Tokenizing Real Estate: Lofty on Algorand

Property investments for the future.

Mini-REITs

Recently, we took the dive into Lofty, a Defi company built on Algorand. Lofty tokenizes real estate to enable crowdfunding using Algorand Standards Assets (ASAs). For as little as $50, anyone who makes an account can begin investing. The investor profits in two ways. First, cash dividends are paid out daily based on the cash flow of a property. Second, as the property value appreciates, tokens can be sold.

Each property is held under an LLC that is administered through Lofty. The LLC is securitized through the ASA tokens created for individual property. Lofty finds deals using an AI model. From what we can tell, it looks at all the properties for sale in an area. It then inputs distance to schools, historic pricing information, distance to other amenities such as grocery stories, crime rates, and other vital factors. After reducing the list of investable properties, the company picks the best. It brings them under contract for tokenization and investment. Each property, in essence, becomes a mini-REIT.

According to our research, Lofty offered 25 deals between 1 May and 30 September of this year. Suppose it can sustain a rate of 5 deals per month. In that case, individual investors should have a wide variety of properties to choose from and rapidly gain a diversified portfolio. By using ASAs, Lofty reduces its overhead and can offer deals at better prices.

Real estate can be a complicated business. Tough tenants, maintenance issues, and more can drive down margins and cause headaches. Lofty currently administers properties through property managers. During initial offerings, 5% of tokens are reserved for a maintenance fund.

Pros:

1. Lofty allows micro-investments in a diversified set of properties. Instead of focusing on a local area, investors can invest in many localities and reduce risk. Daily cash flow is also beneficial.

2. Sign-up is easy, and property tokens are sent directly to your Algorand Wallet. Of note, an Algorand Wallet is required, and you cannot yet hold these tokens directly on an exchange such as Coinbase.

Cons:

1. Dividends are paid to your Lofty account, not to your Algorand Wallet. Centralized payments like this are not what Defi is about. The company is working towards automated decentralized payments. It says that payments in USDC and Algo directly to wallets will be available soon.

2. There is no active marketplace for the tokens. If you want to sell, the company will repurchase tokens at the current property valuation. For example, if a property was valued at $100k and there were 100 tokens, Lofty would buy the token back for $1k even if the original value of the token was less. Lofty plans on hosting a secondary marketplace for tokens to provide liquidity for investors shortly.

3. Investing in real estate requires more tax filings. Depending on who you are and where you live, investing using Lofty could require additional work on your part. We recommend consulting a professional to figure out how it could affect you.

Lofty is a young company and recognizes each con to its platform. As they scale, they intend to improve their offerings to fix the first two issues. Taxes…well, that’s another story.

Breaking Down the Deals:

As part of our test of Lofty, we purchased two tokens ($100 total). Both properties were in the central United States. Lofty broke down each deal with expected cash return, forecasted property appreciation, and location metrics. We found these numbers to be understandable and the charts clear. As part of the token purchase process, we completed a governance survey that asks questions about how the property should be run. It included topics such as conditions to replace appliances, evict tenants, and more. The questionnaire was relatively short but professional.

Each property is estimated to have over a 16% annual return inclusive of dividends and appreciation, according to Lofty. It’s hard to know if that estimate is fair. Lofty advertises that it uses the HouseCanary Automated Valuation Model (AVM) to determine the Fair Market Value of properties. It updates valuations monthly. The valuation of your tokens update as well.

Lofty displayed clear photos for each property and an integrated map to look around the local area. The properties themselves were modest and reasonable. As Lofty invests its own money with each deal, it has skin in the game. That is important for accountability to individual investors.

Conclusion:

Generally, real estate is less volatile than crypto. We are choosing to invest using Lofty to diversify our investments and generate some cash flow. Lofty is also working towards a decentralized future, which we want to support. We believe that as the platform matures, investors will gain a significant amount of value from it. We will continue to post updates about the process as things change.

If you are bearish on Lofty, you can save your money for something else.

If you are bullish on Lofty, you can invest today.

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I am not a financial advisor. This article is for educational purposes only. You should do your own independent research before making any investment decisions.

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