Whether it be microloans from companies like Kiva or innovate payment options for mobile users in Sub-Saharan Africa, alternative finance provides many unique opportunities for people to improve their lives and those of the communities they live in.
Real estate crowdfunding is one area people are accessing to improve their neighborhoods. Some sites offer the opportunity to support communities across America while others concentrate on a specific area.
Count Loquidity in the latter group. Loquidity encourages Midwest expats to invest in properties in Indiana, Michigan, Illinois and Wisconsin.
Loquidity COO Joe Elias is a panel speaker at the second annual Fintech Global Expo, which takes place this Thursday and Friday in San Diego.
An old maxim in investing is it pays to go against the grain… when everybody exits, you should consider moving in.
If you perform your due diligence and not accept mass action for fact you can find yourself in a good position.
That is what Joseph Elias and Loquidity are hoping for, as they build a real estate investment platform focusing on encouraging expats from the Central and Midwestern United States to invest in properties in Indiana, Michigan, Illinois, Minnesota and Wisconsin.
“We grew up here we know this market better than anyone else,” said Loquidity COO and Co-Founder Joe Elias. “We look our investors in the eye and they know we have their best interests at heart.”
In developing the platform, Mr. Elias and Co-Founder Jesse Clem also knew people from the Midwest, whether by birth or a later move, maintain strong emotional ties to the region.
“The Midwest is very strong for investing in their communities. More people would rather invest in their community than chase a higher return. If you can get a decent return but invest in their community they’d rather do that than chase a higher return.”
And there are decent returns. While capitalization rates in the Chicago area are around five percent, they average between seven and eight percent in Michigan, Indiana and Minnesota.
“They are higher because real estate is not overpriced like the coasts are,” Mr. Elias explained.
Given the novelty of online real estate investing, Loquidity has to take a few extra steps when recruiting investors.
“The majority of our time is spent educating people on how crowdfunding can be used for real estate investing,” Mr. Elias noted. “It is foreign to a lot of people.”
“A lot of it has to do with lack of awareness, maybe people don’t trust it enough yet. But a lot of people do get it, they are the early adopters. There is the same bell curve with investors and sponsors.”
Getting investors in the front door is important but just as important is letting them know when closing time is.
“We also have to have a good exit strategy, that’s one of the questions we get a lot,” Mr. Elias admitted. “We try to keep it to five years.”
Mr. Elias concedes the market is still forming and there are few certainties as to how both primary and secondary markets will develop.
“For us it is wide open which is cool, but it is a lot of responsibility. We have to make sure we do it right.”
It is hard to have a discussion about Midwestern real estate investment without mentioning Detroit.
“We are talking to a large ex-pat base who want to invest in Detroit,” Mr. Elias said. “Detroit’s looking for outside investment. Especially if they went to Michigan, Michigan State, or Wayne State, they have strong ties back to their state and they want to see it thrive. They don’t have a spot to go to put their money in where they know it’s going to go directly to an investment.”
Loquidity sees real estate crowdfunding contributing more than just capital to Detroit.
“People don’t need (just) money, they need people spending time there,” Mr. Elias said. “I went to school in downtown Detroit, I lived there, worked there, and after five it was a ghost town.”
“It is changing now though. Detroit has changed a lot in the last two or three years. Dan Gilbert has done a lot getting more businesses downtown. He has done a really good job with that. Everything has been positive. You have a lot of public private coordination that really has not happened before.”
“We come in and say ‘Dan, you have these properties. Wouldn’t it be great if you got the community involved?’ What would be the impact if you got both accredited and non-accredited investors to do a building?”
Mr. Elias said real estate crowdfunding lends itself well to mixed-use buildings which are such vital parts of successful revitalization projects.
“Bars are a good example but also retail shops, movie theaters, and restaurants. You can start to take advantage of a lot of these mixed-use buildings because there is this huge resurgence of urbanization, even in the suburbs. People do not want to have to drive everywhere they want to be able to walk out and enjoy the neighborhood.”
“I am into the technology end and I am finding all that technology makes people want to go out and actually talk to people. It is an interesting shift to urbanization. It was the suburbs for decades but it is now coming back.”
And if people come back to downtown Detroit, what they will find are many great buildings, constructed during a time of growth but which now need some TLC. That plays perfectly into the mindset of an investor looking at this as more than simply a paper transaction.
“Many buildings are beautiful, but dilapidated,” Mr. Elias admitted. “You are a part of bringing it back to life. With a new building it is harder for people to wrap their head around that it does not have that emotional attachment.”
“With the unaccredited crowd it is a lot more emotional. We want to say we will put out a good product. Still do your due diligence, but we will not put out a deal that is wishy-washy. We want people to get emotionally connected to their communities and where they are putting their money.”
“If you think about nonprofits raise the money, they are hitting an emotional note with people. They do not necessarily see the benefit but with real estate you can see the benefit, you can support the businesses which are located there.”
Banks are also shedding distressed properties at a rapid rate. While they can provide an opportunity if you do your homework, in the case of Detroit, too much supply brings unique problems, Mr. Elias cautions.
“For us there is no shortage of distressed properties in Detroit but there is a problem with appraisals, mainly on the single family side. Since 2012 the whole City of Detroit has done just over 500 mortgages. That is pretty abysmal for a land mass that could take in the entirety of New York City, Washington, D.C., and San Francisco.”
“Distressed properties are always an opportunity. You have to be careful with due diligence and location. Even if someone gave me a house in Detroit for a dollar and I put $60,000 into it. I may not be able to sell it for $70,000. I might only get $40,000.”
Loquidity is looking ahead past the point when real estate crowdfunding becomes commonplace and is considering how to differentiate themselves in what they look forward to being a competitive marketplace.
“We are having conversations on a weekly basis as to how we can structure deals, how we can incentivize them and be more creative for the investor,” Mr. Elias explained.
“We are not just taking their money and sending them a check. We are looking at creative lease structuring and reward-based programs for investors. Loquidity believes the vanilla of crowdfunding for real estate will be a good financial deal, so the question becomes what are the other added benefits for investors, sponsors and the community that you can provide.”
Real estate crowdfunding is a novel concept in an industry with a glacial response time to change, so Mr. Elias expects skepticism of the concept.
“You have a lot of people who say I do not want to deal with unaccredited investors, a lot of people who are uncomfortable. We tell them they do not have to deal with any investor – that is up to us to manage.”
He prefers to concentrate on the reverse, and looks forward to new and exciting opportunities.
“We may approach a business and say this is a Loquidity-crowdfunded business with additional incentives for a business to come in and thrive. At some point we may advertise this building is crowdfunded with a potential base of customers and revenue and entice quality businesses to come in. That is the ultimate goal we have in mind.”
The SEC’s slow response to putting national crowdfunding rules in place have spawned intrastate legislation in several states, so there have been some positives. Still, many would see federal legislation as the next important step in the growing acceptance of crowdfunding. Why is there such opposition and why is it taking so long?
“If you look at how money has been managed in this country and really around the world it has been held with a few,” Mr. Elias said. “Opening the doors scares the crap out of a lot of people. They see it has potential but they are cautiously optimistic.”
“A lot of people are still skeptical and they have a right to be. The way Congress has worded it, people have to find a way for it to make sense.”
“Audited financials are an item that scares people. In Michigan you can do a raise up to $2 million but if you do a raise between $1 and $2 million you have to have audited financial statements. There are still a lot of requirements that make sense but not in certain cases. They want to paint everything with one brush not multiple ones.
“They have to start somewhere and learn and that’s the problem.”