custodial account provider, IRA Services Trust. Based on our first round of learning with a handful of early adopters, our software team has now soft-launched a new, integrated IRA account setup wizard. To access it, click the new person icon that appears in the top right of your screen once you log in (or click the image below).
So far, we think it’s working pretty well for most people and for most account setup scenarios. Let us know what you think. You can click here for IRA FAQs, and we have specialized customer support to help and want to make sure all your questions are answered for what can be a complex process--but also a rewarding tax-advantaged one.
IRA Special Offer: As with most IRAs, there will be fees for IRA account maintenance. We will waive these fees for life for our initial IRA investors who transfer and invest more than $10,000 in their IRA accounts by July 31, 2017.
--- Other Developments ---
More Loans. Lots More.
After a temporary slowdown, our legal team finally caught up with the lending team. We’re now offering more loans than ever. In May, for example, we were able to offer as many loans in one month (20) as we had year to date. That’s great news for investors. An internal analysis we recently produced shows how much increasing the number of loans in your portfolio can substantially reduce variations in expected returns and timely repayments. We’ll have that data ready to share soon.
Based on investor feedback, we’re improving our bi-weekly loan updates and monthly statements. Loan updates now include a reminder of when you invested in each loan and when the loan is due for repayment, along with the most recent information on project progress. While you may notice we’ve also made a few tweaks to our monthly statements, a significant overhaul and redesign is underway. When it’s done, that will provide even more information about your Groundfloor portfolio and how it is performing.
We hope you will take advantage of these improvements and those to come. Our team thrives on customer feedback--positive and constructive alike. Feel free to comment here or email us at email@example.com and we’ll be sure to respond and pass it along.
All the best,
Brian & Nick
Groundfloor aims to offer investors a full spectrum of risk adjusted returns; from 5.5% to almost 25%. As basic finance theory instructs, investment returns should increase as the risk of a given investment increases. This post illustrates the risk, and the results, of investing at the upper end of the yield spectrum by describing the performance of the loan on 4626 Brooks St., NE in Washington, DC.
Priced to yield in excess of 23%, we are now reporting that we expect this loan to experience a significant principal loss. This is just our second loss out of over 100 loans repaid since we began lending over three years ago. While some losses are to be expected in any portfolio, we think losses are opportunities for self-examination on the part of our lending team, as well as our community of investors who build portfolios of loans with us. This loss, which is expected to total $65,900, will upon realization represent a 0.22% reduction in our overall portfolio performance since inception.
We know most startups in the "real estate crowdfunding" market have shied away from this kind of transparency. Not at Groundfloor. We are still the first and only issuer of a direct real estate debt security that is publicly regulated by the Securities & Exchange Commission (public filings are available here), and the only one that is open to the non-accredited 95% of U.S. investors. We submit to a higher standard of public disclosure. When something goes wrong, we go beyond what we're required to disclose to share the details behind the numbers presented in our monthly performance filings.
Groundfloor’s $97,000 loan for 4626 Brooks St., NE was originated on January 11, 2016 to finance the on-going renovation and expansion of a single-family house. It is subordinate to a first mortgage loan from F & N Enterprises, LLC. The $145,000 first mortgage loan closed on January 27, 2015 to fund acquisition and renovation of the property. Repayment was expected through a sale of the property upon completion of construction.
Groundfloor’s $97,000 was comprised of the following elements:
- Settlement Charges: $9,725.01
- Borrower Cash Out: $1,774.99
- Renovation Escrow: $85,000.00
The total project capitalization ($254,000) consisted of:
- Borrower Equity: $12,000 (4.7%)
- First Mortgage: $145,000 (57.1%)
- Groundfloor Mortgage: $97,000 (38.2%)
The $360,000 estimated After Repair Value (ARV) yielded an estimated leverage of 95.3% Loan-to-Cost (LTC) and 67.2% Loan-to-Value (LTV). Given the extremely high LTC, the loan was considered very high risk and was accordingly rated “F” on Groundfloor’s “A – G” scale. The speculative nature of the loan was reflected in the 23.8% interest rate.
OUR ASSET MANAGEMENT ACTIONS TO PREVENT LOSS
Over the course of the project, Groundfloor disbursed 9 draws totaling $53,400, leaving a balance of $32,100 in escrow. We subsequently received notice that the borrower had encountered problems with structural systems and related permitting. Groundfloor promptly terminated further draw disbursements, met with the borrower and inspected the property. Subsequently, the borrower defaulted on the first mortgage.
Groundfloor consulted local Washington, DC counsel to advise on various workout options and strategies to engage the first lien holder in a cooperative resolution. Groundfloor and the first lien holder engaged in negotiations to structure a resolution that could yield the maximum recovery. Valuation information obtained by Groundfloor, as well as the first mortgage holder, indicate there is insufficient value in the property to pay off both loans in full. In fact, there is insufficient value to satisfy the first mortgage holder’s full legal balance. Given the senior lien holder has first claim on the collateral until a full payoff is realized, it is clear Groundfloor has virtually no negotiating leverage.
Ultimately, the lenders did not reach agreement, and the first lien holder notified Groundfloor this month of their intent to foreclose. The foreclosure is scheduled for June 19, 2017. Groundfloor expects its second lien to be extinguished upon foreclosure by the first lien holder. The remaining escrow funds which we held pending completion of the construction will be returned to investors, net of our costs incurred to recover additional balances.
SUMMARY AND CONCLUSION
Projected Loan Performance
- Loan Amount: $97,000
- Undrawn funds in escrow (LIP): ($32,100)
- Recovery expenses: ($1,000)
- Net Recovery: $31,100
- Principal Loss: $65,900 (67.94%)
Groundfloor was aware of the risks in the transaction and priced the loan accordingly. The risks were disclosed to investors. Nevertheless, we continuously strive to utilize negative experiences to improve our product. For example, we decided last year, well in advance of any problems with this loan, to discontinue offerings of junior lien loans. We hope to reintroduce them as we continue building loan volume. A larger number of available loans facilitates greater diversification of investor loan portfolios. It also makes concentration in higher risk offerings such as 4626 Brooks St less likely.
Despite this loss, Groundfloor continues to deliver an outstanding value for investors. As the only path for non-accredited and accredited investors alike to participate directly in loans backed by real estate, we’re especially proud of the 12.78% annualized net return (including this loss) that we have generated for our investors on average through over 100 loans repaid to date.
That's the net rate of return overall -- for all of our loans that have repaid so far, assuming an equal amount of investment in every one. How about second lien loans like 4626 Brooks? We've made 11 other loans in junior lien position. All of the others have already returned principal and interest in full. This loan is the only second lien loan that did not. That will be of little solace to investors who concentrated their investments with us in the one that didn't repay in full. But investors who diversified by investing an equal amount in all 12 of our second lien loans earned a net annualized return of 14.19% on that group of loans taken together. If there's a silver lining in this news, that is it. Second lien loans as a group delivered 1.41% more yield than the overall portfolio. That's a quantification of the reward for the additional risk.
We appreciate the trust and faith of those who have been with us since the early days of our national expansion over 18 months ago. And we look forward to growing and welcoming many more investors in the year ahead. As always, whether you invest with us yet or not, we welcome your feedback, critical commentary and suggestions about this loan or any other topic below in the comments, or by email directly to me at firstname.lastname@example.org or Brian and Nick at email@example.com.
We recently announced the availability of one of our most frequently requested features, the ability to invest in Groundfloor loans via self-directed Individual Retirement Accounts (“IRAs”). That’s exciting for two reasons.
Reason #1: The Impact
First and foremost, opening up investing with Groundfloor via Individual Retirement Accounts is an important milestone toward fulfilling our purpose. Merrill Lynch and AgeWave recently found that one-third of Americans have nothing set aside for retirement, and another 23% have less than $10,000. You don’t have to be a financial advisor to know that's not enough.
Why don’t people have more? It certainly isn’t for a lack of options. Many just don’t have the expertise to navigate public markets and don’t trust the intermediaries who would do it for them. Developing the discipline to save your money is hard, but it’s even harder for those who feel that investing is too complex or that the system is rigged against them.
We started Groundfloor to solve those problems by taking private lending public. Our unique offering, the only one of its kind in real estate to be qualified by the U.S. Securities & Exchange Commission, allows everyone to invest directly in private loans with attractive returns. For the first time ever, with Groundfloor you don’t need to be a wealthy accredited investor to participate and earn high yields on favorable terms. Accredited investors also appreciate that we offer the only publicly accessible and regulated way to participate with full disclosures and compliance behind it. There’s no fund manager taking a big chunk of your profits here. Our investors build their own portfolios. We make that as simple and fast (and profitable) as possible.
Now, with the launch of our IRA investing, all of that goodness is available with the benefit of tax-advantaged retirement investing. We hope that for millions of people this will be refreshing, motivating and encouraging — enough to kick their retirement savings into high gear. This also means we can start solving a critical societal problem together, one do-it-yourself retirement portfolio of private real estate micro loans at a time.
Reason #2: The Implications
Second, we’re excited about this news today because of what it represents. Groundfloor has come a long way. Back when we started in 2014, we offered just 20 loans for $1 million over that first year. Two years later, in just one month (December), capping off a momentous 2016, we offered 40 loans for $4.5 million (that’s over four times as much in one twelfth the time).
This is important because we didn’t build Groundfloor to funnel big dollar investments into meeting a funding goal for any particular loan, but to enable investors to build well-diversified portfolios within a given asset class. Our product and our operations have always been designed with this end in mind, and it’s working.
Since increasing available loan volume, we’ve seen the average investment per loan decrease to $450 from over $1,000, but the average total investment per investor increase to $2,500 per month. We’ve cheered this development. Our original vision is well on its way to being realized. The volume of loans we’re now offering is ready to support retirement investing, with the bigger account balances and broader allocation that comes with it.
How To Take Part
The administration of self-directed retirement accounts is complex. To help manage the process, we’ve partnered with IRA Services Trust Company as our first supported custodian. With 35 years of experience and the most advanced technology of all the alternatives we considered over the past year, we trust them to provide a reliable backbone for administering our investors’ most important assets.
Starting today, we are gradually extending invitations to existing Groundfloor investors who complete this survey to indicate interest. Within 24 hours of announcing it, we already have hundreds of responses indicating many millions of dollars of interest. As expected, self-directed retirement investing is in high demand!
Our first wave of participants will receive invitations this week. We’ll expand in the coming weeks as we continue to refine the investor experience and make process efficiencies to serve you well. We’re also working on increasing loan volume to accommodate the additional demand.
In the meantime, we welcome questions, comments or feedback via the comments below or via email at firstname.lastname@example.org. Whether you’re new to retirement investing and looking for a way to start, or eager to reallocate a portion of your existing holdings, we’re here to serve you.
We’re often asked, “How’s Groundfloor doing as a company?” Looking back on 2016, we’ve prepared an infographic to answer that and provide some additional commentary that will help put the data into context. There’s never been a better time to be an investor or a borrower with Groundfloor. Having delivered on our promise of more loans in more places in 2016, we have big plans for 2017.