Own US Real Estate – The Crypto Way. Yes, you read it right.
The prospect of investing in real estate abroad has always been alluring.
Unfortunately, capital controls of the TradFi system at home & ownership laws abroad have made this an opportunity that only the ultrarich can afford.
Well, not anymore. Enter: Lofty Real Estate – a blockchain-based service that allows you to own US Real Estate through tokens – The Crypto Way!
1. What is Lofty AI?
Lofty is an online marketplace that:
– Helps prospective sellers of properties in the US tokenize their real estate;
– Offers tokenized properties for sale to investors globally;
– Appoints property managers on behalf of investors who collect rent & make hires for repairs & maintenance;
2. What is Tokenization & Why Does Lofty Use It?
Tokenization is the process of creating fractional representative units of an asset. In the case of Lofty, each property’s appraised value is divided into units of US$50 each, and these units are called tokens.
So a property with a US $100,000 value will have 2000 units of USD 50 each representing the entire ownership rights in the property.
Lofty utilizes this method of distribution because it opens up investment avenues for a huge market at home & abroad for people who don’t have the financial capital and/or our constrained by a myriad of laws to invest directly in physical real estate.
All you need is a cell phone & an Algorand wallet with USD50 worth of stables, and you’re all set.
3. How Does the Lofty Marketplace List Properties?
A property owner desiring to sell his property applies to the Lofty marketplace. At this stage, an initial desktop appraisal is undertaken to approve or deny the listing based on several factors including but not limited to occupancy status, condition, location, rental history, etc.
Once the property is approved, it is put under contract by a newly formed LLC. The LLC is then tokenized into individual $50 tokens on the Algorand blockchain.
The next step entails the hiring of a professional property inspection company that shall provide a report to improve upon the initial desktop appraisal. The main concern is the need for repairs which, if required, are done so by the seller or a net payment is accepted by him with a credit to the LLC.
In the last step, the property is listed on the Lofty marketplace. Once all tokens representing the property are sold, that is, the property is fully funded, and the LLC will move for transfer of the property by registration of the title deed in its name.
5. I Want to Invest. How Does Lofty Work?
5.1. Sign Up
The second step is setting up an Algorand wallet and connecting it to your Lofty account. The platform supports the Pera Algorand Wallet Mobile App & the MyAlgoWallet app.
You can now start browsing properties in their marketplace. Together with pictures, the marketplace provides & curates detailed financial data, inspection reports, and property documents.
Once you decide on a property, you will need to opt into that property using your algorand wallet. This is basically a security feature, like permission to the protocol, to send you your tokens in exchange for $ALGO, $USDCa, or $STBL.
5.3. Collecting Rent
Once the purchase is complete, you get tokens worth USD $50 each and become a direct owner with your first rental payment coming on the same day. The rent may be withdrawn as Crypto ($ALGO, $USDCa, or $STBL) to your algorand wallet or through one of the fiat / TradFi options available.
5.4. Token Appreciation
On a monthly basis, the protocol undertakes a valuation exercise using the HouseCanary Automated Valuation Model – a leading price standard in the industry. The token price is adjusted for changes in valuation in response to the actual property price going up or down.
5.5. Cashing Out
There are no lock-up periods & Lofty tokens can be sold at any time for no fees or penalties. At the moment, the protocol itself is the redeemer but they anticipate the launch of their secondary market exchange later this year.
All income & appreciation is taxable for US investors with the protocol deducting these at source (payout and/or cash out) & providing necessary paperwork filed with the IRS to the investor.
Non-US Investors are subject to similar Withholding taxes which, depending on tax treaties that the Investors’ home country has with the US, may be waived. However, all income generated would remain taxable in the investor’s home country.
Lofty utilizes the Algorand blockchain which is a fast, secure & cost-effective network. The use of blockchain technology helps tokenize the property & ensures all transactions are recorded on the blockchain.
Similarly, there is decentralized ownership & governance which is ensured by blockchain technology. No single investor is allowed to own more than 10 -15% of any property & all major decisions are voted upon by the token holders through a super-majority clause (60%). These decisions are then binding on the property manager and the platform.
6. Lofty – Real Estate & Some Real Questions
6.1. Is Lofty a legitimate enterprise?
Lofty is incorporated in the US which means it is regulated by the US Securities & Exchange Commission (SEC) as an incorporated enterprise. Whether the SEC additionally regulates it as a securities issuer is not clear.
From the content of the disclaimers available on the Lofty website, it seems they aren’t offering any investment advice and that makes me feel the regulatory environment applicable to them is general and if specific just not related to investment products.
Leading investors including Y Combinator and Nvidia are backing the project with the management team boasting a rich experience profile from the banking, e-commerce & technology sectors.
As of the time of writing, since their May 2021 launch, USD 16.3mn worth of funds have been invested in Lofty tokens & USD 394,000 of daily returns have been processed so far.
6.2. Is Lofty a Safe Investment?
There is nothing like making a safe investment. Some risk is always present. In this case, your investment is subject to the general risks associated with the US economy & the real estate market in particular. Higher interest rates depress property prices whereas lower interest rates positively impact them.
It is also reasonable to assume that, as with all real estate, there are unique risks with respect to the property as well that may weigh in on your return profile. With no disrespect to anyone, properties located in ethnic areas or where crime rates are high will be cheaper but also attract lower valuations going forward.
Of course, with all physical assets, come other risks as well. For example, a flood destroying your property altogether & necessitating major repairs.
The Lofty team and platform mitigate some of the above risks through the use of vetting properties through third-party inspectors and undertaking insurance where necessary. Generally, this only leaves market risk with the investor.
6.3. If Lofty is not the securities issuer, who is the legal owner of the property & how?
Token holders are the owners of the property through an LLC which has the title deed of the property registered to it. Lofty is only the managing partner of the.
Any legal challenge to Lofty itself would not impact the status of the individual properties themselves as they fall under separate legal structures.
6.4. Does the Price of Algorand Impact the Price of Lofty Tokens?
No. The change in the value of the property is the only impact on the price of your token. The Company only uses the blockchain infrastructure to tokenize the process. There is no price linkage with Algorand.
6.5. How does Lofty make money?
Lofty makes money in two ways.
They take a 5% listing fee on each property (or $5,000 if less than $100,000) & also charge sellers a 3% seller’s fee at close (or $2,500; whichever is greater) in order to list their properties on their marketplace.
7. Final verdict on Lofty Real Estate Investing
Lofty presents a unique and innovative application of blockchain technology to a real-world problem. It shows us a path as to how we can create access to global investment opportunities.
Personally, I have to also commend them for democratizing access. Many people, in the US or abroad, cannot buy real estate to live in leave alone as an investment. The Lofty product offering solves this barrier to entry.
The most fascinating aspect is that they have a product that is KYC-compliant and this gives you a glimpse of the future of finance and investment. I believe that investors, no matter the size, should take advantage of this product to diversify their portfolios.