Flower beds frame the front door of a freshly renovated mint-green home for sale on a quiet West Nashville street.
New granite countertops, stainless steel appliances and wood flooring brighten the interior.
But beyond its facade, the Leslie Avenue fix-and-flip venture near the trendy Nations neighborhood is anything but ordinary.
California cryptocurrency firm Property Coin bought the property earlier this year and will devote sale profits to boosting the value of its brand of digital cash.
Tech-enhanced real estate deals
It’s one of a growing number of competing technology-based ventures flooding Nashville’s real estate market with millions of dollars.
“Our business is something people haven’t seen before,” said Andrew Jewett, co-CEO of Property Coin. “We are buying homes in both cash and cryptocurrencies. We love the Nashville market and want to buy $50 million in Nashville real estate in the next year.”
Atlanta-based Groundfloor, another online fix-and-flip venture, is also bullish on the Nashville market. The company wants to invest $1 million in Nashville real estate immediately as it expands nationwide. It’s offering loans for local partners to flip homes while accepting online investments in its renovated houses as low as $10.
“What’s special about Groundfloor is that the minimum investment is only $10,” said Groundfloor CEO Brian Dally. “This allows investors the opportunity to really diversify. With only $100, an investor could invest in 10 loans.”
Groundfloor’s website lists photos and descriptions of its properties, and allows people to pick and choose which to finance. The company is similar to Fundrise, Rich Uncles and RealtyShares — though they each have notable differences.
Unlike Property Coin, these online platforms accept cash and return any profits in cash within about a year.
In contrast, Property Coin owners can cash in anytime — provided they find an interested cryptocurrency buyer.
“The coin is a way for us to fund the acquisition of new properties. It represents fractionalized ownership of all the properties we buy,” Jewett said. “It provides far greater liquidity on the back end for investors.”
What is cryptocurrency?
Cryptocurrencies are decentralized, anonymous, internet-based financial transactions that eschew the government-regulated cash system. Bitcoin, perhaps the most famous brand, was the first digital coin when it debuted in 2009. There are now hundreds of them.
The encrypted codes are verified and secured so they can’t be altered, preventing charge-backs and counterfeiting. The transactions are also immediate, unlike bank cash transfers that can take days to process.
Property Coin investors are betting on the company itself rather than single properties, as with Groundfloor.
Jewett believes the $3 coins will get more valuable as the company amasses properties.
“We’re reinvesting 100 percent of profits with the effect of creating this natural upward pressure on price,” Jewett said. “There’s nothing really behind cryptocurrency other than a belief and a trust. But we’re putting real assets behind it.”
Property Coin’s parent company, Aperture Real Estate, uses new digital technologies to scour house listings around the country for the best deals. It owns a few dozen homes in Georgia, North Carolina, Indiana and Nebraska, and plans to quickly expand its Tennessee portfolio. It’s renovating three homes in Memphis.
The firm avoids costly high-risk markets such as San Francisco and New York City.
“We want to go to places that have much better affordability,” Jewett said. “The only limiter is capital. We need more money to buy houses. That’s the only reason we have 30 homes instead of 1,000.”
New and risky
Stock in new companies has historically been sold only to people dubbed “sophisticated investors,” meaning their incomes top $250,000. But the 2012 JOBS Act opened the door to crowdfunded startups that offer buy-in for as little as the price of lunch.
“Unless you’re one of the wealthiest 3 to 4 percent of people, you haven’t had equal opportunities to invest,” Dally said. “These are old rules in place since the Great Depression. We allow you to invest directly in the loans for the properties themselves.”
But these new low-cost investment opportunities exist in a murky regulatory area. The upstart industry is dogged with money laundering, scams and other fraud.
For now, Property Coin requires investors to have high incomes because the startup is complying with federal securities laws to limit risk. But next year the coins can trade freely to anyone with a few bucks.
The risks haven’t dissuaded many from the lure of low-barrier real estate stakes.
Investment in such startups is soaring despite the risk of lending money to untested, unregulated ventures. More than $11 billion has been entrusted in new cryptocurrencies this year, according to the Wall Street Journal. Billions more are raised by crowdfunding sites.
Joshua White, assistant finance professor at Vanderbilt Business School and a former SEC financial economist, emphasized the importance of doing research in the “cryptocurrency craze” before handing over money to any startup company.
“There was more money raised via initial coin offerings (for new cryptocurrency companies) than early-stage venture capital in 2017 despite the SEC’s elevated scrutiny, investor warnings and widely publicized enforcement of fraudulent initial coin offerings,” White said. “Advice for any investor is to read through all the documents to try to determine if this is a legitimate business that’s going to generate positive cash flows. This is a space where there’s been a lot of fraud so you want to double-check.”
Groundfloor and Property Coin issue statements to investors and the SEC about their profits and have teams with extensive real estate, finance and technology backgrounds.
Groundfloor said in its 2017 annual report it paid $1.6 million in interest to investors last year with an average return rate of 12.83 percent.
It also publishes warnings of the risks involved.
“We do not guarantee payment of the limited recourse obligations in the amount or on the time frame expected,” Groundfloor’s offering circular states. “We have the authority to modify the terms of the corresponding loans which could, in certain circumstances, reduce (or eliminate) the expected return on your investment.”
But Dally said the young company is delivering strong returns.
“The first thing we tell people is to make sure you spread out your investments over a lot of loans so your eggs aren’t in one basket,” he said. “Not every project works out. I think people are smart enough to make their own decisions. I don’t think you have to pay people money to invest for you.”
Reach Sandy Mazza at firstname.lastname@example.org or 615-726-5962 and on Twitter @SandyMazza.