Tracking my experiments with two web-based real estate investing platforms: Groundfloor, which offers “hard money” loans to flippers and landlords, and Fundrise, sort of a REIT that allows investors to select properties individually. How’d they do?
Readers from last summer may remember my long series on Real Estate Investment Trusts (REITs) and their role in a Risk Parity portfolio. There were a number of “conclusions” for me regarding REITs: they are not actually all that uncorrelated with other equities, utilities are probably what you want if you think you want REITs, and that REITs don’t actually represent the housing market as you think of it. If you do want to track the housing market, you might want to look at investing in what I called semi-direct real estate investing. These are a big step removed from direct ownership of a property, but closer to the action than investing in a REIT:
In the article, I mentioned three such platforms: Groundfloor, Fundrise, and PeerStreet. Now, almost six months laters, it is time to check in on how they have been doing. Are these right for you? I’m not the one to say, but hopefully my own experience is instructive.
I started off with $500 in the account in late January of last year, and then went up to around $2,500 by late March. Since then, I’ve hovered between $2-3500, and currently have $3,170 invested. Here is my portfolio summary:
So, 75 separate loans (from $10 to $100 each), of which 33 have been repaid. On the repaid portion, I have made 9.9% return, and have in the process, experienced 4 defaults. The defaults represent 5.3% of my portfolio, which is higher than what I expected. I remember seeing somewhere that defaults were in the 1 to 2% range, though I couldn’t find that when I looked just now.
The biggest issue for me has been the number of loans whose term has been “extended.” When loans are made available, there is an expected term, anything from 3 months to 18 months. There will be a date of maturity listed with that, so when I was first on the platform, and just had a dozen or so loans, I’d track those maturity dates and check in a week later, expecting the repayment to have been made.
I quickly realized that it just doesn’t work like that. I have 23 loans that are now past their maturity dates, totalling $1,200 dollars. On paper, I’m still earning interest on those extended loans, so it might not be a big deal, but some have been extended so long that default must be on the table. One of my loans should have been paid back in April, but I’m still waiting.
I have contacted Groundfloor about it, and their response has been reasonable, but I do feel a bit burned by gross over-optimism on the expected terms of the loans. I know mortgage rates have been rising and markets have cooled in many places, so there’s a logical reason behind the struggles for some of Groundfloor’s borrowers, but 23 out of 75 is almost a third which have missed their targets.
Otherwise, I have been pretty happy with Groundfloor in terms of nuts and bolts. Their site is great, transfers to and from are easy and fast, and their customer service has been responsive and helpful. I am hopeful that the defaults are a matter of bad luck and the extensions are just related to the broader trends of the housing market, rather than flaws to Groundfloor itself.
Verdict: Three stars out of five. I’ll probably keep my target in the 2 to 3 thousand dollar range, in hopes that the extensions are just that. I did previously think I’d climb up to about $10,000 invested, but I’ll hold off.
If you would like to signup for Groundfloor, you can get a $50 sign-up bonus once you invest $100, and as part of the deal, I get $50, too. Normally, I don't have any referral links like this on my site, and it certainly didn't influence my review. But, since you, dear and enlightened reader, get the same financial incentive, I thought it ethical to include it.
I opened my Fundrise account in August, just as I was working on the REIT series, and put $1,000 in first the starter portfolio and then the basic portfolio. My goal was to get it up to $5,000 at which point I’d have the ability to select individual projects to invest in.
Since most of my Groundfloor investments are, the South, especially Florida and Georgia, my plan with Fundrise was to focus on commercial and industrial real estate in geographic areas other than where. Over the next few months, I had planned to get up to the $5,000 threshold to do that.
But right from the start, I had a lot of trouble with navigating the site due to the security measures. I realize that security measures are a good and necessary thing, but there is a real design flaw. It asks you to enter in a phone number, but doesn’t accept international numbers, but on the page, there is no alternative verification method offered or an escape out of that screen, so you’re just stuck there.
This meant calling in to sort it all out, and after the third time, I gave up and decided to ask for a liquidation. On the website, it said my value at that time was $980 or something, but if I requested liquidation, the actual amount would be lower. I expected this: I was only in the fund for four months and I understand that they’ll want to make sure there is a pain point for getting out. The actual payout was $915.18, plus $1.81 in dividends, so $916.99, a 8.3% loss. Not the end of the world, and at this point, I’m just happy to be done with it.
To be fair, the Fundrise customer service was fine, the website worked well once you got in, and it isn’t like Fundrise was deceptive or anything like that. It might work fine for others, and if you’d have happened to invest in Fundrise during a good stretch for REITs, I suppose the returns would be solid.
Verdict: Two stars out of five. Disappointing. I had been really excited about the possibilities for diversification and solid returns, but don’t see myself trying again with Fundrise.
Was having all the problems with Fundrise, so didn’t actually experiment with PeerStreet yet. May try again soon. Right now, my allocation to real estate is above my target, but if it drops significantly below, I’ll think strongly of trying my luck with PeerStreet. Their strategy is basically the same as Groundfloor, though, so I’m still looking for something that can provide access to commercial and industrial real estate projects, as Fundrise was supposed to.
Not quite what I hoped, but that’s the way investing goes. I think I’ll keep going with Groundfloor, look to start with PeerStreet in the months ahead, and will keep my eyes open for other platforms. I may just have to research and pursue traditional syndication deals. Those typically have higher minimums (~$25,000), and can have lock-up periods of three or even five years, so I’ll have to do more research before committing to these.