Crypto booms opens door to a new class of landlords


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

But before the work could go ahead, he had to discuss it with a group of other people who, like him, had bought 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 scamming us?’” Gipson said. “They said, ‘I can go to Amazon and buy one for $35.'”

Like many decisions about Lofty AI, it came down to a vote of the owners, with bylaws requiring a supermajority of 60 percent for approval.

Welcome to the next phase of the crypto economy, where ownership of far-flung rental properties is broken up into digital tokens that are sold around the world, and where token holders transform the business of owning into a series of online surveys. line: a system that the tenant may not even know about.

Lofty AI is one of several tech startups looking to use blockchain technology to create a new form of real estate investing. They join a growing movement built around shared ownership and cooperation, often called distributed autonomous organizations, or DAOs.

DAOs often form around specific projectslike crowdsourcing money to buy a first edition copy of the constitution of the united statesand members can give feedback if they purchased a token online.

The concept of real estate investment for the average person is not new. websites like fundraising Y ceilingstock They have for years offered the opportunity to buy shares of homes and commercial developments in distant locations, but they often require a minimum investment of $1,000 or more and restrict how quickly an investor can cash out.

Lofty AI goes further, creating a largely unregulated online marketplace where almost any adult in the world can invest as little as $50 to buy a digital token equal to a stake in a single-property rental business. Each token represents an ownership interest in the Delaware-based limited liability company.

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

She said the rise of new real estate markets reflects how hot the housing market has become, attracting more and more investors and driving many would-be homeowners out of price.

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

Lofty AI is still small. Their online marketplace started last year and until now lists about 90 rental properties, primarily 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 can start building an investment portfolio of rental properties?'” he said. Jerry Chu, CEO of Lofty AI. The startup obtained funding from Y Combinator, a well-known Silicon Valley investment firm.

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

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

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

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 single entity controls. Chu said blockchain ledgers are apt to replace old-fashioned record-keeping in real estate because transactions are transparent.

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

But it is unclear whether the idea of ​​democratizing rental property investment will fit well into a tight housing market that is already seeing a big change thanks to other tech startups.

Gipson said the startup began telling investors not to contact its tenants directly after an early experience when a tenant found out about Lofty AI and thought it was so unusual it must have been a scam.

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

Historically, single-family home rentals have been informal arrangements, as individual owners rented their second homes or properties they inherited. But that changed during the Great Recession that began in 2007, when large investment firms started to buy foreclosed houses.

That has paved the way for small investors to integrate, said George Ratiu, senior economist at

“Single-family rental is becoming a standardized investor class,” he said. “We are starting to feel and see the impact that technology is having.”

Ratiu said investors have been attracted to rentals in part because of low levels of new construction restricting the national supply of housing and raising 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 down market? Will their positions be covered well enough that they can withstand that impact? he said.

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

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

Last year, a new investor darkly joked on Discord: “I joined the club and I have tokens. I’m not sure if my business card should be titled ‘moneybags uncle’ or ‘slumlord’. Please advise.”

Fields, the Berkeley professor, said complex and anonymous property deals could make it harder for owners to hold themselves accountable.

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

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

Converting owner-occupied homes to rentals is being pushed back in some neighborhoods where neither tenants nor outside investors are especially welcome. The Wall Street Journal reported this month that leasing restrictions are on the rise between the communities of owners.

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

In the mountain town of Aspen, Colorado, the St. Regis hotel sells shares of ownership 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 may address what has long been a downside of real estate: People generally can’t sell quickly if they need cash for another purpose.

“We believe that blockchain technology and its gradual introduction provide an important pathway to facilitate 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 crypto 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 to now avoid most of the Securities and Exchange regulations. Commission.

SEC Chairman Gary Gensler has said that most crypto tokens have the characteristics of regulated securitiesbut the commission has so far postponed issuing rules while the Biden administration study various questions around cryptocurrency.

The SEC did not respond to a request for comment about 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 regulations, Lofty AI has been crafting its own rules, such as prohibiting any one person from owning more than 15 percent of a property. The company earns 8 percent of a property’s sale price if investors buy all the tokens.

“Our hope is to make it as big as possible,” Chu said.