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Episode 2: The Genesis of RealT

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As explained in episode 1, with RealT, Jean-Marc and Remy had a vision to create something bigger than their previous successes. The RealT business model allows them to align their resources with their long-term vision.

 

Resources

When you have more than 18,000 units as they did in Montreal, it is impossible to finance the entire real estate portfolio with your own funds. You have to find partners, especially financial partners, like banks. However, due to administrative and regulatory constraints, these institutions are not nimble and can restrict real estate acquisitions. By turning directly to individual investors, RealT finds a source of financing much faster and can close interesting deals. Using this leverage, commissions are lower than through the institutional system. In addition, investors can individually choose to leverage credit through RMM.

 

Long-term vision

Thanks to tokenization and the ability to split real estate into shares of approximately $50, RealT makes it easy for all types of investors to hold real estate assets. This mechanism also makes it possible to attract investors with a short-term vision (3 to 5 years) and long-term investors (15 years minimum).

Indeed, it is no longer necessary to liquidate the real estate itself simply liquidate the RealTokens that hold this property. So if an investor wants to withdraw from the project, RealT does not need to sell the property, as the investors only need to sell their RealTokens. This change allows RealT to follow its core strategy of concentrating its investments in a specific area in order to achieve economies of scale while improving neighborhoods to retain and attract tenants. The result is an appreciation of the entire real estate portfolio.

If several investors wanted to sell their assets and RealT was forced to sell the property, RealT could not implement its strategy. RealT would be unable to create momentum if they were selling one property in the area and buying another a few weeks later.  It would be near impossible to recreate the success they had in Montreal or Wynwood.

The RealT approach accommodates new investors who might be interested in buying RealTokens of already owned properties. Long time investors, on the other hand, might be interested in accumulating these RealTokens because they have understood the RealT strategy.

 

I – Area selection: Detroit

RealT’s first step in the process is to buy heavily in areas that have been in decline and are beginning to revive again. Before the pandemic, cities like New York, Los Angeles or Miami were saturated. The return on these cities is negative and the return on investment is only possible when the properties are resold if the market has continued to grow.

In contrast, the U.S. city of Detroit, the automotive flagship of the early 20th century, went bankrupt in 2013 with a debt of $18.5 billion. As early as 2015, Remy and Jean-Marc began to look at and analyze this city. As in Miami with Tony Goldman, they saw billionaires arrive to inject hundreds of millions of dollars to revitalize the area.

One example is Dan Gilbert, who invested more than $500 million in the early years and today his total investments are estimated at more than $1.3 billion in Detroit. Before setting up operations, RealT always looks to see if influential leaders are coming to a distressed city. These investors have the same vision as RealT to improve the neighborhoods where they invest. For example, to ensure the safety of individuals, Dan Gilbert has implemented private video surveillance systems, hired security guards, and restructured the city to attract a new type of population.

Seeing the progress made since 2015 and the upcoming grants, Jean-Marc and Remy decided to create RealT in 2019 with a focus on the Detroit market.

 

II – Neighborhood selection

Before starting to invest, RealT selected potentially promising neighborhoods in Detroit by analyzing the CIP (Capital Planning Improvement office). This document can be found at the city council and it shows how much the state, the city and the municipality will invest in this district, this street and its surroundings.

In the CIP, we can see which works are planned:

  • Rebuilding roads
  • Putting electrical cables underground
  • Creating speed bumps to slow down speed
  • Installing fiber optics
  • Restoring parks
  • Installing new surveillance cameras

RealT also analyzes the duration of these CIPs, an important point in its strategy. RealT is not a trader who is there to buy and sell its acquisitions within 3 years but a builder who aims at improving the city in the next 15 years.  When an investor or developer gets to a significant size, it becomes a stakeholder and is able to make proposals on the allocation of funds distributed over the next CIP.

RealT also knows the expectations and needs of the people living in these cities. For example, one of its selection criteria is whether a park or playground is present in the neighborhood or whether there are plans to build this infrastructure in the near future.

Today, investors and RealT are aware that Detroit is not the safest city in terms of security and crime. That’s part of the equation, though.  In exchange for this risk borne by investors, the returns are attractive.  However, there are details to mitigate this risk. For example, if a misdemeanor or crime is committed within 1,000 yards (about 900 meters) of a park, the punishment if convicted is multiplied by 3. As well, the United States is known to be less flexible than Europe or other countries in enforcing sentences.  For single women, living with their children, this is a key criterion in their selection of properties to live in.

 

III – Property selection

In order to successfully propose a new property per week, RealT performs an average of thirty ‘Due Diligences’ per week.  In other words, the company does its homework.

RealT first looks at the structure of the property, namely the foundation and the roof.  If it finds a defect on this part, the property is abandoned and RealT moves on to the next one.

It then looks at the maintenance items:

  • The condition of the floor under the carpet
  •  The quality of the windows to be well insulated from the cold. Winters are harsh in Detroit!
  •  The functioning of the fire alarms
  •  The state of the bathroom and the water heater

RealT goes so far as to analyze the paint. If lead is found in the paint, the owner has 60 days to take action. After that time, the owner can be fined up to $2,000 per day and this amount can go up to $20,000 if there are children in the property.

Secondly, RealT tries to focus on multi-family properties (small buildings) rather than single family homes.

For a house, you have one tenant and you must have a roof, a water heater and a boiler.

For a multi-family, you have 10 tenants and you must have one roof, one water heater and one boiler.  The math speaks for itself.

However, RealT does not rule out single family homes when there is a good opportunity. Marlowe was the first tokenized property. It was a single family home that was offered last quarter 2019 for $63,750.00 with an expected yield of 12.84%. In May 2021, it was re-priced at $68,500.00, an increase of 7.45% with an expected rental income of 12%.

RealT calls this type of property its “bread and butter”: low maintenance, continuous and correct appreciation, with a consistently paying tenant.

 

IV – Tenant selection

RealT can make great real estate deals and renovations, but all that work can be undone with the wrong tenant. So RealT has a well-defined process for selecting a new tenant and that is why the vacancy between outgoing and incoming tenants is about 45 days (the time needed to refresh the unit and select the tenant).

RealT starts by calling previous landlords to find out how the tenants left their old units. An unfavorable tenant can leave damage which can be expensive to repair. It is not uncommon for the tenant to dismantle the water heater and leave with it.

Then RealT analyzes their credit score to see if the tenant has been over 30, 60, 90 days late in payments in the past few years. Even if the home is 100% subsidized by the Section 8 program, RealT looks to see if the tenant has ever had a problem paying their utility bills. Indeed, Detroit winters are very cold, and a power outage could freeze and blow the pipes. This costly repair would be the responsibility of RealT and the RealToken holders.

Finally, RealT looks at the judicial history of the tenants so that it does not impact the living environment of the other tenants of a multi-family with, for example, loud noises at night.

RealT’s goal is to keep the tenant as long as possible by improving their quality of life. With over 20 years of experience in real estate, Remy and Jean-Marc know that money is not made by changing tenants every year but by keeping them as long as possible until the rent increase becomes too much for the current tenant. It takes a minimum of 3 years to pay off the cost of renovations. If you want to increase your rent a little more aggressively to earn an extra $50 per month, you are not profitable because at the end of the year you have earned $600 but spent $1,500 on renovations. RealT prefers to increase rents gradually and keep tenants in place until it is possible to increase the rent by 15% to 20%.  Until that event occurs, RealT does everything possible to retain its tenants.

At certain times in their lives, some tenants may have difficulty paying all their utilities such as internet service. In a multi-family, RealT can offer basic internet to all tenants. When RealT starts to have many properties on a street, RealT can raise all the rents by $10 and turn one unit into a community center so that the kids have a safe place to come and enjoy shared computers with internet connection.

 

V – RealT Suite

As you can see, in order for RealT to implement these economies of scale and small improvements, RealT needs to concentrate its presence in certain areas and streets.

RealT senses that some investors seem to be getting tired of having primarily Detroit properties. However, for RealT, the work done over the last 3 years is starting to show synergy and efficiency on Cadieux and Greenfield streets.  RealT’s goal is to continue to focus its efforts to create this momentum.

For the moment, time is proving RealT right, early valuations show that on average properties have gained between 10% and 15% over the last year. History shows that on average after a decline, the appreciation of a real estate portfolio is close to 100%, 10 years later. During this time, investors receive their income regularly.

It is true that today investors cannot diversify into many cities and countries. RealT’s vision is to continue to build on this momentum in Detroit and expand this process to other cities and countries.

 

 

Disclosure

This information is not an offer to invest in any token or other opportunity and is provided for information only. Any offer to sell or solicitation to buy interests in the Issuance will be made only by means of an offering memorandum delivered by an employee or agent of the Issuer. Any references to past performances are informational and cannot be considered to indicate or guarantee any future results. Investing in crypto currencies involves a substantial degree of risk. There can be no assurance that the investment objectives described herein will be achieved. Investment losses may occur, and investors could lose some or all of their investment. Performance results are shown net of all fees, costs, and expenses associated with the token. Should an investor choose to redeem a token through RealT or on a secondary market, other processing fees may be assessed that are not factored into the returns presented.

 

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