TRANSCRIPT
slava (00:02.428)
Hello and welcome to another episode of Smart Humans. I am super excited for today's guest. As always, we have Brian Dally, the founder and CEO of GroundFloor, an expert in all things real estate and especially real estate debt. Brian, welcome to the show.
Brian Dally (00:21.262)
Thanks for having me. It's great to be with you.
slava (00:23.516)
Absolutely, so fun. So we always like to start with the very basics. How did you even get into alternative investments?
Brian Dally (00:32.558)
I started investing as a hobby at age 15. I'm going to date myself when I say this, but my dad sent me to the library to learn what a mutual fund was. And he gave me great incentive. He said, look, if you invest some of your summer earnings in this, whatever you put in, I'll match it. And.
By the time I got into college, I had quite a portfolio built up. I dollar cost averaged in and I always kind of had stock investing, stock market investing as sort of a hobby throughout my young adult years. And I think that's the reason that I ended up starting ground floor really.
slava (01:10.812)
So wait, you started already investing and your dad sent you to the library to do this when you were 15?
Brian Dally (01:15.79)
When I was 15, he said, go learn what a mutual fund is, pick one. If you start investing in it, I'll match what you put in it. And it was great because I learned a lot. I found something that stuck with me throughout my years. And I think really that's the reason that I started Ground Floor is that experience of being a hobbyist, individual, self -directed individual investor for 30, 40 years.
slava (01:41.756)
love it. Do you remember what that first mutual fund was?
Brian Dally (01:44.494)
I do. At the time, it was called 20th Century Funds. I selected several of them. One was a growth fund, one was an international fund. I think the other was a growth and income, no, a value fund or a small cap fund. I think I had four or five of them at the beginning. I was dollar cost averaging into each of them. Whenever I earned a little bit of money, you'd have to mail in a check. It was old school.
They renamed it to American century for obvious reasons, right? cause the 20th century ended. So I had to rebrand and I was a customer that whole time, man. I was a customer through all of that until, until my thirties.
slava (02:15.42)
That's right. For our listeners.
I love it. For our listeners, what is dollar cost averaging?
Brian Dally (02:25.294)
So dollar cost averaging is when you set aside a certain amount of money that you're gonna put into a security or into a portfolio on a periodic basis. Could be weekly, could be bi -weekly, could be semi -monthly when you get paid, could be monthly. But the idea is if you're investing in an index fund or something like that, if you're investing the same amount every time, when the price rises, you're buying less of it, right? When the price...
declines, you're buying more of it and you're thereby smoothing out the variation, right? And the variability of what you're investing in. And over time, the theory is you'll end up with a lower average cost basis in the security than you'd have if you're trying to pick, you know, pick the bottom or pick the top and try to time the market.
slava (03:13.788)
Amazing, how long was your dad matching for?
Brian Dally (03:16.494)
I think he went right up until I got into college. So a good solid three, four years. He was, you know, I think through my first year of college, my summer earnings, and then, then I started earning enough money in the summer. I had like two jobs. I was, you know, working at a warehouse 40 hours a week, getting all the overtime I could. Then I was doing telemarketing in the evenings. I was super motivated to invest, you know, and stack up chips. So, and build my portfolio. So after that, I think he's like, okay, you've got the bug. My work is done. You're on your own.
slava (03:44.476)
Good on him. I have three kids. I think I'm gonna have to use that trick. Were you actually investing, do you remember this, were you investing into your own account that many years ago or was it under your parents' account?
Brian Dally (03:50.67)
It's a good one.
Brian Dally (03:59.022)
So when I first started off, I think that the mechanics were my dad had to be, I think my dad had to be the account owner when I was 15, but then when I turned 18, he turned it over to me. Yeah.
slava (04:10.204)
Amazing, yeah, it's really like fascinating how much that's all evolved because now kids can actually have accounts at younger ages. So obviously your dad was ahead of his time. So I imagine there's a little bit of dot connecting between 18 years old going to college and then ground floor. Can you connect some of those dots? What happened in between there?
Brian Dally (04:17.006)
Right, yeah.
Brian Dally (04:27.438)
I sure can. Well, I had a career in telecom, sort of after grad school. You know, I started, I started entrepreneurial when I was in grad school. I was there for four years and I built my first website, you know, in the mid nineties, you know, tinkered around a lot of entrepreneurial projects. Ultimately, well, the first website I ever built was called caveatemptor .com. It was a, it was kind of like an eBay.
slava (04:45.98)
What website, what was that for?
Brian Dally (04:55.502)
for law students. I was in law school and I observed that the place I went to law school didn't have used texts for sale. And what people would do is they'd post, you know, they'd put up posters all over campus and you'd walk down the hall and you'd be like, yeah, I need Epstein on torts. I need this criminal law book. I'll grab this phone number. And you didn't have a mobile phone, so you'd run home and you'd call these numbers and be like, hey, do you still have this book? Guy would be like, nah, I sold it. Sorry, man.
Hey, do you have this book? Nah, man, I sold it. this guy has it. And that was the, it was purpose built for the web. You know, it was like a great, so I built a database driven website that allowed people to sort of buy and sell, you know, on the spot. And it was, it was really successful. I had a lot of fun. I did it just to learn how to write software for the web. But that was, yeah, that was 96 when I launched caveat on door .com. Yep. And decided not to quit law school and take venture capital. I still.
slava (05:43.452)
This is like 96.
slava (05:48.444)
Nice.
Brian Dally (05:53.006)
I stayed in school and went off to Silicon Valley. And when I did, I ended up in the wireless industry, did a bunch of startups, venture backed startups, was a founder of a couple that didn't get very far. But then I started Republic Wireless, which was a huge success. And when I left Republic Wireless, the arrangement I made with the new owners was that I wouldn't compete in wireless for a while. So I had to find a new industry.
And I kind of went back to my roots. The jobs act had been passed. I know you worked on that. My co -founder, eventual co -founder, Nick Bargava was part of that. And I was interested in that law because I thought from the individual investor's point of view, that this law would create opportunity for us as self -directed individual investors to get to participate in private markets in much the same way that Charles Schwab enabled us to participate in public markets.
with a discount brokerage, which ultimately ended up in fractional share purchases on Robinhood and other platforms. So, I think we're going through a similar sort of evolution in alternative investing. The JOBS Act kicked that off in my view, and I wanted to be involved in that. And so that's why we started Ground Floor.
slava (07:09.756)
Amazing. Thank God I asked where it all started, because I already just thought you were some finance guy wearing vests doing real estate that...
Brian Dally (07:16.078)
Dude, I think we were the only founders who were doing something in real estate that weren't real estate guys. It's just hilarious. We didn't know that it'd be in real estate. We weren't real estate guys, and we weren't actually Wall Street guys either. We weren't financial engineers. We weren't real estate investors. We just found our way to real estate investing because we wanted to build something for the masses. I wanted to build something that wasn't too esoteric for people. We had like
26 categories of potential assets that we could, you know, asset classes that we could build securities in, we thought with reggae or title three or something. And we just noticed that when we did customer discovery, people really like the idea of real estate and alternatives because it's tangible. And we ended up getting to residential real estate because it's familiar, because so many people own homes over time. It's kind of like an aspirational asset class, if you think about it. And so as an individual investor,
I got excited and then we built a debt product because we realized that's where the smart money is in that capital stack. It's the debt because debt is low vol, has a lot of other great characteristics to it. And so as an investor, I got really excited about that. And we're really the only guys that fractionalize that and figured it out. And I think it's cause we had that sort of strategic intent from the, from the beginning.
slava (08:42.3)
Amazing, such a diverse background from the eBay for law books to crushing it in wireless and obviously then going into the alt market.
Brian Dally (08:50.638)
Dude, it's worse than that. I worked in online gambling. In 2005, I went off to England to work for a Bessemer Ventures backed startup that was doing real money poker on mobile phones. It was great because there was legislation over there and I kind of find myself in these kind of regulatory, you know, sort of markets where you can create value, you know, by complying with regulation if you're willing to do that as an entrepreneur.
slava (09:03.644)
That's early. That's good.
Brian Dally (09:20.174)
I think there's a real opportunity to create value in finance with that.
slava (09:23.74)
Yeah, I mean, I've seen that with the things I've worked on as well. Too often investors and entrepreneurs see regulations and they're like, ooh, scary, stay away. But really it's one of those things, if you put in the effort, it can really become the moat, right? And not only could be a bad thing.
Brian Dally (09:35.982)
Well, yeah, I mean, look, we put in $2 million of capital and probably four years of execution. We were, a lot of people misunderstood us as a real estate crowdfunding site. We never were that, that we weren't doing what you did with Indiegogo. We weren't trying to crowdfund anything. And we didn't think that was a great business model either. We got lumped in with those. We were the smallest, slowest growing real estate crowdfunding. Everybody else is just raising tons of venture capital and putting a credit investor to work.
you know, into these syndications, we had a very different idea about what we wanted to do in the mass market. And so, you know, it took us four years, $2 million just to get the regulatory foundation built. And then we're like the dog that caught the car, you know, we're like, holy shit, now we can sell this on a fractionalized basis. At the time, the minimum was $10 per investment. Now it's $1. So we allowed, you know, we allowed these people to build these highly hyper fractionalized portfolios.
slava (10:26.908)
Nice.
Brian Dally (10:31.854)
And I think it creates, I think it's the right way to create value in alternatives for individual retail investors. Still a lot, a lot of work to do. but yeah. Yeah.
slava (10:41.564)
We're gonna go back there in just a minute. First, we need to hear about your opinions about all these asset classes. So you obviously like real estate, we'll jump into that in a second, but what's your thoughts on the other big asset classes? So for example, we think about it as real estate, private credit, pre IPO venture, crypto, art, and collectibles. So I'd love to hear your thoughts across the board.
Brian Dally (10:47.118)
Yes.
Brian Dally (11:05.134)
Look, I think in general, more access is better. I think more important than the actual asset class, frankly, is the format. Because if you'd have told 20 -year -old me when I was getting, when I was broadening from mutual funds into individual stocks, that I could invest in the stock market so long as I...
turned my money over to this fund manager who had invested for me. and by the way, like you're seeing with the Starwood REIT and the Blackstone REIT in our space, you know, they lock up your money, and it's hard to get your money out. Or you're taking equity risk on the markets trading that NAV down. You know, if you told me that I could invest in stock market, but those were the terms. I mean, I tell you to go fly a kite means like, no, man, I want to buy Nvidia and Tesla and
Amazon and well, I want to build my own portfolio and I might choose to index into some of that, you know, and a lot of people do, but having that freedom in public markets, I think is really, really important. I think it's true in alternatives too. So I think all of the asset classes can be good, but if they require you to submit to the dictates of some fund management model and the costs of some fund management model, you know, the business model really matters.
the format and structure really matters and the transparency really matters. And I think the liquidity matters. And I think these are real hurdles to people getting good outcomes. You know, I look at pre IPO company investing, for example, as one of the categories that you mentioned. We have finally, yeah, go ahead.
slava (12:42.076)
Right, right, but let's jump in more on exactly what you, Brian, thinks. So your net worth, how much are you putting into private investments?
Brian Dally (12:47.214)
Yeah, yeah.
Brian Dally (12:51.502)
man. Well, if you include, if you include Bitcoin in irresponsibly large amount, outsider ground floor, I would, I would, if you include Bitcoin, I'm probably 90 % into alts. Yeah.
slava (12:52.924)
percentage -wise.
slava (13:02.748)
Okay, nice, 90 % in alts. And how would you break down that 100 % of alts if you put it into those six categories? How much of it is yield oriented, so private credit and real estate versus those asset backed, so more the pre -IPO venture, the art, the collectibles, and the crypto. So how would you break down between those two categories?
Brian Dally (13:27.47)
Yeah, I mean, I'm Bitcoin, not crypto. So, you know, very big difference for me on that. I'm a big in Bitcoin. I'm probably, I want to say probably half my non ground floor. Now, where you got to, you got to, as a founder, you got to keep your company. Who knows what's going to happen with that? You know, famously a liquid. I'd say my real estate debt holdings with ground floor are probably.
slava (13:41.82)
Wow.
Sure. Sure.
Brian Dally (13:55.982)
probably another quarter to 30%. And then the balance, I have a smattering of pre IPO startups. You know, I don't really get into collectibles. I'm not, I'm not trading in that stuff. I have a small amount, you know, in wine and whiskey with, with vent, you know, I like vent. I like there again, to me, I look for format as an investor. I it's very important. It's more important to me what the structure is and what the terms of the investment are.
slava (14:13.308)
There you go, that's collectibles, there you go.
Brian Dally (14:26.158)
even more than the categories, right? The more categories, the better, but they really need to be structured in a way that favors the retail investor. And that's rare, right? Few people have done the work to structure these offerings in a way that, you know, allow the retail investor to get the value that's commensurate with the risk they're taking. And that's the issue.
slava (14:46.044)
Any thoughts on art?
Brian Dally (14:49.198)
I don't know much about art. I have friends that trade in it. They really like it. I haven't, no, I haven't dabbled there. I've looked at it, because I think it's a category that a lot of people pay attention to, but I just don't know what to invest in. And for me,
slava (14:52.924)
But not for you.
slava (15:03.932)
And pre -IPO, are you like early like Angel or are you late like pre -IPO because you know people or where do you like to, okay.
Brian Dally (15:10.254)
I like angel. I like, I like to find founders with whom I identify, you know, and where I can be a value add. There are some cases where if it's really close to ground floors, business ground floor will make the investment. We made an investment like that in a, in a real estate finance startup. and it was because I really liked the founders. I mentored them coming out of tech stars and, I still liked the company a lot and, they've grown fantastically, but I really like sort of.
slava (15:26.236)
Nice.
Brian Dally (15:38.318)
you know, seed, pre -seed investing where I can get involved with the founder and, you know, where I can add some value in an area that I know about.
slava (15:46.268)
What's your top piece of advice for those looking to angel invest into seed and pre -seed? One piece.
Brian Dally (15:51.086)
I think be prepared to lose everything you invest. I think that's the healthiest. I think you have to look at it as it's a corner of my portfolio that I do because it keeps me engaged professionally and intellectually, spiritually. To me, it's a way to be involved. It's like a long -term hobby. It's kind of like where I started with investing as a kid. I really like it. I don't plan to make a lot of money on that part of my portfolio. And I think that's the number one piece of advice is,
slava (16:12.988)
Totally.
Brian Dally (16:20.878)
Make sure you have intrinsic reasons. Go beyond the extrinsic reasons. And then if you end up making a big hit on one of your investments, that's awesome. But I don't think that's the reason to do it, in my opinion.
slava (16:34.844)
So 50 % BTC, I mean, that's significant. So what's your point of view today, right now on BTC and crypto? I know you separated those two words.
Brian Dally (16:46.958)
I like it. It's the hardest asset in the world. It's limited, you know, it's fixed supply. It's digital gold and beyond. To me, it's the only way that I can preserve wealth and save and I like the philosophy of it. I like the, I like what it means for the world. So I like it all the way around. I can never own enough.
slava (17:13.468)
Do you have a price that you're selling BTC at?
Brian Dally (17:17.486)
No, I don't sell it. One does not sell one's bitcoin.
slava (17:19.196)
But I'm saying, I like that one does not sell one's Bitcoin, meaning if it hits 100K, a million, 10 million, all right, until when?
Brian Dally (17:27.885)
I'm a buyer. I'm a buyer.
Brian Dally (17:33.486)
I mean, until I want to trade it for an experience or an asset that's meaningful to me. Yeah, I don't look at the price of Bitcoin. I look at it as a trade. I would never trade it for fiat currency. I would never trade it for some other investment. I will trade it for an asset or an experience that's meaningful in my life. And that's it. That's what savings is for.
slava (17:45.084)
Nice.
slava (17:56.508)
So I've done quite a few of these episodes and I think you're the first person who is pro real estate, like significantly pro real estate and then also significantly pro BTC. That doesn't have to happen that way, but usually that is the dichotomy, the split of how people.
Brian Dally (18:13.583)
People are like one or the other. I see it as an and because I like the fact that my real estate debt portfolio in particular, I like being the bank. I like being in the position of the bank. I like having that hard asset. I like the yield on it. So it's, you know, it's a fantastic, there are two forms of yield actually that I think are interesting about real estate debt in particular, if you do it right. Yeah, sure. Yeah.
slava (18:39.132)
Can you hold that for one thought? One thought. So next question is about the market. Broad question, open -ended, take it wherever you want. What do you think of the current economy? What do you think of the stock market? What do you think of what's going on? Take it wherever you want.
Brian Dally (18:45.806)
Yeah.
Brian Dally (18:57.966)
Well, I think monetary and fiscal stimulus is everything. I think we are doomed to inflate the currency. That's the only way out of the $34 trillion of debt that the United States government holds on its books. There is no other way out that the politicians can or will avail themselves of. And it's only a matter of time before, you know, the reported inflation numbers are not the real inflation numbers. We all know that.
and therefore all assets, hard assets in particular are going to continue to inflate. sure. We may have disruptions due to, you know, shocks to the exogenous shocks or something, but I think, you know, those of us who have assets are very fortunate. I worry about the people who don't have assets and how to onboard those people into that inflation because they're the wealth gap is, is, is bad and growing and it's only going to get worse because those who have assets.
slava (19:56.348)
What did you mean by, sorry, what did you mean by the inflation numbers aren't the real inflation numbers?
Brian Dally (20:02.286)
Well, I just think if you they keep changing the scoreboard. So the way they really reported inflation in the 1980s has really changed. What's in the basket changed the way they account for it changes. I think I've seen some reports that say, you know, it's probably over reported by half or to, you know, under reported by 2X. I'm not a macro economist. I'm not going to, you know, I'm going to hold that opinion lightly, but I believe it. You know, I think they have a they have every incentive.
to underreport inflation and I think they are underreporting it. I think they're rigging the game so that it sounds good, but there's no way that the US government cannot proceed from its current fiscal position without inflating the currency. It has to happen, and it is happening.
slava (20:50.588)
And obviously that's one of the reasons you're pro Bitcoin. So where do you think on a more near term, let's call it the next six months, the next 18 months, the next two years, where's the economy head? Where does, you know, the macro markets, the stock market slash implication on all these alternative assets, what happens in the next 24 months? Try to predict it for me.
Brian Dally (21:16.846)
Well, look, I think the younger you are, the more you believe that alternative investments are the way to save for your future. Because in addition to people being wise to the fact that, you know, that inflation is eating away their real purchasing power and their wealth, I think people are aware that the stock market, you know, it may continue to climb. I think all assets will continue to climb, but I think people are interested in alternatives as a.
as a way to mitigate some of the manipulation that they may perceive is happening in the market, whether that's high frequency trading, or whether that's the hedge funds getting in and playing games, you know, the individual issues like can't stop, right? I think people believe that alternatives, I mean, look, alternatives are a chance for all of us to be a primary provider of capital, right? When you fund a startup,
And this is how we funded our startup, by the way, where we've raised the vast majority of our growth capital from our customers who are now in 30 % of our company. Look, if you are a primary provider of capital, there's alpha in that. There's a lot of risk in it too, but there's a lot of alpha in that. And you are less likely to be the sucker at the poker table if you are a primary provider of capital. And I think people like alts because...
you get to be that primary provider of capital. Now, it's different in some categories, some places you're trading secondaries, but at least you're trading secondaries in famously a liquid, kind of opaque markets where you might have an edge, right? I think people understand pretty well that in public markets, they don't necessarily have an edge and they don't really understand the game. So I think there are two strategies, right? One, you're just indexing into everything and you're following John Bogle's advice or you're keeping costs low.
and you're gonna benefit from the asset price inflation that's sure to come. Now, if the asset price inflation comes with economic malaise, then some of those issues are gonna start to tail off and probably won't perform as well as some of the hard assets that don't have a performance problem that a company has. So that's why I like real estate as a hard asset. That's why I like Bitcoin as a hard asset. Hell, I even own a little gold.
Brian Dally (23:37.902)
Right? You know, just for the hell of it, just for comparative purposes to see how much I'm losing compared to my Bitcoin.
slava (23:43.548)
So in regards to like interest rate cuts, Fed cuts, I mean, do you see one this year in 24, two, what do you see? What do you, what?
Brian Dally (23:50.286)
and we model no cuts this year. We model, you know, in our business, we're not counting on cuts.
slava (23:55.836)
What do you see 25 like? Any 25?
Brian Dally (24:00.142)
We're not, I mean, I think the market says there should be four in 25 right now, but just every time you, if you waterfall the market, like you'd waterfall a salesperson, when do they give you a forecast? The waterfall keeps cascading down. And so, you know, we, we pay close attention to those markets in sort of where people are betting, where they're putting their bets and what they're, what they're predicting. As an intermediary, we just have to be smart.
We just have to be smart about pricing risk and maintaining margins for that risk for the retail investor. And life is good as a provider of short -term debt. We don't have to make long -term fixed interest rate debts in our business. So we're in a pretty luxurious position in this rate environment because we can track it and keep up with it and adjust and be very agile. But we're not counting on or particularly expect rate cuts.
slava (24:57.084)
So if I had to summarize, no cuts in 24 and less than four cuts in 25. Nice. So let's transition to ground floor itself. Many people who are listeners are very familiar. Others, this might be the first time they're hearing of it. So could we just start with what is ground floor? Can you just tell us what it is?
Brian Dally (25:01.71)
That's where I would be, yeah.
Brian Dally (25:16.622)
Sure.
Broadly, GroundFloor is a provider of capital to real estate investors who are fixing and flipping properties. You know, they're repairing aging housing stock all over the country or they're building new housing stock. That's actually an important part of what we do because in the United States, we're underbuilt, we're under supplied in housing and our customers who are borrowing money from us are helping to solve that problem by bringing new supply online. So we're a capital provider.
We're also an investment platform. So we're vertically integrated as a capital provider and investment platform. When we originate these loans to these investors, we turn them around and we fractionalize them on our platform and we sell them off in $1 increments to retail investors who are building their own portfolios of these loans. You can come to ground floor, invest $1 ,000 and have hundreds of loans in your portfolio pretty quickly. And the loans are attractive because they're high yield loans.
that repay really quickly and they're backed by an asset. So if the loan doesn't perform, let's say it's a one year loan for $250 ,000 for a house that the entrepreneur who's building it or renovating it hopes is gonna sell for 350 or $400 ,000. Let's say the market turns against them or the project doesn't go well, there's execution risk, we can move in and foreclose, sell the asset and return the capital to the investors on a pro rata basis.
So we've done about 7 ,000 of these projects now. We financed about $1 .5 billion in housing projects now. And that's just invested capital. That's not the inflated value of that. That would be probably twice the value of that, probably $3 billion if we were looking for a vanity metric. We don't trade in those much. So we're a capital provider or a investment platform. And then we're an asset manager, right? And so we manage those assets and make sure the capital gets
Brian Dally (27:14.862)
return. I used to have community bankers who would take me out and say, Hey, Brian, are you sure you want to get into this lending business, man? It is tough. It's gonna, it's gonna make your skin crawl. It's gonna make you feel bad about humanity. And you know, they well meaning, you know, say, look, it's, it's easy to lend the money out. It's hard to get it back. It's like, you know, we've repaid over 800, you know, $800 million worth of investments so far. So we know we appreciate that. Yeah, it's a
And that's what it is, an opportunity for investors to expose themselves to get exposure to these high yield real estate loans, build their own portfolio and be in the same position that a bank would be.
slava (27:40.764)
When did you start?
slava (27:52.604)
And what year did you start?
Brian Dally (27:54.253)
We started in 2013.
slava (27:56.7)
So about 11 years old.
Brian Dally (27:59.15)
11 years old, yeah, and counting. Still alive to tell the tale.
slava (28:01.436)
Incredible, geriatric and internet time, which means you're amazing. So you said that you're getting the loan back. So in the jargon, you're into the real estate debt. You're not into the real estate equity. So for some people, this might be a new concept. So can you explain what's the difference?
Brian Dally (28:15.342)
Correct. Yes.
Brian Dally (28:22.574)
Yeah. So if you think about what a bank, when you borrow money to buy a house, the bank gives you a mortgage, right? And you are due to repay the mortgage in 30 years or 15 years or whatever the length of your mortgage is. And you have an amortizing payment of principal and interest. This is similar, except the loan is a lot shorter because the purpose of the loan is to buy the property, renovate it, and then sell it or refinance it into a rental portfolio. So we serve as kind of the bank, if you will.
to provide that loan. Just like the bank in the case of your mortgage, if you don't pay your mortgage, they're gonna foreclose. Same thing with us. If the borrower doesn't repay on time, you know, at the end of the one year loan or sometimes an 18 month loan, then we have the legal right to move in and foreclose, take possession of the property, sell it, and then make our investors whole. So that's, it's a big difference between equity, because the problem with equity, and by the way, we do offer equity investments on our platform too. You can...
invest in second liens or in equity positions in some of these products. We've been experimenting with that in the last few years. The problem with equity, there are a lot of problems with equity for retail investors and alternatives. Number one is liquidity. With equity, you'd never know when you're going to get your money back. And because equity is riskier, it's paid after the debt is repaid. You're dependent upon a profit being realized to make money on your investment.
and not all investments generate a profit, right?
slava (29:49.5)
Right. And to be specific, the equity is if the home was bought for $200 ,000, that's how much was the price of the home. If the home ends up being worth $240 ,000, that 40 ,000 of appreciation is the equity because the home is the actual asset that appreciated. Is that right?
Brian Dally (29:56.558)
Yep.
Brian Dally (30:08.75)
Correct. Yeah. And of course, typically there is debt and equity in the capital stack and the debt is going to get repaid first, right? The debt has the principal, it has interest and it has fees, right? That flow to the provider of the debt and all of that has to be repaid. Property taxes have to be repaid. Homeowner's insurance has to be repaid. There are many, many costs that have to be repaid before equity investors get that $40 ,000 of profit.
And importantly, a lot of the structures that we've seen out there for retail investors to get exposure to the equity, actually, their profits are getting eaten away by that. And the returns on the equity, this is upside down from what it should be. The returns on the equity are actually lower on average than the returns on the debt. And that's a statement about how high the costs are. And some of the platforms that are offering this equity are marking up.
So they buy the property at one level and then they mark up the asset before they sell it to the retail investor. So the retail investor is getting stuck sort of buying at a very high price. And so there isn't a very good clean entry point for equity today. We've noticed that. But we're monitoring that because I think equity is an interesting place for retail investors to play in the capital stack if you have the time horizon and if you have the appetite for that volatility.
slava (31:36.508)
So what would you say are the two or three main pros of debt, real estate debt, without saying anything negative about real estate equity? So is it that the timeline is shorter? Go ahead.
Brian Dally (31:45.806)
Number one is the yeah, the timeline is shorter. So you get your money back on an average of 10 months. So and you know, you're getting your money back when the loan is due. And if the loan goes longer than that, as it does in some cases, you know, you're eventually going to get it back, right? And there's an asset underneath it. Secondly, the yields are very attractive. So the yields are, you know, in this market around 12 to 13%.
11 to 13 % would be a normal range for yields in this category. And then I think the third benefit is the predictability. There's very low volatility in this asset class because it's first in the waterfall to be paid. And that's not something that most of us, certainly 15 year old me or 20 year old me wouldn't have appreciated that, wouldn't have known about that as an investor. But as you start to invest, you realize,
that a lot of the smart money's in credit. It's in debt because of these dynamics about the yield and the turnover and the certainty of repayment timeline. It creates a lot of liquidity that I think is uncommon in these markets.
slava (32:57.276)
Awesome. So you mentioned that you started out offering $10 options and now you have a dollar option. So to state the obvious, you don't have to be rich. You don't have to be accredited to be able to use your platform. Is that correct?
Brian Dally (33:07.31)
Correct.
That is right. Yeah. And that was purposeful from the beginning. That's why we took, you know, four years to build the regulatory foundation. It was bleeding edge because what the SEC, if you want to offer a fund, the SEC will let you do that. Right. That's not a problem. If you want to offer something that's more elaborate and more retail investor friendly than a fund, you know, there's a lot of regulatory engineering that has to be done in order to make that scalable. And it took us a long time to build that scalable foundation.
slava (33:38.364)
Amazing, having worked with the JOBS Act, that's super impressive. So what are the investment options? So if I'm going on your platform right now, I want to deploy $100 or $10 ,000, what are my options?
Brian Dally (33:52.75)
So the number one option that people are picking today is our auto investor app. So if you download our app, you can put some money to work in it. It'll automatically diversify you into an index. And what's special about this index is that you then own the underlying issues. So you're not in a fund. You actually own a sleeve of products. So it quickly diversifies you into a whole lot of our loans. And that's.
slava (34:21.02)
Like 30 or more?
Brian Dally (34:23.118)
Well, we release about 20 to 30 a week. So you, you know, probably if you invest, you know, a thousand dollars to start by the time these loans repay and recycle within a month or two, you'll have, you know, a couple hundred loans in your portfolio. And we find that once you get about 40 to 80 loans in your portfolio, it becomes very predictable in terms of your yield and in terms of your cashflow. And we have projection tools that'll show you that.
The second opportunity on our platform is we have a really popular offering called Ground Floor Notes that allows you to sort of put money away for a month, three months or a year and earn a yield on that. And that's backed by a pool of real estate loans. So you're sort of loaning money to a ground floor subsidiary in order to earn a yield. And people really like that. The yields are lower, but the payment timeline is fixed, right? So you know when that money's coming back to you.
And it's backed by a pool of loans, so it's slightly less risky probably than owning individual loans.
slava (35:27.132)
So it's a little different than the auto investor, but similar, except for that it's a fixed timeline.
Brian Dally (35:31.278)
It is. It is a fixed timeline when you know you're getting your principal and interest back.
slava (35:36.284)
and for that the returns are a little bit lower.
Brian Dally (35:38.542)
Yeah, they are. They're a little lower. They tend to be about seven and a half percent versus the loans where you can get it like 11 to 13%. We also, for accredited investors in the world we live in, in securities law, right? You understand this. Securities law is extremely expensive in terms of compliance and setting these offerings up. So we've established a little sandbox on our, on our website called GroundFloor Labs. And if you're an accredited investor, you can participate in a really wide range.
of new and experimental offerings that allow you to participate in cash flows from multifamily properties, cash flows from land advances, equity in multifamily projects, second liens in new construction. There's a whole, there are probably about eight or 10 categories at any given time that we're experimenting with as new products. So for the accredited investors amongst us,
They get to sort of get in there, tinker with these products, give us feedback about them. And of course, what we're looking to do is graduate those products to a broadly addressable securities offering that will allow everybody to have access to it. It just, we have to go through the learning cycles. We have to, you know, it's like most startups have to have product market fit, you know, we have to have product market regulatory fit. It's like a third, you know, leg of the stool or the point in the triangle. That's, that's always the foil, you know, I will point out though.
slava (37:00.924)
Nice.
Brian Dally (37:02.446)
I think submitting to the regulatory oversight over the years has made us better. I think it's the reason that in a space where there have been other platforms that have managed to fail, serving just accredited investors like Peer Street is one that everybody knows about, there are others. I think it's the reason that we've stood the test of time. We did the work to build to these tight constraints. It was expensive, it was time consuming, it was humbling, but in the end, the product is better.
due to the regulatory oversight.
slava (37:34.716)
Is ground floor originating the assets, the projects themselves and underwriting it or is it a marketplace where you find other managers and then you put it on your marketplace?
Brian Dally (37:47.95)
We've realized that we need to be vertically integrated in order to succeed for the investor. So we are, we are self -originated about 90 to 95 % of our product is originated by us. In some cases it's referred to us. In some cases it's brokers around the edges. We've experimented with buying loans from other originators. What we have found over time though, the best performance comes not from any of those other categories around the edges, but the stuff that we originate.
And I think that's been a powerful part of what's made our platform successful over time. That was a hard bullet to bite. We get done with the regulatory foundation four years, then we had to go build an origination platform nationwide. That was like a whole nother startup, man. It was brutal, but it was worth it. It is worth it to provide that quality product to the retail investor. We always said it would be institutional grade product.
offered to retail investors. And we have succeeded in selling the same product to institutional investors over time. Blackstone was a buyer before COVID. We've had other buyers along the way fractionally since COVID. And so we are intent on maintaining that institutional grade level of origination and asset management to make sure the retail investor is getting the real thing that the hedge funds are getting and the private equity funds are getting and the family offices are getting.
slava (39:15.26)
So you're getting 11 to 13 % yield for the investors. How do you guess a strong yield while limiting the default risk and the potential for these loans going upside down for you when you're the one originating?
Brian Dally (39:29.198)
Yeah, I mean, we joked about the Groucho Marx problem, right? It's like, how could any loan or any investment that would allow me as a retail investor to invest be worth investing in? Right? It's like a, it's a problem that we joked about, you know, throughout the years. And we, we wondered about that ourselves. What we learned is that the value that's being created with the use of the capital is so strong, right? The need.
for additional housing supply and for modernized housing stock for the first time home buyer in particular, which is where we specialize, kind of in that first time home buyer quartile of the markets where we serve. The value is so strong that good operators, good borrowers are earning 35, 40 % return on equity and they are happy to pay 11 to 13 % yield on a loan.
if it's structured the right way and we have some specific structuring that we do for them that's very friendly to these operators, it's operator friendly and there's a trade in there. Their alternative would be to have a financial partner who take half their profits, right? And so even though these yields are high, it actually is inexpensive compared to most of the alternatives. There are some institutionally funded Wall Street based lenders out there that...
look like they're cheaper, but then they come with all this hair on them that the retail investor doesn't require. And what we've shown is our credit performs at least as well as that Wall Street funded credit. So there's a good trade in there.
slava (41:09.436)
Nice.
You hinted at this before, but interest rates obviously are quite high now and they were lower before, but you've been around for a while. You've seen high interest rates, low interest rates, and now higher interest rates. So how does investing into real estate debt get impacted by the fluctuation of rates and how should I, the investor, think about that on your platform?
Brian Dally (41:32.686)
Look, I think the risk premium for this category has shrunk. It shrunk at about the same time that rates have increased. So it used to be when this category was new, you know, and people, Wall Street hadn't discovered it. You know, there wasn't much competition out there for the loans. You know, the spread between the risk -free rate and the rate that you could get on one of these loans might be, I don't know, in the double digits. I mean, a crazy spread, right? Even before ground floor started.
What's happened over time is that spread is narrowed. And I think the market is trying to discover what the proper spread is. And the jury's out on that. As an investor, what I think about when I look at these high rates is I realized that number one, exit, you know, the exit is more difficult to achieve. So you want to invest behind experienced operators who know how not to overprice the product.
right, who know how to land the plane, you know, not over invest in the collateral and build a product that's affordable for a broad number of buyers or people that want to put it into a rental portfolio. So in a high rate environment, I think you want to be a little more choosy, you know, biased toward, you know, experienced borrowers, experienced operators. And I also think it pays to, to, to invest at the lower end of these markets, right? This sort of starter homes.
as opposed to the higher end. I think higher end tend to be more rate sensitive for the same reason that asset prices are rate sensitive in general, right? So the bigger the asset, the more rate sensitivity you're gonna get in absolute terms. I think that's a real factor. I do think the spread today is still very attractive. I think, you know, we modeled, you know, when we saw COVID come, we said, shit, what do we do if, you know, 2008 happens again?
If we, if we model the 30 % decrement, you know, in the asset values throughout our portfolio, and we saw a five to 10 X increase in foreclosure and default and real estate owned activity, you know, it involves a lot of costs. What would the retail investor get? And the answer came out instead of expecting 10%, you'd get like six, which in that market is, you know, instead of getting repaid in 10 months, you'd probably get repaid in 14.
Brian Dally (43:54.99)
You know, in that market, you know, 6 % net realized in 14 months is probably still a pretty good return for whatever's going on in the market to cause that sort of disruption. And so it sort of, it gives you a depiction of why it's valuable to be in that first position with a lean behind you. It's a very powerful lever to protect against some of these interest rate issues. It's really equity investors that suffer from the high interest rates.
slava (44:20.124)
And to say back.
slava (44:24.412)
Got it, and to say back what I think you said is the premium on top of the risk -free rate used to be about 10 to 12%, sorry, about 10 to 12%, and now it's closer to like seven or something like that above the risk -free.
Brian Dally (44:37.486)
I think that'd be a fair way to plug it. Yeah. Yeah.
slava (44:40.832)
Great. And then I think you mentioned that your current portfolio, your personal portfolio is around 25 % in real estate debt, let's call it. Is that something you would advise to the listener? Is that how much they should be thinking about in terms of the diversification of the alternative basket? How they should think about getting into the real estate debt?
Brian Dally (45:02.702)
I think it really depends on people's goals and what else they have in their portfolio. You know, I think for me, I think about Bitcoin as a, as a foundational asset. And then I think about how much yield am I looking for, you know, as a, as a way to drive the real estate portfolio. I'm 52, almost 53 years old. So I'm looking for more yield than growth probably, you know, but I think it's different, you know, if you're starting out.
and you're trying to build it. We have a lot of young investors on our platform who are trying to build a snowball and they use ground floor to build that kind of income snowball. I think it's very difficult to make a recommendation that's broad based. I do think for the most part, people are under allocated in debt because they're not familiar with it. And when people think of investing, they think of owning equity in something and they think of the upside in that. I think what...
what I advise people is take a look at debt, appreciate the virtues of it and orient yourself to it and then find your allocation. It's not gonna be a meme stock, it's not going to the moon, but then again, the tortoise clipping 10, 12 % coupons every year for the risk you're taking is pretty darn good for a good chunk of most people's portfolios, I would think.
slava (46:25.084)
Nice, those are some wise words. So transitioning now to trying to be as smart as Brian, what is it that you listen to, that you watch, that you read on a daily, weekly, monthly basis, or what is it that is part of the Brian being smart routine?
Brian Dally (46:42.286)
I'm an avid reader. You know, I'm, I am, I confess I'll, I'll read the table of contents. I'll read the first few chapters. I'll pick a couple chapters of something. And then I go over to short form and I, you know, and I devour sort of the meat, you know, of what it is. And then I pick other parts to read. So I'm, I'm, I, I, I kind of float like a butterfly when I'm reading. I, I, I really want to consume a lot of thinking. I'm really into,
You know, I read a lot from Bitcoiners, you know, full disclosure. I'm really interested in sort of, you know, their economic perspective. You know, I read some sub stacks from them. I really appreciate the macro analysis that comes out of that community. I think, I think James Lavish is really interesting. I think Lynn Alden, these are two commentators that I think a lot of people know. And I really appreciate their, their commentary in the market.
slava (47:28.988)
Can you give one or two specific ones? Maybe.
Brian Dally (47:41.39)
you know, I, I, I read a lot of that. yeah, so I, I'm, I'm pretty broad based in what I like to read. You know, I, I'm looking for synthesis, you know, and as a, as a leader of a, you know, 90 employee company, I'm also trying to stay up on the start at state of the art about how to herd the cats and organize people and run a good company. So I'm, I'm constantly reading, you know, in rereading, you know, material about that, about leadership and.
alignment and companies and you know, stuff that probably boring to a lot of people listening to this podcast, but I like it.
slava (48:14.524)
And any anything particular that you're watching or that you're listening to?
Brian Dally (48:19.47)
let's see, what have I lately? What would come to mind? you know, there's a book that a lot of people and people in my job, read that's, it's a book called traction by Gino Wickman that a lot of us use as sort of a go -to. I've looked at it in the course of building my startup several times now, over the years. And I have found myself recently turning to it as we're adding new products. You know, we're thinking about expanding geographically or thinking about, you know,
doing some corporate development work, I'm really sort of leaning into that methodology as an operating system for our company. And so I really like the work that Gino has done in developing that system. Keeps us sane.
slava (49:01.404)
love it. The final question, the more specific it could be, the better, which is what's one investment that you would recommend? And obviously this is not investor advice, so we follow compliance rules here, but what is one investment that you personally like that two, three years from now that you think is going to do great? And you can pick anything you like in the private or public markets. We prefer private, but the more specific you could be and our listeners can go buy some, the better.
Brian Dally (49:32.11)
I would be remiss if I didn't, my favorite asset that I own even more than Bitcoin is my ground floor stock. I would be remiss if I didn't talk my book and we're about to reopen our, every two years we open our crowdfunded equity raise to our customers. And it's typically our customers who participate. We have 7 ,000 shareholders. So I would exhort everyone to consider ground floor as a pre IPO investment in your portfolio.
I think if you look at what we've built, it's not only a great product, it's a great company. I think it's worthy of investment and I think we've been good stewards of that capital. And so I would point people to that. Honestly, I would say our company, I feel great about people investing in our company and we're getting ready to reopen our stock offering.
slava (50:25.916)
Amazing. Perfect timing. Well, we've covered so much content. We could thank your dad for getting you started back at age 15, sending you to the library. And from then you've invested in mutual funds. He matched your investments into 20th Century Fund, which obviously eventually had to change its name. You have a diverse background having done the eBay for law school books, wireless industry, to navigating the jobs act and starting Ground Forward, which is incredible.
You're able to spend four years and two million bucks to actually create a foundation that's now been lasting 11 years later. It's incredible that you started offering at $10 for an investment and now it's even just $1. So really building it for the masses. You're very bullish into all it's having been now at 90 % into all, which is heavy, which is amazing. That's not even counting your own personal company stock. And you diversify across most of the assets, maybe not art, but do you, you do like some wine and whiskey and you're heavy, heavy, heavy into BTC.
You have to be prepared to lose it all when you get into Alton, especially pre IPO, which is awesome. You're super long into BTC. And then you mentioned on the economy that we're doomed to inflate the currency. And so we're under reporting inflation. That was a hot take. So you heard it here first and you know, your customers now own 30 % of the company and that's going to be your bet at the end here. Also the fact that there's no cuts for 24. Again, another hot take.
Less than four cuts for 25. You're not a brand new company. You've been around now. You have over 7 ,000 projects, one and a half billion dollars of invested capital. You're really into real estate debt versus real estate equity. And it said very simply, strong yields, shorter timelines and predictability, which is amazing. There's lots of options. So people want to pick their own or they want to have the auto investor or if they want to get into some of the more labs oriented stuff. So.
I like this line, the institutional grade for the retail investors. That came out of your mouth. So you obviously have succeeded at that. There's been some compression in the market coming down from 10 % above risk free to now 7%, but that's still a great return above risk free return. And, you know, I think you said it right. We just take a look at debt and then just find how you want to allocate into it and your predictions for the future. I have to say, you said BTC, even though you didn't say it and then ground floor as your own stock. So thank you very much, Brian.
slava (52:48.796)
for being on the show.
Brian Dally (52:50.478)
Thanks for having me.
