A couple months ago I was introduced to Lofty.ai, a real estate investment crowdfunding app with a crypto twist. Some of you may know that I am a fan of the Algorand blockchain for its speed, scalability, decentralization, and focus on bridging the crypto and traditional finance worlds. Lofty is built on Algorand, which makes it a blend of two things I really like: Real Estate and DeFi.
A few disclaimers before I continue:
- I have invested in one of Lofty’s properties and plan to continue investing in them
- I am in the process of investing in Lofty directly
- Some of the information below was discovered through a call with Max Ball, the COO of Lofty
- None of the below is financial advice, please seek independent legal or tax counsel
What is Lofty?
Like many crowdfunding apps before it, Lofty sources properties, renovates, and rents them out. Then it creates a Non Fungible Token of the LLC interests and sells them to investors. Investors are then entitled to daily rental dividend payments made through Lofty’s platform. Lofty earns income by taking a listing fee.
Lofty went through YCombinator, a highly respected startup accelerator, and initially began as an AI as a service firm to help investors find up and coming neighborhoods throughout the US. However, they pivoted last year, to get more skin in the game and invest in properties directly.
What I dislike about Traditional Real Estate Crowdfunding
There are a number of things that I do not like about traditional crowdfunding like Fundrise or Crowdstreet. The biggest issue that we saw last year during the start of the pandemic was liquidity. While these companies touted liquidity as a benefit, the truth is that investors’ funds were completely locked for an indefinite period of time. This dilutes the value of investing in a Traditional REIT.
The other is the move from holding assets in Limited Partnerships and LLCs to REITs. I love REITs, but some of the best benefits of real estate investing are leverage and depreciation’s tax benefits. Depreciation expenses flowing through to personal income is a way to get the double benefit of cash flow and lower taxable income (seek a legal professional’s advice about this).
What I like about Lofty
The nice things about Lofty are plentiful:
- Properties are held in LLCs and income is reported on K-1s allowing full tax benefits
- Tokenization simplifies a bunch of legal issues and reduces transaction costs
- The AI that they have built is a competitive advantage that none of the other new entrants to the space have
- They are excellent marketers and have used some excellent guerrilla marketing techniques to gain traction
- They have sold out their first three properties in days or hours
- It’s all passive. They do all the sourcing and management leaving me with rental dividends.
How Lofty Works
The UI is very simple to use. The initial account set up does require you to go through a Know Your Customer (KYC) flow so they can prevent fraud and money laundering. You can also set your Algorand or MyAlgo wallet address for you to receive your rental dividends.
Lofty has an offering page for each property similar to the deal that I invested in: 4661 Bertra Rd. After reviewing the deal you can choose to invest via bank account or credit card. The benefit of the credit card is that your tokens are available to you immediately, whereas if you use a bank account the tokens may take a few days to hit your wallet. As an example, I paid with card and received the tokens almost immediately and received a nice investment bonus in $ALGO.
At the time of writing, Lofty is still working on the daily dividend distributions. However, the dividends are credited to your account daily. Currently if you would like a withdrawal you can reach out to them directly. I’m personally interested in having my rent payments received as $ALGO and hopefully being able to reinvest into properties via $ALGO. This would allow me to invest completely outside of the heavy transaction fees in TradFi. They’re also exploring ways to sell your tokens on the open market, likely through a platform like AlgoDex or Yieldly, completely removing any liquidity risk that has been associated with other crowdfunding platforms.
Another alternative that I’m thinking about using is with the BlockFi credit card (referral link) so I can earn Bitcoin as rewards while making investments. Spending money I already want to spend to make money seems like a win/win scenario.
What is REALLY interesting about the future of this space
As you many know I have been deep diving into Decentralized Finance this year. At the moment Lofty does not use any leverage in their properties which can cause the cash flow return to be lower than a traditional leveraged deal. To counteract that they have sourced and renovated properties to give 6-7% cash on cash returns and 18%+ IRR which is excellent. I believe this will be possible, but harder to replicate, at scale. Alternatively, they could start, and I believe they intend to, use leverage in new deals which would boost both cash on cash and IRR. In that case you could start to see 10%+ yields and 20%+ IRR. That is VERY interesting to me and would be very worthy of moving some of my dividend portfolio over.
The SUPER interesting part of this is that as the Algorand DeFi system matures each of the properties could be valued independently and used as collateral on DeFi loans. Meaning they COULD continue to use unleveraged deals and each investor could dial in leverage according to their own risk tolerance. If Lofty decides to use leverage, then each investor could do their own Cash Out Refinances via a crypto loan. Of course there would have to be some automated valuation and collateral assessments, but wow that would be cool.
Overall I’m super excited about Lofty and the maturation of the Algorand ecosystem. It feels like early days, and if it can come even close to Ethereum or Binance Smart Chain, then I believe we have some nice days ahead of us. Algorand does seem to have an edge on some of the other new chains since it has some features that are purpose-built for finance. So I expect that we see the delineation between TradFi and DeFi start to blur. That is when things will be very interesting. Crytpo and Fiat working seamlessly where they make sense.
I’d love to hear your thoughts on crypto, crowdfunding, defi etc on here or Twitter!