Real estate for $1, or $50? Startups see fractional ownership as the future

Since late September, more than 60 investors have signed up to purchase a stake in the company that owns the Washington, a new short-term rental property in downtown Sandusky.

They’re buying in for as little as $1.

That investment model — designed to make real estate accessible to everyday people with a swipe on a smartphone screen — is the brainchild of Rhove, a Columbus-based startup. The company is one of a growing crop of players in the fractional ownership sector, which gives investors access to a piece of a property instead of the whole thing.

Aided by blockchain technology and changing regulations, these startups all promise to unlock previously unattainable assets, from luxe vacation homes to modest investment properties. But their business models are far from uniform.

Some, building on the time-share template, offer stakes in second homes that owners can use for part of the year. Others provide a platform for trading shares of single-family rental houses, which are divvied up by hundreds or thousands of buyers wielding cash, credit cards and cryptocurrency. And then there’s Rhove, which aims to democratize ownership, $1 at a time.

“Imagine a world where everyone’s an owner,” said Calvin Cooper, Rhove’s 34-year-old co-founder and CEO. “Imagine if every renter was an owner. Imagine if Africa’s middle class could hedge inflation by investing in New York real estate. Imagine if Colombia’s rich weren’t the only ones who could protect wealth by investing in Miami real estate during times of political turmoil. … Today’s real estate market, it leaves too many people out.”

Traditional real estate investing requires up-front cash, risk tolerance and education — plus the patience to navigate lengthy acquisition and development processes. Cooper and his peers believe there’s a better way, particularly at a time when home prices are soaring, putting ownership of any sort — let alone portfolio-building — out of reach for many Americans.

The premise is intriguing, said Jonathan Ernest, an assistant professor of economics at the Weatherhead School of Management at Case Western Reserve University. These startups could broaden the pool of real estate investors by reducing barriers to entry. They’re also offering single-asset alternatives to buying shares in real estate investment trusts, companies that already own and operate a basket of properties.

But, depending on the deal structure, fractional ownership also raises some red flags, Ernest said.

Far-flung owners who buy stakes in rental houses at $50 or $100 each, for example, may be motivated by the possibility of swift gains — and less inclined than local, more traditional landlords to spend money to fix up or maintain the real estate.

“The worry is if there’s 100 or 1,000 people invested in this one property that doesn’t do well, it’s really hard to go after all of them, get mad at all of them … and shame them out of town,” he said. “You end up with less potential recourse to make sure that things get moving forward and that properties get repairs.”

Rhove’s model leaves the developers and existing owners in control. Investors agree to buy non-voting shares in the companies that own the real estate. The business launched in 2018 but did not unveil its app and begin advertising specific properties until this year, according to an offering circular filed with the U.S. Securities and Exchange Commission.

So far, Rhove is trying to raise relatively small sums — between $214,000 and $535,000 — to replace existing ownership equity in four apartment or hospitality properties in Columbus; Sandusky; Silvis, Illinois; and Kapolei, Hawaii. The app lists a handful of potential future deals, and Cooper said he’s preparing for announcements about some major partnerships.

For property owners, Rhove offers an avenue to free up cash. It’s also a marketing play.

“I don’t care if we get a dime at the end of the day,” said Brent Zimmerman, a Cleveland developer and entrepreneur whose family owns the Washington.

Zimmerman believes that fractional investing will encourage more people to educate themselves about real estate. He also sees a chance to attract affinity investors, people who have an attachment to Sandusky and are motivated by more than returns from rental income or property sales. Part of Rhove’s pitch is the idea that apartment-dwellers and travelers can own a piece of the places where they live or stay.

“This is about recreating how communities are built, how neighborhoods are built, how cities are built,” said Brett Kaufman, a Rhove co-founder and investor who also is the CEO of Kaufman Development, a Columbus-based developer of apartments and mixed-use projects. “I think this is the future of real estate, and it’s going to become what the consumer demands. … They don’t want to just live in an apartment and have nothing to show when their lease expires. They want to have an experience that is making their lives better.”

The prospect of building generational wealth is part of what drew Jerry Chu, a 29-year-old techie living on the West Coast, to the fractional ownership industry. He’s the co-founder and CEO of Lofty, a Miami-based startup that lets investors buy $50 stakes in single-family rentals.

Since launching in early 2021, Lofty has facilitated sales of more than 124 homes, nearly half of them in Northeast Ohio, through a process called tokenization. Basically, the company converts ownership stakes into tokens that are traded and re-traded on a blockchain, a digital, public ledger that records transactions and tracks assets.

Sellers list their houses on Lofty, and buyers pay $50 per token toward the asking price. Once a deal is fully funded, the rental changes hands. A group of decentralized investors then is responsible for voting electronically on everything from plumbing repairs to the hiring and firing of third-party property managers. Lofty makes its money on transaction fees.

Chu owns shares in roughly 40 properties traded on Lofty, including some homes in the Cleveland area. The company was drawn to the Midwest because of existing relationships with real estate investors and the combination of relatively low home prices and stable rents.

That price-to-rent dynamic has made Cleveland a mecca for out-of-town landlords, a trend that worries public officials and policy researchers who are trying to improve life for renters, boost homeownership or simply figure out who owns what.

But Chu believes that the identity of the property manager matters much more than the landlord. And he sees single-family homes as an asset class that everyday investors can grasp much more easily than office buildings or shopping centers.

“Anyone in the world, despite their educational background, understands what a house is. They understand they can collect rental income,” he said.

Investors on Lofty earn daily rental income and stand to benefit if the houses grow in value. Buyers own the homes through limited liability companies, though Lofty is shifting away from traditional LLCs and into emerging entities that allow for collective governance. Last year, Wyoming became the first state to grant legal company status to such entities, called DAOs, or decentralized autonomous organizations.

Consultant Rob Hahn said many of these startups sound like real estate investment trusts, repackaged as part of the “hype train” around blockchain technology and token-based investing. The managing partner of 7DS Associates in Las Vegas, he spoke about the disruptive forces rattling the real estate industry during the Ohio Realtors convention in Cleveland last month.

He’s also a member of the industry advisory board for Pacaso, a San Francisco-based startup focused on shared ownership of second homes. None of Pacaso’s listings are in Ohio.

Fractional ownership of vacation homes makes a lot of sense, Hahn said, since such homes often sit empty for part of the year. The legal complexities around selling shares in investment properties to regular people — not just accredited investors — seem much more cumbersome and fraught with peril, he said. But that just might be the way the industry is headed.

“I want to say it’s a novel niche, but I’m afraid it might be a more permanent direction,” he said during a phone interview. “I just don’t know how this generation is supposed to buy houses. … Ohio, as I mentioned at the conference, is one of the bright spots where homes still remain pretty affordable. But even in Ohio, unless we see a dramatic increase in wages, I just don’t see how some 31-year-old couple is supposed to buy a house.

“Having said that, if you don’t want to rent for the rest of your life, you have to get on the property ladder somehow,” he said. “Maybe the way to do that is through some sort of fractional ownership model.”