Brian Dally, GROUNDFLOOR
Innovation and Creativity in Real Estate Investing
GROUNDFLOOR is a real estate crowdfunding platform with a twist. First of all, they grade each loan that they make, which is an interesting differentiator, second, the minimum investment is $10, and third, they allow both accredited and non-accredited investors to invest. But what really makes them stand out is that even with only $10 you can actually identify a specific deal to invest in.
Brian is knowledgeable about what's going on in the market today, is an innovative and creative leader in the industry, and has fantastic insights into best practices for raising capital online, especially during challenging times. You are going to love what he has to say today.
What You're Going to Learn
- How GROUNDFLOOR Was Built for Times like This
- How Capital Markets That Are Built on a House of Cards Always Come Tumbling Down
- Where to Find Opportunity in Volatility
- Why These Times Are More Favorable for Experienced Investors
- How Good Entrepreneurs Spot Opportunities and Are There at the Right Time
- Why the Ten Dollar Minimum Investment is Genius
- How to Control Your Investment like a Fund Manager
- Which Capital Investments Lead to Explosive Growth
- Which Early Stage Capital Investments Lead to Explosive Growth
- And much more!
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We Were Built for Times like This
ADAM GOWER: You have a unique platform in the real estate crowdfunding space. But before we get into the details of that, there is a big banner on your website specifically that says, “We were built for times like these.” Tell me about that. What does that mean?
BRIAN DALLY: It's really good to be with you. I think this is a really interesting time for all of us in real estate and real estate finance. I met my co-founder in 2012. He had just finished working on the 2012 Jobs Act, which, of course, liberalized capital formation in a way that enabled different types of crowdfunding, actually. Real estate has been a very successful sort of story within that. Part of the reason that was all happening in 2012 is because of what happened in 2008 and 2009. Our company was born out of that. When we looked at what happened in capital markets during that time, we realized that part of the failure of capital markets then — and honestly, part of the failure in capital markets now with what's happened during the pandemic — is a structural one.
We had a very specific vision for how that structural shortcoming could be addressed and we created the company to do that. When we say we were built for times like this, what we mean by “times like this,” we mean in times when REITs have suspended redemptions, locking up individuals’ capital when they most need and want liquidity. When they as an intermediary, even a well-meaning or constructive intermediary, have put the hammer down of their intermediary power over their individual investors. When large institutions who buy paper, which originators like GROUNDFLOOR or others in our space might use in order to allocate capital to sponsors, you know what they all did? They stopped buying paper at precisely the time when people needed them to continue buying paper.
And they've literally locked up the market not because they thought the market was in trouble, not because of primary concerns about the health of the real estate market, but because they faced redemption requests. They faced margin calls and they faced fires in their portfolios. Those are not primary and substantively valid reasons. Those are structural problems. And I'm going to tell you, seven years into building this company — we know that the vision we had for retail investors having all the rights, prerogatives, opportunities and power on a level playing field with the hedge funds and the big banks — we were right, because you know what? Retail investors don't have margin calls, face liquidations. They don't have the same structural deficiencies and problems that institutions who are applying inappropriate levels of leverage to their funds have. So when we say we're built for times like this is what we mean: we think a capital market structured this way, the way the GROUNDFLOOR is structured, is more pliable, more durable, more flexible in times like this. And it's true, the data is bearing it out.
Capital Markets that Are Built on a House of Cards Always Come Tumbling Down
ADAM GOWER: Basically, what happened during the last downturn was the banks stopped lending. You had this desperate need for liquidity, but there was no liquidity. At the same time of course, retail investors couldn't do anything. There was no way of accessing these markets. There was no company like GROUNDFLOOR that was able to kind of intermediate between investors and borrowers and, in your case, single family homes — for that one guy in the audience that doesn't know that — single family homes. Have you seen the same with this particular downturn? Is that the same trend that you're seeing now? That banks have stopped lending and that you're filling a gap? Or are you seeing something different? Is it a bit different this time?
BRIAN DALLY: Different, it's different this time. It's always different. What's consistent is that capital markets that are built on a house of cards always come tumbling down. The way they come tumbling down, which Jenga block fails in the capital markets house of cards always is different. In this one, it's not the banks. It's not the banks that are at fault, especially in our market. The banks aren't lending in our market anyway. They don't make loans on individual short-term real estate investments, projects that are single family housing renovations. It's not a category in which they're acting. What happened here instead, is the large institutional buyers of paper who buy that paper from originators, stop the buying. And the other thing they started doing was requiring ridiculous terms like 12 or 18 months of interest coverage while simultaneously reducing leverage from a standard of about 65 to 70 percent to 55 to 60 percent. So the effective leverage would be less than 50 percent. That's very damaging to a real estate entrepreneur. The sponsors in our audience here know that. To not be able to achieve the leverage really limits your ability to take on projects. And by the way, that has a terrible effect on the economy as well. This all rolls three and six and twelve months downhill in a really deleterious way.
Opportunity in Volatility
ADAM GOWER: I went and had a look at SeedInvest and we'll talk about that in a little bit. Fabulous video there, I’ll definitely put a link to it on the Shownotes page. It’s a very good video. And one of the things that was mentioned in that video, I'm not sure if it was you or Nick, one of you said we see opportunity in volatility. Walk me through that from your perspective in this environment that we're in right now.
BRIAN DALLY: Sure. So, we offer a debt product. That's very different from an equity product. If you're an equity holder in a time like this you're in the first loss position. If assets decline in price or because of a liquidity crunch, they have to be sold at an inopportune time, you just think of having to sell a stock in order to pay your bills, for example. That’s a classic example. You can really lose a lot if you're an equity investor. By the way, as an equity investor, if you are buying at the bottom in real estate or any other category, you can gain a lot. That's one form of opportunity in volatility. Here's another one. When you're a debt holder, you have two advantages going for you. One, you're owed the same amount of principal back no matter how the price of the asset performs. Right now, that's an opportunity because you are taking less risk as a debt holder. But you are earning relatively higher returns on balance on a shorter timeframe than most equity investors are. When we think about opportunity in volatility there are two forms of that. One is, equity investors have opportunities if they're willing to take the risk. But debt holders have opportunities to make returns that are relatively high, relative what equity investors are taking for a much higher risk, just by being consistent through the process. The opportunity that we see in volatility is we see much better credits coming our way. More experienced borrowers. We see much better collateral coming our way. We see our borrowers who are the equity holders getting the buy for depressed prices and then making more profit and therefore helping us make loans that are fundamentally more secure. People kind of misunderstand. They think, “oh, volatility is scary and that's bad.” And that may be true if you're an equity holder who needs liquidity, but it's great if you're a lender. It's great if you're a lender.
These Times Are More Favorable for Experienced Investors
ADAM GOWER: Did I hear you correctly, that you said you are seeing higher credit borrowers bringing discounts or deals to you during this current—
BRIAN DALLY: Yeah, much more.
ADAM GOWER: Really?
BRIAN DALLY: Yes. Because access to capital has gotten crushed, so there are fewer places to go for capital. If, like GROUNDFLOOR, you actually have capital to lend on advantageous normal terms — I mean, people will say they have capital to lend, but the terms are hideous — if you actually have capital to lend, the borrowers have fewer places to go to get terms that are attractive to them. We've just seen a real increase in sort of the quality of deals that are coming our way, which I think is just a function of how many alternatives there aren't in a market like this.
ADAM GOWER: That's really fascinating. So you're able to be more selective then, during this time?
BRIAN DALLY: Yeah, absolutely. And I think these times are more favorable for experienced investors as well. Because experienced investors know — what's the Warren Buffett statement, “Price is what you pay, value is what you get.” They're careful in discerning about that. They've been waiting for moments like this and they have the cash and they have the capital to go in and take advantage in a way that I think newer investors or newer sponsors may find it harder.
Good Entrepreneurs Spot Opportunities and Are There at the Right Time
ADAM GOWER: I’m interested — I'm not actually a single-family guy, but I’m fascinated because it's kind of the undercurrent of everything that is real estate. It's a key indicator.
BRIAN DALLY: Single family is the place where a lot of investors or sponsors get their start.
ADAM GOWER: My question is, where is the opportunity coming? Is it coming because people are losing their homes or defaulting on homes and that's providing a downward motion on pricing, or, actually are you seeing a flip side of that? Are you seeing higher demand for people moving in? What's going on actually?
BRIAN DALLY: What’s happening is both supply and demand have declined, but supply was already depressed relative to demand. They've moved down in our view. In most of the markets where we are, we see that supply and demand have both taken steps back, but that really, supply has actually been constricted more than demand. That’s interesting because we have thought that over time, if this recession extends for a long period of time, people may be forced to sell their house for less. We don't know. Because truly, the price is going to be determined by the balance between supply and demand. The truth is, there is so much long-term demand that has built up relative to the shortfall in supply that it would take a very long and very deep recession indeed, to depress house prices.
ADAM GOWER: So—
BRIAN DALLY: Go ahead.
ADAM GOWER: I was going to say then, so the logic is that if supply has gone down and demand has stayed the same, or at least it's come down less, that there would be increased pricing on the existing stock. and yet you're telling me that there are opportunities for single family home renovators, fix and flippers. Explain that because it doesn’t quite match.
BRIAN DALLY: This goes back to the point about opportunity in volatility, right? It's what I was trying to say about an equity holder with cash and who knows what he or she is doing. There's an opportunity in volatility because even though on a macro scale prices may be increasing, there are spots and situational factors because of the volatility, because of job losses in a certain area regionally, or in a neighborhood. There may be specific factors in a place that are driven by the volatility that create that opportunity for an equity buyer, who has the resources and the experience to do it, to go in and take hold of that. But it really plays to the strength of an experienced investor or sponsor, to know where that is. To have the resources — the human resources as well as the financial resources — and the talent to go in and the vision to go do that. But that's what the great entrepreneurs do. They did it in the last downturn, too. That’s where you really learn how good of an entrepreneur you are — is spotting those opportunities and being there at the right time.
ADAM GOWER: Exactly. Getting actually through a downturn, not just surviving it, but really taking off during it.
The Ten Dollar Minimum Investment is Genius
ADAM GOWER: I wanted to talk about your ten dollar minimum. Very interesting that you actually think of that as a divestment tool for investors. I when I first heard of the ten dollar minimum, it actually struck me as being sheer genius. And the reason for that, especially if you are appealing to a non-accredited audience — which is a very unusual thing for any platform to be doing. You're one of very few that do that — but the reason that it's so fascinating is because it appeals to a different audience, a millennial. Millennials are those who are said to be less wealthy than their baby boomer parents. But, if you are able to get that demographic in, even at ten dollars or a hundred, and they start to invest a little bit more year after year because they get used to the platform, they start to like it, etcetera. Guess what? They’re the generation that are going to inherit the baby boomer wealth.
BRIAN DALLY: That's true.
ADAM GOWER: And when they get those inheritances, where are they going to go? They're going to go where they've got so comfortable for the last 10-20 years investing.
BRIAN DALLY: I think you're putting your finger on something that's very important about the ten dollar minimum, because it does make it more accessible to people. It also makes it healthier to those people when they access it. If I'm going to invest one hundred dollars, and if our minimum were one hundred dollars instead of ten dollars, you can only invest in one loan if that were our minimum. If our investment were a thousand dollars, you might not be able invest at all or you might really struggle to get that thousand dollars together and then you could only invest it in one loan.
ADAM GOWER: Well, I hope those eggs are safe in that one basket. And that's not how Wall Street does it. That's not how Wall Street makes high returns at low risk. That's just not how they do it. What we want to do is give everybody those same tools, no matter how large your portfolio is. There's a structural difference that's important to millennials.
Control Your Investment like a Fund Manager
ADAM GOWER: Redemptions means that when you invest in an eREIT, you are locking your money up? In your case it's the same thing though, isn’t it? If I put a hundred dollars or a thousand dollars in alone, I have to wait for it to mature before I get my money back.
BRIAN DALLY: No, it's not the same thing at all.
ADAM GOWER: So explain to me the difference.
BRIAN DALLY: Here’s the difference. Structurally you're not turning over one hundred dollars to us and we're telling you when you get your hundred dollars back. You're taking your hundred dollars and you're spreading it into 10 loans. Now, if you did that — our data shows if you invested in a couple of loans every month for about six months — the data shows empirically that pretty much every month, one or more of your loans is going to repay.
ADAM GOWER: I see.
BRIAN DALLY: And that's even more true if you invest in 100 loans over the course of six months. The point is, instead of the fund manager having control, you have control. And you have control because you can decide how much you invest in each loan. On our website right now, we show you exactly how many months it is until that loan is due to repay. If we did a 12-month loan and the loan wasn't funded until three months, we held it three months, then there's nine months left on that loan. And you see that, you know when it's due. And as you gain experience, you know that most of these loans kind of repay early. They repay on average about three months early.
ADAM GOWER: Can you invest on your platform in a loan late in its lifecycle?
BRIAN DALLY: Yes, absolutely. As long as it takes to fund it. And we have so many loans now that sometimes we're holding them back and sometimes they're very short-term loans so that might be a six-month loan. I think there might even be one on there that has less than two months left on it.
ADAM GOWER: And you can invest in that loan with just two months left?
BRIAN DALLY: Yeah. The shorter it gets, the more people want it because it's short and then they see that the property is listed for sale and are like, “oh shit, there's no risk here.”
Capital Investments that Lead to Explosive Growth
ADAM GOWER: Let’s talk about SeedInvest and what are you doing right now over there. Tell me a little bit more about that, it’s very interesting.
BRIAN DALLY: Like most startups in the early days, we were fortunate to access early stage capital from angel investors. We needed that capital to pilot our concept and kind of hire our earliest team — that was great — and to build the first version of our product. As we progressed, we earned a qualification from the Securities and Exchange Commission. It's only the third of its kind ever qualified. I mean, LendingClub and Prosper are the only two that have ever been qualified for an offering that’s structured our way and that's not even in real estate. We're the only one in real estate. That was five years ago. But it took us a long time to get that. When we got that, we earned an investment from a VC firm that invested five million in the company. And that really helped us hire a lot of staff, grow our investor base, build up the business and that was very, very helpful. When we got to about 2017, two years after we raised that capital, we started thinking about how we wanted to grow and we started thinking about our mission. The money that we needed wasn’t significant because the business is fundamentally profitable. And the growth opportunity that we saw was significant, but we knew that we could start raising money from our customers every year and giving them a fair share of the profits of the company and the value of the company over time. That was our goal. We wanted to live our mission and finance the company in a way that was aligned with our mission. We took a big risk. We opened up our own equity offering on our own platform in 2017, and it was extremely successful.
ADAM GOWER: That's right. Yes. IT was very interesting. It was around the time I spoke to Emily.
BRIAN DALLY: I think that first round started, we got qualified in early 2018 and we raised almost five million dollars. And that was enough to finance a lot of the growth investments we wanted to make that year. We came around to 2019 and we did it again.
ADAM GOWER: That was a reggae, was it? So that was also a non-accredited investor.
BRIAN DALLY: Yeah. The minimum investment was 10 shares and our first round was at ten dollars a share. All you had to do is invest $100 to own a piece of GROUNDFLOOR. I forget, in that first year I think it was well over 1,000 customers, maybe 1,600 customers in that first year, actually invested in the company with an average of $2,700 or $3,000 each, which was really exceptional. That's how we get to that five million dollars that we raised in that first year. It worked so well, we did it the next year. We said, “Okay, now we're gonna raise the price. The price in the second year is fifteen dollars a share,” because the company had a lot more revenue and a lot more value, and once again, we raised about another five million dollars.
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