Cryptocurrency boom opens the door to a new class of landlords

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

But before the work could continue, he had to hash it out with another group of people who, like him, bought shares in the property through a cryptocurrency website called Lofty AI. And some of them need convincing.

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

Like many decisions about Lofty AI, it is based on a vote of its owners, and the rules require a 60% majority to be approved.

Welcome to the next phase of the crypto economy, where ownership of remote rental properties is split into digital tokens that are sold around the world and where holders holding tokens transforms the homeowner business into a series of online polls – a system that the tenants may not even be aware of.

Lofty AI is one of a number of tech startups aiming to use blockchain technology to create a new form of investment in real estate. They add to a growing movement built around shared ownership and cooperation, commonly known as distributed autonomous organizations or DAOs.

DAO is usually formed around specific projectssuch as human resources community to buy a first edition copy of the US Constitutionand members have a say if they have purchased tokens online.

The concept of real estate investing is not new to the average person. Sites like Fundrise and RoofStock for many years have offered the opportunity to buy shares in homes and commercial developments in remote locations, but they often require a minimum investment of $1,000 or more and limit investor access. How fast can I withdraw?

Lofty AI is taking it further, creating a virtually unregulated online marketplace in which almost any adult in the world can invest as little as $50 to buy technical tokens. the equivalent of shares in a real estate rental business. Each token represents a portion of ownership in the Delaware-based limited liability company.

Desiree Fields, assistant professor of geography and global urban studies at the University of California, Berkeley.

She said the emergence of new property markets reflects how hot the housing market has become, attracting more investors than ever before while valuing more prospective homeowners.

“You can’t afford to buy a home yourself, but maybe you could be the 50th homeowner,” says Fields.

Noble AI is still small. Its online marketplace started last year and so far list about 90 rental properties, mainly 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 we can make real estate investing more accessible, so that anyone with an internet connection is available,’ said Jerry Chu, CEO of Lofty AI. Can anyone start building a rental property portfolio? “. The startup received funding from Y Combinator, a well-known investment firm in Silicon Valley.

“What we want is to benefit from these individual acquisitions without having to deal with the issues,” he said.

Gipson, 24, is not a typical Memphis host. As a student in the San Francisco Bay Area, he also owns tokenized shares of rental properties in Chicago, and he regularly votes on topics to come up with for his property – such as: The new ceiling fan has been approved by the owner.

“I feel like a homeowner making those decisions,” he said. Eventually, he plans to sell his tokens for a down payment for a house of his own.

Token purchases and sales are recorded on a blockchain, a system in which multiple computers contribute to a shared database or ledger that no single entity controls. Chu said the blockchain ledger is suitable as an alternative to the old-fashioned record-keeping in real estate because transactions are transparent.

“Buyers and sellers sometimes can’t trust each other, and that’s why you have this whole escrow and payment process,” he said. “For us, the settlement took four seconds.”

But it is unclear whether the idea of ​​democratizing rental property investment is appropriate in an already tight housing market. see the big change thanks to other tech startups.

Gipson said the startup started asking investors not to contact their tenants directly after an early experience when tenants learned about Lofty AI and thought it was so unusual that it must have been a scam.

“It would be bad etiquette if a tenant had access to 30, 40 different people and said, ‘Oh, I own this property.

Single-family rentals were previously informal arrangements, as individual landlords leased out their second home or property they inherited. But that changed during the Great Recession that began in 2007, when large investment companies begin buy a foreclosed house.

That has paved the way for small investors to source resources from the community, said George Ratiu, a senior economist at Realtor.com.

“Single-family rentals are becoming the norm for the investor class,” he said. “We are only just beginning to feel and see the impact that technology is having.”

Ratiu said investors have been attracted to rentals in part because low level of new construction tighten housing supply nationwide and push up prices and rents. Rising interest rates this year will also keep some potential homebuyers in the rental market longer, boosting demand in the short term, he said.

“Risk is: What happens in a bear market? Are their positions protected well enough that they can withstand that shock? ” he say.

Properties on Lofty AI have a maintenance reserve, and token holders have had heated discussions in the online message board about How to handle the eviction and avoid being an absentee host or worse.

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

Last year, a new investor darkly joked on Discord: “I joined the club and owned the tokens. I’m not sure if my business card should be titled ‘pocket uncle’ or ‘lord’. Please give advice”.

Fields professor Berkeley says that complex and anonymous title agreements can make it difficult to assign responsibility to landowners.

“The landlord can be anywhere. There is this geographically enduring relationship,” she said.

“Homeowner absenteeism isn’t a new thing, but they don’t necessarily have a stake in Cleveland, Ohio, and the people who live there.”

The conversion of owner-occupied homes into rental properties is facing problems in some neighborhoods where both landlords and outside investors special welcome. The Wall Street Journal reported this month that rental restrictions are increasing among host associations.

But the tokenized real estate concept is still being tested in other places, including competing startups like The Arrival House, suggestion rental real estate shares starting at $100 and Vesta Equity, allow holders to convert equity into non-fungible tokens, a single type of digital asset. (Lofty AI tokens are fungible tokens, which means they are interchangeable with tokens in the same property.)

In the mountain town of Aspen, Colorado, the St. Regis is selling ownership shares 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 could solve the dark side of real estate long ago: People often can’t sell quickly if they need cash for something else.

“We think blockchain technology and its gradual introduction provide an important avenue for 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 the crypto markets. Lofty AI has argued that its tokens do not meet the federal legal definition of a “security” and that its market does not meet the definition of an “exchange,” allowing the startup to avoid most all regulations from Securities and Exchanges. Mission.

SEC Chairman Gary Gensler has said that most crypto tokens carry signs of regulated securitiesbut the committee has so far upheld the promulgation of rules during Biden’s administration study different questions around cryptocurrencies.

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

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

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

In the absence of government regulation, Lofty AI has come up with its own rules, such as banning anyone from owning more than 15% of assets. The company earns 8% of the real estate sale price if investors buy all the tokens.

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

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