Investing in Real Estate Debt

Investing in Real Estate Debt

Investment portfolios should consist of assets that offer value appreciation and assets that offer yield. To achieve that mix, modern investors are looking beyond public debt and equities and into alternative assets. Americans ranked real estate as the #1 long-term investment over the past decade, and it’s usually considered the most popular alternative asset.

Investing in real estate takes many forms, such as rental property, shares of REITs, and real estate syndications. Among the different ways of investing in real estate, investors are increasingly considering real estate debt as a new way to diversify. The recent advent of fractionalization makes it easier than ever to access this part of the capital stack in the asset class, though there are still limited opportunities for non-accredited investors.

What is Real Estate Debt?

Debt financing is at the core of the real estate industry, and investing in it is often closer to a private credit deal than a traditional real estate deal. Typically, borrowers need money to purchase or renovate a property, with the property itself serving as collateral. They agree to repay the loan amount at a specified interest rate over a specified period of time to the lender, usually a bank or a private entity, but can also be an individual.

There are many types of real estate debt, from standard residential and commercial mortgages, to construction loans, renovation loans, land loans, with a myriad of different structures and terms. Often they are packaged into mortgage-backed securities, but those are generally only available to institutional investors. It is always important to understand the specific terms of any deal, including the interest rate, the repayment timeline, the position of the loan, the loan-to-value ratio (LTV), and in the case of construction or renovation loans, the after-repair value (ARV) of a property.

Most people associate real estate investing with equity investing rather than debt investing. Equity investing involves collecting rental income, paying for property expenses, and capturing the reward of appreciation or the downside of falling property values. Debt investing is more straightforward and offers steadier returns with both a lower upside and lower downside.

Why Invest in Real Estate Debt?

While the high interest rate environment has recently had the greater real estate market in a holding pattern, it has provided a boost to debt investors in the form of higher yields. Debt can be a good way to diversify your portfolio while providing a passive income stream. Real estate debt is also usually secured by a real asset, limiting the downside risk compared to common private credit deals where a company can simply go bankrupt. Often, investing into real estate debt deals requires less capital than real estate equity deals and also offers greater liquidity, with investment terms as short as a month.

There are, of course, risks associated with real estate debt, as there would be in any investment. The borrower can default on the loan, which is mitigated if the loans are secured by property. However, property values can decline, and if a property is underwater - meaning the debt owed exceeds the property value - not all funds may be recovered even in the case of a foreclosure. In the case of construction or renovation loans, there is a risk that the project stalls or is never completed. Typically, the higher the promised return of a deal, the higher the implied risk.

What does Groundfloor offer to investors?

Groundfloor allows everyone, including non-accredited investors, to invest fractionally in real estate debt and has a number of offerings.

The first, Limited Recourse Obligations (LROs), are all SEC-qualified, first-position loans that are backed by an underlying real estate asset. They grade each loan on a scale from A (lowest potential risk and return) to G (highest potential risk and return), here is a detailed look at how they arrive at the grade and their lending guidelines.

Groundfloor Notes are secured debt offerings with a set date repayment term, making them ideal for people looking for a consistent and predictable source of passive income. Standard Notes have 30-day, 90-day or 12-month terms, while Rollover Notes have 30-day and 90-day terms. Rollover Notes allow investors to have their principal automatically reinvested at the end of a loan duration.

Groundfloor also works with an IRA custodian, Forge Trust, to offer self-directed IRAs, allowing investors the tax benefits of an IRA. Groundfloor is currently waiving all investor fees associated with IRAs through December 2024.

Why Groundfloor?

For most people, investing fractionally or into a fund is going to be the only way to get access to real estate debt offerings -- very few individuals have the time or capital to originate loans themselves. The track record of the company you choose to invest in is of vital importance. Groundfloor has over a decade of delivering results to their investors. And the Auto Investor product means that you can let them do the work for you with the ability to fractionalize your investments down to $1.

For a very accessible, low minimum investment of $10, you can see stable returns with limited volatility and risk, and regular cash distributions. Short loan periods mean greater liquidity than most other real estate investments, and fractional ownership allows you to diversify your portfolio across hundreds of projects. Groundfloor’s mobile app is easy to use and allows you to track investments easily and makes sure you stay up-to-date on how they are performing.

Invest in Groundfloor

Every two years, Groundfloor offers equity in the company in a crowdfunding raise. Be on the lookout for this opportunity, which should be available in the near future.