You’ve probably heard all about how San Francisco’s real estate market is insanely hot.
Here are a quick few pieces of data to remind you.
First, there’s this flier listing apartment rents that SF-based writer Adam Carstens posted to Twitter a couple weeks ago. Yes, that’s a studio for $US2,795.
Next there’s this chart from Morgan Stanley. It shows that San Francisco real estate prices are up ~50% since the trough of the housing recession.
Finally, here’s a chart from FRED that shows SF real estate prices are climbing quickly, but have not yet reach their housing bubble peak:
Maybe you’re the kind of person who sees data like that and thinks: How can I get into San Francisco’s house-flipping, rent-gouging market?
Until recently, the answer to that question was: Not without a lot of cash.
It used to be that if an investor wanted in the San Francisco real estate market, that investor would have to have at least a few hundred thousand dollars around for a down payment.
Thanks to the JOBS Act and a new Kickstarter-like website called Tycoon Real Estate, people with a few thousand dollars in savings can now invest in flipping houses the way only millionaires used to be able to.
Here’s how it works.
You go to TycoonRE.com and select your property from a graphical menu that looks like this:
Then you look at the property’s full page, where Tycoon Real Estate lists the deal’s terms and, on a scale from 1 to 5, estimates of the deal’s risk and return.
If you like the deal, you click where it says “click here to invest.”
Then you fill out a form, and a Tycoon Real Estate representative reaches out to you to close the deal within 24 hours.
You end up investing in a limited liability corporation that owns the property.
Investments can be as little as $US1,000.
Tycoon Real Estate is a new company co-founded by Aaron McDaniel and Wen Wei. It’s based in San Francisco, and that’s where most of the properties listed are located.
McDaniel, the CEO, graduated from college about a decade ago and spent the first nine years of his career working for AT&T in sales and then business development. He was one of their youngest vice presidents.
He thought of the idea for Tycoon after the passing of the JOBS Act in 2012. The JOBS Act allows non-accredited investors to fund small private companies online. It also allows startups to solicit non-accredited investors for funding.
The reason that kind of activity used to be banned is that investing in small private companies is very risky. It’s risky for two reasons: One reason is that small private companies often fail, the other reason is that small private companies do not disclose their financials, and that can lead to problems of information asymmetry and fraud.
McDaniel wants investors on his platform to know that the investments on his site do have risk.
“I think anyone who steps out and says this is risk free is full of bs and is lying,” he told us during a phone interview.
McDaniel says he’s trying to combat information asymmetry on the platform by requiring third parties who are listing properties to provide a standardized set of details about their deals. He also says that ultimately the site will create a market, and the market will punish bad actors and poor dealmakers.
Tycoon Real Estate is still pretty small, with just a few dozen deals available on it right now.
If it gets big and starts funelling even more capital into the San Francisco real estate market, all those people throwing rocks at Google buses and whining about rents are certainly going to come after the startup, accusing it of fueling an already dangerous bubble.
Afterall, San Francisco is already, according to one study, “the least affordable housing market in the U.S.” — with just 14% of inventory in a price range middle class incomes can afford.
McDaniel hopes people will see that his site could also be a force for cheaper real estate. He hopes, for example, that investors will eventually use the platform to fund the kind of lower-income housing projects the governments of San Francisco, California, and the United States will administer, but not fund themselves.
The point of Tycoon, he says, it be an “inclusion thing — to allow people to be part of something that only a small few were allowed to.”