Deidre Woollard: Hello. I'm Deidre Woollard, an editor at Millionacres. Thank you so much for tuning in to the Millionacres Podcast. I've been on a mission lately to talk to leaders from all the top crowdfunding websites and find out what their journey has been like in the past year, what they see about the future, because I certainly see great things. I'm excited today to be talking to Jesse Stein who's the head of real estate at Republic, which is an alternative investment platform that's open to all investors. They have over two million active users. They've closed over 500 million in investments. They've got some new products that I think are really interesting. For the first half of the podcast, I'm going to be talking to Jesse. Then for the second half, I'm going to talk to Jesse and the team from Nada Homes and their partnership with Republic on Cityfunds. Welcome, Jesse.
Jesse Stein: Thanks, Deidre. Happy to be here and thanks for having me.
Deidre Woollard: I feel like you have had this front row seat to everything that's happening in real estate crowdfunding, which over the last couple of years has just been amazing. What are you seeing right now as things evolve?
Jesse Stein: A couple of things pop to mind. First, I'm very surprised by the interest by institutional sponsors in wanting to consider and use crowdfunding as a way to raise capital. Almost everyone we speak to believes that raising capital online is the future, and there are a lot of firms that are looking to get in early and build that brand recognition and start building that investor network that they can continue to grow and benefit from in the future. We've seen in the public markets how there's been this retail revolution and this has really sped up this interest level, where online capital raising, it's going to provide an additional catalyst for these companies to continue to grow their assets under management. Second, I've been very amazed at the innovation by the sponsors that are using crowdfunding. It's not just your typical real estate investment products. I think both sponsors and investors realize that real estate investing has been available to the crowd for 30 years since the advent of the REITs that started to go public in the early '90s. But the real revolution here for real estate crowdfunding is the creation of these unique products that fill the void for real estate products that don't exist in the public markets.
Deidre Woollard: I think that's one of the things that's really interesting that you're doing, is that you've been thinking about it from a product perspective. In terms of the sponsors and developers, have you seen a rapid uptake in sponsors and developers being interested in using crowdfunding?
Jesse Stein: A hundred percent. Even though sponsors believe it's early, where the amount of capital that they can raise through crowdfunding is not necessarily a meaningful amount for the types of transactions that they're doing, they do want to establish that retail network. Blackstone really was the first to market of the big private equity firms to say, hey, we can raise an unlimited amount of capital from institutional investors, but we're going to start raising from retail as well. They brought their non-traded REIT to market a few years back. There were a number of their peers that came with similar products. You're going to start to see the same thing within crowdfunding, where the quality of sponsors will continue to grow, and all of a sudden, it's going to be, hey, if this group is doing it, maybe that's something I should look into as well. We're starting the shift. We're still going to have your mom-and-pop real estate sponsors, developers, property owners. This is a great way for them to raise capital if they don't have those institutional investor networks. But we're also seeing the more established asset managers and sponsors who are looking at this as a way to complement their institutional capital raising strategy.
Deidre Woollard: Interesting. I know one of the things that's been important for Republic is creating opportunities for non-accredited investors. One of the things that I hear from non-accredited investors,sometimes is they get a little frustrated about not being able to be involved in some deals. Why was it so important for you to focus on really opening things up for everyone?
Jesse Stein: That's really the core basis of the Republic platform. One of our taglines is "Power to the people". It is a little frustrating that the definition of a credit investor which was created decades ago is still in play today. Considering there's just such an equal access to research and information regardless of an investor's net worth or income, you would think that the SEC, who made a slight adjustment to the definition last year, would've gone a few steps further and really allow people to invest whether it's based on sophistication, or knowledge, or totally eliminate the income and wealth considerations. Hopefully, the entire concept is reconsidered at some point. But for now, it does create a regulatory barrier for non-accredited investors looking to participate in certain offerings.
Deidre Woollard: That's true. I understand in theory why it exists, but I also understand why it's so frustrating. That's why I think the steps that they made last year to make it a little bit more knowledge-based was a good step in the right direction, but still a really big gate for people to get through.
Jesse Stein: It is. They showed that they understand that conceptually it doesn't necessarily make sense but weren't really willing to give up some of the investor protections that the rule is meant to. For real estate, I believe that it's even more important for non-accredited investors to be able to participate in these type of offerings, because in addition to the economic aspects of real estate where it has been proven over the course of centuries as a great way to build long-term wealth, allowing non-accredited/accredited investors to participate in these real estate offerings, you have that pride of ownership in real estate where you could walk past the building, or be in a neighborhood and say, hey, I own property here, as well as provide the ability to support local communities, or in the case of Cityfunds, invest in markets that people like whether it's because they live there, they visited there, or it's a market that they just want to participate in. Our vision at Republic and at Cityfunds as well is to allow as many people as possible to participate in these type of products.
Deidre Woollard: I love that pride of ownership thing. One of the things that we've learned through having a mobile service is that we've had some of our investors take pictures of themselves at the buildings of the crowdfunding projects they're participating in. They're really excited about it because they have that pride of ownership. Let's talk a little bit about Republic's mobile app because I think that is so smart. I think a couple of companies haven't really gotten on the boat yet with developing those mobile platforms. Do you feel like investors are much more comfortable now using mobile in a way that they weren't even maybe three or four years ago?
Jesse Stein: A hundred percent. You look at public market trading companies like Robinhood or Republic that were mobile-first platforms and we're obviously able to grow really significant user bases. Regardless of the demographic, people are spending an enormous amount of their time on their phones, and it's sometimes the preferred medium. Even when a computer or laptop is just as easily accessible, people do prefer to research, browse, and transact through their mobile devices. I think at Republic, a lot of people have this perception that our user base is skewed to the very young side. These are 20-somethings who are always mobile and that's why they're investing in these startup companies that Republic specializes in. But the reality is that our user base is actually older than Robinhood's typical user base. Thirty-five to fifty demographic is our biggest constituency.
Deidre Woollard: One of the things I like about Republic, and maybe that's part of why this has that reputation, is that it's innovative. I wanted to ask you about crypto and tokenization. I know you've been studying that. I'm really fascinated by this tokenization I feel like in real estate had started years ago, but it never really has taken off the way that I thought it would. What are you thinking right now about the role of crypto in real estate?
Jesse Stein: A hundred percent. Our blockchain advisory group is one of the most prominent groups in the industry. We're at the front lines of everything that's going on in the crypto space. What I would say is that the two industries haven't really figured it out. Like you said, for years, we were reading about how tokenization is going to revolutionize real estate and it's going to provide all of these benefits. The reality is that tokenizing an asset or the equity of an asset for the sake of tokenization, it doesn't do anything. The bottleneck around innovation in real estate capital markets was not a technological problem that blockchain solves. The restrictions on innovation are typically regulatory-related. You just haven't seen that adoption, because by tokenizing your asset in real estate, you don't get that marketing benefit that you think you would get, and you might lose more typical real estate investors than you actually gain in crypto investors. Crypto investors, they're not looking for an 8-10 percent stable return on an investment. They're looking for a thousand X over the course of a month, or at least the chance of that. When you come to them with a very safe, secure, stable asset that doesn't have the potential to produce those type of returns, it's just not that interesting to them. I do think there is something big to be done with tokenization blockchain in real estate. We're working with our blockchain group on developing some products that we think might makes sense and are truly innovative, nothing we can discuss at this time, but exactly to your point, it hasn't taken off the way that everybody thought it was a few years back.
Deidre Woollard: One thing I've noticed that has taken off or at least gotten legitimized is Bitcoin. I noticed that UWM announced this week that they are looking to accept Bitcoin for mortgages. Used to be that in real estate, accepting Bitcoin for the sale of a property was a publicity stunt. It was one I used when I was working in PR. Do you feel like Bitcoin itself is becoming more legitimate within real estate separate from crypto?
Jesse Stein: Not necessarily. I think you still have property sellers that use it the way that you described, as a publicity stunt, to say, hey, we now accept Bitcoin. You have to keep in mind that from a tax perspective, when someone uses their Bitcoin to buy an asset, it's a lot different transaction than if they're using cash. They do have to pay capital gains or potentially losses on that Bitcoin conversion to whatever assets they're acquiring, so it is a bit of a different animal. I do think the use of digital currency, whether that's stablecoins or something that a government might create, has the opportunity to potentially assist in real estate transactions and make those easier and more efficient. I think the greatest value that Bitcoin has provided to real estate is by making a whole lot of people very rich. When they realize that they're set for life, or they are so rich that, hey, maybe I should diversify into different assets, it's often real estate that they want to put their money into. So Bitcoin helps as far as it's created a lot of wealth that ultimately will flow or has flown to real estate.
Deidre Woollard: That is an excellent point. I have definitely seen that, that a lot of people who wanted to get out of their Bitcoin, they immediately went to real estate, and I always love to see that. Let's talk about some of the things that I feel like most investors want to know right now, which are interest rate changes, financial concerns about that, possibility for inflation, global uncertainty. How much is all of the swirl of news that's happening right now impacting Republic, and how do you separate signal from noise?
Jesse Stein: I think you have to think about it based on which sector you're investing in, what asset type, what location, because macro-level events and changes in the economy are going to impact each of those a little bit differently. Let's take inflation for example and rising interest rates, and assume that those happen at the same time. For sectors like residential or hospitality where that inflationary pressure can be passed along to a tenant or a person staying at a hotel, those sectors that are not as negatively impacted by inflation and rising interest rates the same way that a net lease property or an office building with long-term leases or a retail building with long-term leases would be where those properties are really trading on a multiple of income and react similarly to fixed income products. Then from a market perspective, you have to think, if inflation and rent growth and home price appreciation continue along the same line, which of these markets can continue to attract demand if prices go up? That's where you have to look at what are the jobs in this market. Are these jobs that are also going to increase income as home prices? A market like Austin is a good example. There's so much migration to Austin and so many companies moving to Austin. These are well-paying, high-tech jobs where we've seen as Austin prices appreciate and appreciate, income levels have been maintained in a similar ratio where there's just continued demand even at those higher prices.
Deidre Woollard: I think that is a perfect segue to start talking about the Cityfunds. Let's take a quick break here, and we'll come back and talk about that.
Welcome back. For the second half of the podcast, we're going to talk about Cityfunds and Republic's partnership with Nada. Nada is a real estate service and finance company. It's committed to making homeownership more accessible and affordable for everyone by building solutions for anyone looking to sell, buy, finance, trade, or invest in real estate. I'm here with John Green and Mauricio Delgado along with Jesse to tell us more. Let's get right into it. Let's talk about Cityfunds. I think it's an extraordinary idea. How exactly do these funds work?
Jesse Stein: I'll take that one. Cityfunds are city-specific real estate funds that invest exclusively in single-family residential properties in a given market. This makes it a unique product in that it provides a targeted exposure to a city's residential real estate market through a diversified portfolio of properties. Now, this is something that does not exist in the public markets, and goes to the point I made earlier; you have to bring unique products to market in this space rather than try and replicate something that already exists in the public market. The multi-family or even single-family residential REIT in the public markets, those very much have broad geographic diversification. So this concept of the Cityfund, it's something I've been personally working on for years. It's rooted in the fact that I've lived in New York my whole life. I've seen many, many people become extremely wealthy just by owning real estate. These are not sophisticated investors. These are people that know very little about real estate. But the point is that by participating in the market and letting the market do its work and appreciate over time, there's tremendous wealth that can be created just through the ownership of real estate. The product was created to allow a much broader group of people to be able to participate in this long-term appreciation and wealth creation.
Deidre Woollard: How did this partnership form? How did these two companies connect?
Jesse Stein: We got to know John, Mauricio, and the Nada team as they were running their campaign for Nada on Republic. We started talking about creating this type of product, and it really was a perfect fit because of the home shares product that they had created. This was really what I think is the missing piece to the Cityfund product. The fact that we can take a pool of capital and distribute that amongst a diversified portfolio of assets and not have to deal with the burdens of property management for those assets, it was really just a perfect fit. These Cityfunds, these are vehicles that are focused on providing an index-type return based on market performance. Together with the home shares product, it gives us the ability to build a real diversified portfolio with a limited amount of capital. It's just a perfect way for us to be able to build and scale the Cityfunds.
Mauricio Delgado: From Nada's perspective, just to piggyback on Jesse's remarks, the partnership was a no-brainer. As we get to know Jesse and the team, there was very much a natural alignment in mission, vision, values, as well as product. Bringing this investment product to market together for us is a way of furthering now our shared mission to democratize access to the largest asset class in the world.
Deidre Woollard: Interesting. You've got two companies. How did the two of you get together and choose your first cities? Were you sharing data together? Did you already have cities in mind?
Mauricio Delgado: It was very much a collaborative effort. We did arrive at the first three cities of Austin, Dallas, and Miami really based on two primary factors. One, you have historical market performance. Home prices in each of these cities have increased by 100 percent or more over the last 10 years, those strong signals for forward-looking projections. Two, they each have diverse characteristics. Each city has its own unique identity which is well supported by a strong demographic and economic factors. The combination of performance and the unique aspect we felt was something that made a lot of sense.
Deidre Woollard: Jesse, you talked about Austin earlier. I looked on the site and looked at the Cityfunds. I know that Austin is the city that has had the most investment dollars so far in people investing in the Cityfunds. I know the buzz about Austin is just crazy. I feel like I'm talking to people about Austin all the time. Is that what you're seeing, is that people really wanted to get into that market and hadn't had a way to get in until now?
Mauricio Delgado: That's a great question. The buzz has definitely been a positive factor. You have Elon Musk predicting that Austin will be the biggest boomtown in the last 50 years. Then Zillow recently reported that the home values in Austin have actually increased by nearly 40 percent since July of last year. The buzz and just the market trends have been very, very supportive for that.
Deidre Woollard: Is it also very hard to invest in that area, though? There was a Redfin report out recently that said that Austin is the city where people have paid the most, six-figures over asking in some cases. Does that make it a challenging environment for you on the buying side?
Mauricio Delgado: Yeah, of course. In its most simplistic way of looking at a market, it's really a supply-demand issue. There's more demand than there is supply, and Austin's a great market for that. One of the benefits of Cityfunds is that we do invest alongside homeowners with our home equity investments. That doesn't lock access to a substantial amount of inventory within these markets. Then over Nada, because we are a retail consumer model to where we offer real estate service, we do have boots-on-the-ground real estate sales team in that market that does give us an advantage in sourcing and identifying opportunistic on-market as well as off-market properties. But there is a limited supply for sure.
Deidre Woollard: You're invested in Austin, you're invested in Dallas, also Cityfund in Miami. How fast are you planning to roll out other cities and what cities are you looking at next?
Mauricio Delgado: We can't speak generally to it. The market is going to dictate the traction and acceleration of how many we release. But so far, we have circled this year for four new cities to be launched. We have Phoenix, Nashville, and Tampa that we're focused on. Then for the fourth city, we've released a new feature on our site to allow users to actually go in and vote for a Cityfund so they can express their own demand and interest. At this time, Portland's leading as the fourth new city. We would hope to get those out. Then as we look forward, we've identified over 50 of what we see as the most attractive cities across the country as potential future Cityfunds that we plan to release and scale over time.
Deidre Woollard: Interesting. Phoenix, the amount of people moving there, the price increases last year, I think they were at the top of the Case-Shiller list amost every time this year. Nashville, another huge boom. Tampa, I feel like people are not necessarily appreciating how big Tampa has gotten in recent years. I think that's an interesting market as well. Those markets sound like they're mostly for the single-family rentals. But as you invest in different cities, are you planning to shift the strategy or is it always going to be single-family and single-family rentals as the core of the strategy?
Mauricio Delgado: Another good question, Cityfunds will always remain singularly focused on single-family residential. However, again, one of the most significant advantages of a Cityfund is that we are also investing into homeowner equity. They're our product that we've termed home shares. The home shares products really enables us to address a bit of a two sided problem that we see within the real estate market. Number one, you have the ability to unlock access to the $22 trillion homeowner equity market. That's obviously for the investors in the fund. Then two, it also enables liquidity for homeowners in these cities. This product is unlike taking on any new debt or requiring them to move out of their homes. By doing so, it allows us to gain access and really to acquire assets at a pretty accelerated pace in these cities.
Deidre Woollard: Interesting. If someone is a homeowner and they're part of the home shares program, when they're ready to sell and move on, can they then sell their home into the Cityfund? Is that how it works or no?
Mauricio Delgado: Cityfund is looking at entire home acquisitions for the purpose of rental properties. That does introduce the optionality for a homeowner to sell an entire home to a Cityfund and then we could offer a leaseback option. That would be an option. We did the same thing towards if you had sold a fraction of your equity via a home share product, that option would still exist.
Deidre Woollard: That makes sense. For investors in Cityfunds, what is the exit strategy? Will there eventually be a secondary market for selling shares?
Jesse Stein: Liquidity is a key aspect of the Cityfund product. Our intent is to grow each of the Cityfunds to a point where we can list it on a secondary market exchange. The best case scenario for that would be a New York Stock Exchange or a NASDAQ. But there are other options if we're not large enough at the point that we want to bring that liquidity to market for investors. The way that we think about this is that these products are going to be really ETFs for each of the given markets. Where today, there are thousands of ETFs, you can invest thematically in any type of sector, any asset class, any investment strategy. What you can't do is invest in a city through the public markets. We often use ETF as an example of how we expect these products to be traded and treated as a publicly available investment product.
Deidre Woollard: Interesting. Makes me wonder if as these Cityfunds grow and you have these different options, could you diversify by city? You're feeling bullish about Austin now, but maybe you feel like Tampa is going to be big in five years, so you could play around to diversify within the Cityfunds. Is that how it could work?
Jesse Stein: A hundred percent. As a liquid product, of course, you can go in and out of Cityfunds and potentially even shore the Cityfund if you want to make a speculative bet against a given city. But we're also building tools where when we have more Cityfunds, if you want to invest a certain amount and allocate funds across various Cityfunds, you might say, okay, I want to invest $10,000 and I want 20 percent in Austin, 10 percent in Nashville, 20 percent in Dallas, etc., and build that portfolio of Cityfunds where you're diversified but you have this targeted exposure in each, and you can move around that allocation over time based on something you read in the paper or data that you're presented with. It's that control over your allocation that we can provide that doesn't exist in the geographically diversified companies like an Invitation Homes.
Deidre Woollard: Within the individual city, are you thinking about expanding across the different neighborhoods? Are you targeting specific neighborhoods? Are you clustering? What's your buying strategy look like?
Mauricio Delgado: The Cityfunds, in particular, are focused within the MSA of a city. That does expand some opportunistic areas where we're looking at what I would refer to as fringe markets, such as you see coming up and around, where communities are coming in. We're looking into strategies such as that in each city. That's where Nada as a company, we have real estate partners across the nation, so we're able to leverage that to get more insights into it, as well as we have data partners to help us get insights to these pockets. In that case where you're looking at, if it's a rental property, what is the average rental yield forecast within that market? It's this lifecycle of a PUD that you can predict where it's going to turn more rental and set expectations as to a lesser homeowner. We very much take data and market insights into consideration to inform our acquisitions.
Deidre Woollard: Are you buying properties that are maybe as is and then fixing them up for rentals, are you buying existing rentals, or both? What is that strategy like?
Mauricio Delgado: A bit of both. We're not setting aside a substantial budget or target for really any renovation substance. For Nada, being a platform that is consumer-centric and consumer-focused, we have the optionality for example, I spoke to this earlier, the option for a homeowner to maintain living within their home but sell the entire home and then we lease it back to them. They become a tenant. That's an option we're looking at in certain markets. But just generally speaking, we're not looking to invest in homes that require a significant amount of renovation or remodeling.
Deidre Woollard: In general, how should investors be thinking about with their investment in Cityfunds? What should they be expecting? How long should they plan to hold it?
John Green: Historically, most real estate investment vehicles are based on actively managing, or finding specific properties and then managing them to generate alpha-alpha, above market returns. Cityfunds was designed as a real estate investment product to apply a passive investment strategy across a specific geography letting the long-term trends do the work. Being first of its kind to deploy this passive investment strategy within real estate, we believe this benefits investors in a few ways because of thematic and index-like and through home shares provide access to effectively generate data for the market. We're not actively looking to hit home runs. We're just looking to get market returns, and through home shares, we're able to generate enough investments within a specific city that we believe can mimic the returns for that city without actively managing the portfolio. Because we're not actively managing the portfolio and we're aligning homeowners with investors inherently, we believe that's what creates the self-managed assets within the fund. That gives us the ability to offer these funds with no carried interest, low management fees, and through Republic and through our reg CF offerings, make them accessible to all investors for as little as $500. Those are a few of the benefits that we believe are very unique to this product and for investors in Cityfunds.
Deidre Woollard: Are there any limits on how much someone can invest? Is $500 the minimum across all of the markets?
Jesse Stein: Five hundred is the minimum. Within the reg CF offerings, there's a $5,000 maximum investment. But we're concurrently offering larger investments to accredited investors on the platform as well.
Deidre Woollard: When you're going into a new city, what does that process look like? Do you have to set up people in that market? How does that begin?
Mauricio Delgado: With Nada, again, it's consumer-centric with the real estate partnerships. We do ensure that we have informed and engaged partners in those markets in advance of deploying any of those capital. We structure these partnerships as a means of, if an independent real estate agent partner are direct, not a real estate team, that we give them some benefits by offering the home shares products to their portfolio as well as leverage them to source acquisitions. We set really a target and a frame and a timeline with those partners in advance. An additional element for us is that we have our own in-house title and escrow service. We want to ensure that we have coverage within that specific area to facilitate the closings.
Deidre Woollard: Interesting. You're handling the closing, so how long does it take for the Cityfund to ramp up?
Jesse Stein: Not long. Assuming that we have personnel in place as John mentioned to handle the real estate operations, the way that we've structured these offerings is that each of the Cityfunds is under a single issuer. For us to launch a new Cityfund offering, 95 percent of the documentation has already been templated out, so it's much easier for us to bring something to market as opposed to if we were going to start something from scratch.
Deidre Woollard: I noticed on the Cityfunds that you have days left to invest. What happens once the fund closes and how long in general will each fund be open?
Jesse Stein: The days left to invest is just for the regulation crowdfunding offering. We expect that following the completion of that, whether it's by term or when we hit the maximum amount of $500,000, we'll continue to offer interest in Cityfunds through different type of offerings, whether it's raising more capital into Austin, Dallas, and Miami, or forming new funds and opening those up for investments. From a long-term perspective, we're always going to be looking to grow the Cityfunds and to continue to raise capital into the Cityfunds. Even as a publicly listed vehicle, if we get to that point, we're going to look to continue to grow because the diversification and the economies of scale that come along with growing these portfolios is a benefit to investors.
Deidre Woollard: Interesting. That speaks to my final question which is about your long-term goals for Cityfunds. It sounds like you're really looking at a variety of cities all across the country and giving people that access to invest. Where do you see this in five years?
Jesse Stein: We think there can be a Cityfund for every major market in the US and potentially for major markets abroad as well. The vision is for each of these Cityfunds to be publicly listed and traded with significant assets within each Cityfund and provide a very simplified investment vehicle for people that want exposure to a specific market.
Deidre Woollard: Fantastic. John, Mauricio, anything else to add on that?
Mauricio Delgado: We're pretty well in sync. I think that future and vision is certainly shared. Some of the early discussions around bringing Cityfunds abroad, there's some very interesting opportunities there that continue to balance this option for Nada as a means of introducing a financial product that provides a consumer good while concurrently unlocking an asset class through this investment platform that's democratizing the asset. That combination of a good purposeful product along with a financial product and investment product that's democratizing this asset is certainly something that we'll continue to grow and evolve within these products as we scale.
Deidre Woollard: Fantastic. Thank you all of you for your time. Reminder, listeners, you can learn more about Cityfunds at joinnada, that's N-A-D-A.com/cityfunds. You can always email us at media@millionacres to share your thoughts or ask us any questions. Stay well and stay invested.