By David Drake
GroundFloor, a peer-to-peer real estate lending platform, is launching a landmark securities offering that enables crowdfunding of real estate transactions. This innovative move will allow approximately 43 million Americans in six states to invest in real estate in a way that wasn’t possible until now.
Lending money to a real-estate developer used to be something reserved for banks and other accredited investors. GroundFloor is changing the rules of the game, allowing individuals to become lenders in real-estate projects. The developers of such projects will pay investors interest on the loan just as they would a bank. This new initiative provides the general public with the opportunity to diversify their investments, without being limited by their income or wealth. Also, real estate developers will have access to a new way of financing their projects and ideas, which will stimulate new real estate developments.
Federal regulations generally define an accredited investor as someone with an annual income of over $200,000 or liquid net worth of $1 million. These regulations are keeping the vast majority of Americans out of real estate investing. GroundFloor came up with an interesting and novel strategy. Instead of waiting for new crowdfunding regulations promised by the Securities and Exchange Commission (SEC) that will supposedly allow non-accredited investors to participate in real-estate crowdfunding, the company decided to work within existing state laws. So far, regulators in six states (Pennsylvania, Georgia, Arizona, Illinois, Virginia and Massachusetts) authorized the company’s initiative to solicit residents’ participation in its deals.
GroundFloor’s initiative is granting access to virtually any person interested in real estate investing, regardless of their income or net worth. Anyone can become an investor and the minimum investment is $100. Loan terms vary from six months to five years. As for safety measures, the company has a thorough pre-screening process for developers before they are able to list their projects. Most importantly, the loans are secured by the properties themselves, which is not a feature of other platforms that provide equity in real estate.
GroundFloor concentrates on smaller, residential projects. The pilot project for this whole new real-estate investment philosophy was the renovation of a historical single family home in Atlanta by John Mangham, a successful independent developer. The project was listed in February, and 39 Georgia residents lent the developer $40,000 to complete the restoration. The cash was raised in just five days and the developer will pay to investors 8% interest on the loan.
After the success of the pilot project, GroundFloor has now expanded to five more states (Virginia, Arizona, Illinois, Pennsylvania, and Massachusetts). The long-term goal of the company is to make this type of investment accessible to all Americans.
Other real-estate crowdfunding platforms are relying on wealthy accredited investors to raise money for their projects. GroundFloor, on the other hand, is building a platform for the rest of us, where any investor can access quality real estate investment opportunities. GroundFloor investors will invest anywhere from a few hundred to a few thousand dollars, making a safe investment that will bring nice returns on short to medium terms (from six months to five years). In other words, the company is focusing on a new market, tens of millions of potential investors, and it might just be the boost that the real estate industry and construction industry really need to make a recovery from the recession.
This type of real estate investing comes with a series of advantages for both developers and investors. Developers gain access to funds more rapidly: let’s remember that the funds for the pilot project in Atlanta were raised in just five days! Also, the developers are no longer dependent on financial institutions or accredited investors, which allows them more flexibility and creativity in their projects. Investors, on the other hand, have access to a form of investing that is safer than stock market investing and more profitable than depositing money in a bank.
One more thing worth mentioning: this form of financing is a way of bringing ethics back to real estate. Communities are offered the opportunity to back up projects that bring them something valuable, instead of dealing with real estate projects drawn by huge corporate developers who are far removed from the needs of the community.
GroundFloor makes investing in real estate projects accessible to anyone, building the path to a new way of financing the real estate industry – more flexible, more transparent, more dynamic, and more importantly: open to all.
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos & Events. You can reach him directly at David@LDJCapital.com.