Buying a quality, affordable house has quickly become a pipe dream in premium markets, especially for Millennials looking for a starter home in tech-heavy cities. The real estate market in cities that actively court tech talent is cut throat, with out-of-country investors snapping up houses almost before they even come on the market. Those who are having a hard time coming up with a down payment may feel they have little chance at all of buying a home.
That’s why Yifan Zhang and Adam Stelle, co-founders of Loftium, feel such passion for their startup. Loftium was created to help first-time homebuyers obtain the down payment for a home, using all of the best that tech has to offer. Potential homebuyers make an agreement to rent out their extra room or mother-in-law unit using Airbnb, which creates income that pays off the down payment, provided by Loftium. Their innovation has created big waves in Seattle, Loftium’s home base, and they plan to expand quickly.
I had the opportunity to speak to Zhang about Loftium and the future of home buying in Seattle and beyond -- and I think you’ll be excited to hear what she has to say.
Tell me about you and your startup?
Loftium came from my personal experience Airbnb-ing an extra bedroom in my house, and seeing how amazing the income stream was from that one bedroom. It was enough to cover the entire mortgage of my three-bedroom townhouse. After seeing that, and having faced the down payment challenge to home ownership with all of my friends, I put two and two together and thought, “What if we could actually predict and prepay this Airbnb income to help people with their down payment?” That was the idea behind Loftium.
How did the company come together?
I met [co-founder] Adam Stelle when he was also an Airbnb host, and we started talking. I told him about this crazy idea, and then we started working together informally. We got to see some good traction -- we actually ran a pilot with existing homeowners to see if people were into this idea of Airbnb-ing their extra bedroom for that pre-paid income.
We also started working together with some of the local banks and federal regulators to actually make it happen, because mortgages, as you know, are a very regulated space.
How did you raise a round and get the company live?
We were able to initially show that Airbnb income was fairly predictable over a portfolio of homes. We also were able to sign the initial regulatory approval for Loftium to be a valid down payment funding source. I think that the approval really caught people’s attention. Very often I think startups -- in the housing space particularly -- try to go around regulators by working with interested homeowners or going to the HELOC model rather than going directly for that down payment model, because it is so regulated. The fact that we went straight for that problem caught people’s attention, and we ended up raising a $2.5 million seed round led by DFJ Venture Capital.
Are you lending your money or are you lending other money? Was that $2.5 million to lend?
No, that’s just for the company. We raised additional money to be able to pay the down payments.
How much did you raise in debt?
We got funded for up to 100 down payments. Right now, we are just working on the first 50 that we are able to issue in Seattle, but raised a little bit more just in case. After the first week, it’s looking very positive that we will be able to go through the first 50 very quickly.
How did you manage to get so much coverage coming out of the gate?
I think it’s just the story itself; it’s so resonant. Down payments are a massive issue, and Airbnb is often seen as a force against affordability. Loftium is turning that perception around to make Airbnb a force for good, to make homes more affordable in expensive cities. I think that kind of unique angle caught people’s attention.
When looking at potential homeowners to work with, what are the factors that you take into consideration?
For the most part, we rely on the mortgage companies to qualify homebuyers. They have to meet income requirements, debt-to-income ratio, credit score -- all of that is on the mortgage provider’s side.
In addition to that, we look specifically at the home itself that they are picking, and how much Airbnb income we think that home and that extra bedroom can generate. Loftium looks at all the characteristics such as location, amenities, age of the home, and other similar factors. In addition, we also ask for a background check, because we are entering into this contract with the home buyer for 12 to 36 months, and they have to list their property during that time.
Are you taking just people who are living in their home or those who are renting out their homes as well?
Loftium only works with primary residents. To be clear, this is a primary residence mortgage that we are allowed to issue down payments for. We are not looking at investors who are buying up properties for the sake of Airbnb-ing -- there are so many people that need the down payment help just for their primary residence, and it’s really not our mission to work with investors. Also, you often do need to live in a property to rent an extra bedroom or mother-in-law unit in accordance with many city regulations of Airbnb nowadays.
You are only in Seattle right now?
Yes, right now we have approval to give down payments in Seattle, but we expect to quickly expand and add more markets.
You are giving a $50,000 down payment, but what other funds do buyers have to have?
We’re not able to completely cover the down payment, so the home buyers are required to have at least one percent down from their own funds, and they do need to qualify for the mortgage on their own. They can’t count on Loftium’s monthly income to help with their income sources so, for the most part, these are home buyers that have the income to sustain the mortgage and the monthly payments. For many reasons, our homebuyers have not yet saved for a down payment, whether that’s because of student loans they’re paying off, rising rents, medical debt -- whatever their situation is.
Do you you think that this will push up the value of those lower value units? If you do a couple thousand in Seattle, that could have a meaningful impact on the value of those lower end units.
It’s all about supply and demand, for the housing market. On the supply side, we are huge proponents of building more and faster, especially in the cities that have a lot of home buyer demand, but a lot of housing supply is outside of our control. As a millennial home buyer myself, I think sometimes you don’t have the luxury to wait five to ten years for those problems to be solved. What Loftium can do is to control this one important aspect, the down payment, which is still an unfair barrier between those who have parents who can gift the down payment versus those who can’t. Hopefully we can see additional construction, like in Seattle where they are already pushing new construction like crazy, and that’s great. But Loftium can help people today on the demand side in terms of leveling the down payment playing field.
What kind of diversity have you seen in profile of the homeowner?
We’ve had such an overwhelming tremendous response in just the first week, which is wonderful but also a little sad, because it means that the down payment has been such a massive issue for so many people.
Most of our applicants are first-time home buyers. Many are in their late 20’s and early 30’s and are looking for homes that are slightly below the average price of homes in Seattle -- starter homes essentially. We’ve also had some empty nesters who want to purchase a home, outside of that demographic.
How do you see company expanding?
For the main part, I think our value is really hitting this down payment barrier. If you are above certain income limits the non-profit down payment assistance programs don’t cover you. It’s really about being able to spread to more cities, and be written as part of the national lending guidelines so that we can be an accepted source of down payment funds everywhere.
How do you see your company being defensible to other people coming into market place?
Being able to have that approval to be a valid down payment source was our first hurdle. Second is to expand rapidly so we can be the best predictor of Airbnb income for a private room inside a home, which is a different data challenge than a lot of other data sources for investors of entire Airbnb properties. The final stage is really being able to create this network effect where every person that stays at one of our Loftium homes gets to know about the Loftium experience. I’m an Airbnb host myself and have hosted over 200 guests now in our extra bedroom, and having that network effect for the thousands of guests who will stay with Loftium home buyers and then see that home ownership is possible will be key to our defensibility.
