Real Estate Meets Crypto: Startups Offer Token-Based Investments

Nate Gipson received a notice in February that one of his rental homes in Memphis, Tennessee needed a new ceiling fan. As the owner, he thought the request was reasonable enough.

But before the job could move forward, he had to negotiate it with a group of other people who, like him, had purchased a stake in the property through a cryptocurrency website called Lofty AI. And some of them needed convincing.

“There was a big discussion about ‘Is the property manager ripping us off?’,” Gipson said. “They said, ‘I can go to Amazon and buy one for $35. “”

Like many decisions on Lofty AI, it came down to a vote of the owners, and the bylaws required a 60% supermajority for approval.

Welcome to the next phase of the crypto-economy, in which the ownership of remote rental properties is divided into digital tokens sold around the world, and token holders turn the craft of ownership into a series of online surveys – a system that the tenant may not even know about.

Lofty AI is one of many tech startups aiming to use blockchain technology to create a new form of real estate investing. They add to a growing movement built around shared ownership and cooperation, often referred to as Distributed Autonomous Organizations, or DAOs.

DAOs are often formed around specific projects, such as crowdfunding to buy a copy of the first edition of the US Constitution, and members have a say in whether they purchased a token online.

The concept of real estate investing for the average person is not new. Websites such as Fundrise and RoofStock have offered the ability to buy shares of homes and commercial developments in remote locations for years, but they often require a minimum investment of $1,000 or more and limit how quickly a investor can cash out.

Lofty AI takes it a step further, creating a mostly unregulated online marketplace where almost any adult in the world can invest as little as $50 to purchase a digital token equivalent to a stake in a sole proprietorship rental business. Each token represents a share of ownership in the Delaware-based limited liability company.

“Real estate has always been seen as a heavy industry that resists change, and now we see all kinds of technology and real estate companies,” said Desiree Fields, assistant professor of geography and global metropolitan studies at the University. of California, Berkeley.

She said the emergence of new real estate markets reflects how hot the housing market has become, attracting more and more investors while sizing up many potential homeowners.

“You can’t afford to buy a house yourself, but maybe you can become 1/50th of a homeowner,” Fields said.

Lofty AI is still small. Its online marketplace started last year and so far lists about 90 rental properties, mostly in Rust Belt states such as Illinois, Michigan, Missouri and Ohio. Property management companies handle day-to-day rental operations.

“We just thought, ‘Is there a way to make real estate investing more accessible, so anyone with an internet connection can start building a rental property investment portfolio?'” said Jerry Chu, CEO of Lofty AI. The startup secured funding from Y Combinator, a well-known Silicon Valley investment firm.

“What we want is to bring the benefit of owning these individual properties yourself without having to deal with the issues,” he said.

Gipson, 24, is not a typical Memphis homeowner. A student in the San Francisco Bay Area, he also owns token shares of rental properties in Chicago, and he regularly votes on topics that come up for his properties — like the new ceiling fan, which landlords have approved.

“I feel like an owner making those decisions,” he said. He plans to sell his chips eventually for a down payment on his own house.

The buying and selling of tokens is recorded on a blockchain, a system in which many computers contribute to a shared database or ledger that no one entity controls. Chu said blockchain records are apt to replace old-fashioned record keeping in real estate because transactions are transparent.

“Buyer and seller sometimes can’t trust each other, and that’s why you have this whole escrow and settlement process,” he said. “For us, settlement takes four seconds.”

But it’s unclear whether the idea of ​​democratizing investment in rental properties will sit well in a tight housing market that’s already seeing huge changes thanks to other tech startups.

Gipson said the startup started telling investors not to contact their tenants directly after an early experience when a tenant heard about Lofty AI and thought it was so unusual it had to be. a scam.

“It would be bad etiquette if a tenant was contacted by 30, 40 different people saying, ‘Oh, I own the property,'” he said.

Single-family home rentals have always been informal arrangements, as individual owners rented out their second homes or the properties they had inherited. But that changed during the Great Recession that started in 2007, when big investment firms started buying back foreclosed homes.

This paved the way for small investors to crowdsource, said George Ratiu, senior economist at Realtor.com.

“Single-family rental is becoming kind of a standardized investor class,” he said. “We are just beginning to feel and see the impact of technology.”

Ratiu said investors have been drawn to rentals in part by low levels of new construction that are restricting the nation’s housing supply and driving up prices and rents. Rising interest rates this year will also keep some potential buyers in the rental market longer, boosting short-term demand, he said.

“The risk is: what happens in a bear market? Will their positions be sufficiently hedged to be able to withstand this shock? ” he said.

Properties on Lofty AI have reserve funds for maintenance, and token owners have had heated discussions on online message boards about how to handle evictions and avoid becoming absentee landlords or worse.

“Short-term investors will always choose the cheapest repairs because they don’t want their CoC affected,” one investor wrote this month on Lofty AI’s Discord message board, referring to “cash on cash return”, a measure of investment performance.

Last year, a new investor darkly joked on Discord: “I joined the club and I own tokens. I don’t know if my business card should be called “uncle moneybags” or “slumlord”. Please advise.”

Fields, the Berkeley professor, said complex and anonymous ownership agreements could make it difficult to hold owners accountable.

“The owner can be anywhere. There is this geographically extended relationship,” she said.

“Absentee landlords aren’t a new thing, but they don’t necessarily have an interest in Cleveland, Ohio, and the people who live there.”

The conversion of owner-occupied homes to rental housing is being pushed back in some neighborhoods where neither tenants nor outside investors are particularly welcome. The Wall Street Journal reported this month that rental restrictions are on the rise among landlord associations.

But the concept of tokenized real estate is still being tested elsewhere, including at competing startups such as Arrived Homes, which offers rental property shares starting at $100, and Vesta Equity, which allows landlords to convert equity in non-fungible tokens, a kind of unique digital asset. (Lofty AI tokens are fungible tokens, which means they are interchangeable with tokens of the same property.)

In the mountain town of Aspen, Colorado, the St. Regis Hotel sells shares of property through a digital currency called Aspen Coin. As of last month, 826 investors held the coin, according to tZero, an online marketplace where the coin is traded.

For investors, the emergence of these markets can remedy what has long been a downside of real estate: people generally cannot sell quickly if they need cash for other purposes.

“We believe that blockchain technology and its gradual introduction is an important pathway to facilitating liquidity,” said Alan Konevsky, executive vice president of tZero. “It’s an open book that investors see.”

But government regulation remains a question mark for cryptocurrency markets. Lofty AI has taken the position that its tokens do not meet the federal legal definition of a “security” and that its marketplace does not meet the definition of an “exchange”, allowing the startup so far to avoid most Securities and Exchange Commission regulations.

SEC Chairman Gary Gensler says most crypto tokens carry the hallmarks of regulated securities, but the commission has so far delayed issuing rules while the Biden administration considers various crypto issues -cash.

The SEC did not respond to a request for comment on Lofty AI.

But Lofty AI has already hit a regulatory wall in California, where state law defines security more broadly than federal law. In February, Lofty AI stopped allowing California-based investors to purchase new tokens.

The California Department of Financial Protection and Innovation declined to comment.

In the absence of government regulation, Lofty AI has developed its own rules, such as prohibiting anyone from owning more than 15% of a property. The company earns 8% of the selling price of a property if investors buy all the tokens.

“Our hope is that it becomes as big as possible,” Chu said.

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