Never, in my life, until this week, has news of a startup made me think: “I should move to Seattle and reevaluate my personal financial choices.”
Yet that is what I thought while reading a piece in The New York Times about Loftium, a Seattle-based housing startup with an idiosyncratic business model. It offers to pay, in cash, a down payment of up to $50,000 on a primary residence for prospective buyers who have been preapproved by a lender. In exchange, the home buyers must sign a service contract, agreeing to list a spare room in that new home on Airbnb for up to three consecutive years and split the profit from Airbnb hosting. In essence, Loftium’s plan is to pay people a lump sum upfront to become an Airbnb host and then take a hefty cut of their hosting income in exchange for that onetime payment. The agreement requires that the spare room is listed for 357 days out of the year. Homeowners have to offer a room that can fit a queen-size bed and basic furnishings, and Loftium throws in a few freebies, like a smart lock, bedding, and toiletries.
“For people who don’t need the down payment, Loftium sounds like a crazy idea,” 29-year-old cofounder Yifan Zhang admitted over the phone. Zhang is betting that enough people do need a down payment to make the unconventional arrangement appealing.
Initially, the scheme sounded ridiculous to me, but not necessarily untenable. Becoming a full-time Airbnb host would be exhausting, but also, I don’t own a home. And I’d like to. My partner and I are both paying off student loan debt, and we’ve found it difficult to save after paying rent. Our situation is common. “It’s always been tough for a young person to put together a down payment, but in recent history, it’s [become] even more so a driving factor for why people can’t get into homeownership,” Zillow chief economist Svenja Gudell told me. “It’s just literally coming up with the original savings you need to put down to buy a home.” Gudell noted that 25 percent of first-time buyers end up relying on family or friends for a cash gift to help supplement the down payment.
With no secretly rich great-uncles or millionaire buddies in our social circle, we’ve already considered getting a two-bedroom apartment and then using Airbnb to offset rent next year, so the idea of getting a whole damn house out of Airbnb hosting instead is an alluring alternative. (Right now, Loftium is working with only Seattle properties, although it hopes to expand to Chicago, Washington, D.C., and a few other cities in the next year. It’s not planning any immediate expansion to New York City, due to the restrictive Airbnb laws here, thus my impulse to move from Brooklyn to Seattle.)
The idea became even more alluring when I realized that people might not successfully rent the room out often, and that I could potentially acquire a free down payment merely for saying I was available to host. Loftium uses an algorithm to predict how much money a house will make on Airbnb. While it does not assume full occupancy, sometimes assumes up to 75 percent occupancy. If a room ends up falling short of Loftium’s prediction, the homeowner doesn’t have to do anything. They get the same amount of money as they would if the room had 100 percent occupancy. The risk is on Loftium.
Hosting strangers for the majority of the year sounds burdensome to the extreme. But hosting strangers occasionally over three years, in exchange for a chunky down payment? Bring it on. It seemed to me that the smartest thing to do with Loftium would be to take its money and then set about becoming the world’s most wretched Airbnb host. The possibilities for sabotage seemed endless: I could hide rotten sardines in the closet and then say we lived next to a fish-canning factory! I could put itching powder in the sheets! I could insist I had a rare medical condition that only blasting Korn from 10 p.m. to 5 a.m. could cure!
But, alas, Loftium has already thought about this. The agreement requires buyers to sign up for Airbnb hosting duties with Loftium as a cohost, so the company can see their profile, their messages to guests, and their feedback. (So writing “FYI, THIS HOUSE IS HAUNTED BY SEVERAL DEMONS” to prospective guests would not go unnoticed.)
“If your home just doesn’t perform, then we take on that risk. But if—and guest reviews show this pretty quickly—if you are actively sabotaging that income stream, then you are liable,” Zhang told me. “You have to pay us back, plus the termination fee,” she said, also pointing out that Loftium reserves the right to place a second lien on the home if people break their contract, which means the company will be second in line to get repaid on the mortgage, behind the lender.
So it seems as though the chances of a Loftium-purchased house going unfilled with guests are not as high as I’d hoped. What’s more, entering into an agreement with Loftium places a cap on how many people you can turn down on Airbnb: three vetoes a year. (The company also requires that home buyers enable Airbnb’s “Instant Book” feature, which automatically approves Airbnb guests who ask to stay.) This means that people who purchase a house with Loftium will have to say yes to almost everyone who requests a room, even if they feel uncomfortable. Zhang doesn’t see that as a problem.
“I think a lot of people think that that’s too few, but actually, I’ve hosted 200 people in one year. There’s not a single person that I would have canceled up front from being uncomfortable,” Zhang said. She noted that, if guests cause problems and a homeowner decides to cancel during the booking process, that doesn’t count.
Laura Coe, a 29-year-old finance manager, is comfortable enough with Loftium’s arrangement that she’s taking the company up on its offer for a down payment. The experience will be new for her, as she’s never welcomed Airbnb strangers into her home.
Still, she said her good experiences as an Airbnb guest made her comfortable enough to give Loftium a shot. Coe just closed on her home this week. She chose a house with a “mother-in-law” unit, which means her spare room will have a separate entrance and function as a small apartment. This arrangement seems preferable to having random people down the hall, since Coe won’t have to share a living space with her guests and might be able to limit their interaction entirely to messages. Coe told me that Loftium’s down payment was 5 percent, which came to around $28,000. This means that Coe has agreed to be a landlord for a suite in her house for a little under $10,000 a year, but she’ll also make part of the profit from renting out the room. She plans to have her Airbnb unit ready within the 30-day limit required by the company.
Coe’s deal, particularly how much distance the mother-in-law unit would put between a home buyer and a constant parade of guests, sounds enticing to me. But her situation is one of many different permutations of the Loftium agreement and could still feel like a big ask to plenty of people.
“There are several pieces that have to fall into place to have this be really financially beneficial for you,” NerdWallet mortgage expert Tim Manni told me. “What I would tell every person is that this is just as much a personality decision as it is a financial decision, because it is an unwavering commitment. You’re saying, ‘For up to three years, I will have people in my house nearly every day of the year.’ It could put a lot of your personal plans on hold, your family plans, renovations for your home.” Manni pointed out that, while a 20 percent down payment is still considered standard, many first-time buyers have options to put down far less than that. A Federal Housing Administration loan, for example, can require as low as a 3.5 percent down payment (if your credit score qualifies).
“You’re definitely making a risk in the sense that you are putting your home on the line here,” Manni said. “If you decide, this isn’t for me, or you and your partner have a child, and you say, ‘We can’t do this anymore,’ and you have to break your contract, you’re going to have to pay for that.” Loftium requires people who break their contracts to pay the company back for the down payment, based on time remaining on the contract, at a 115 percent rate. The example they provide on the website shows how hefty this fee can be: “If you received a down payment of $25,000 and want to cancel the contract halfway through, you would need to pay back 1/2 x 115% x $25,000 = $14,375.”
“If you couldn’t come up with that much to start, how are you going to come up with that money to pay them back if something changes?” Manni asked.
Corianne Scally, a senior research associate at the Urban Institute, was also alarmed by the consequences of not fulfilling the Loftium contract. “What if someone gets sick?” she pointed out. “That could really set a homeowner back if they’re liable for paying Loftium.”
Another important consideration: Right now, Loftium works with only a single mortgage lender, the Umpqua Bank for Seattle. This means that people using Loftium will not be able to follow common mortgage advice and shop around for the best deal. That said, Coe told me that she was able to shop around before signing up for Loftium and that she got Umpqua to match another lender’s deal.
Even weighing the risk of taking a deal like this without the funds to back out, Loftium’s offering is, to me, still enticing. (Although I’ll stay in Brooklyn for now.) But there is an irony in its sales pitch. Loftium wants to make home-buying more feasible for people who could not afford it otherwise by using the services of Airbnb—which may warp housing prices in some communities. (Airbnb has no direct involvement with Loftium and did not respond to comment for this story; the link between Airbnb and rising housing prices is hotly debated and still unclear.)
If this model gains traction, it could thrust Airbnb into an ever-more-central position in the real estate market and create a new financial industry sector. “If this takes off, next we will see people securitizing those cash flows, so that instead of selling your future Airbnb income to some startup, you can sell it to a trust that will combine it with other people’s Airbnb income, slice it up and sell tranches to European banks. And finally someone will tokenize it, and you will be able to do an initial coin offering on the blockchain to help pay for your house,” Bloomberg’s Matt Levine hypothesized this week. “The thing about financial innovation is that there are only so many tricks, and people keep re-applying them, in predictable combinations, to every asset they can think of.”
There is one central question anyone who thinks about using Loftium must ask themselves: Is operating a boarding room for three years through a third-party company worth the amount of money that company is willing to front for a down payment? I can’t think of anyone who, if they had any other avenue of providing a down payment, would agree to this arrangement. Anything that doesn’t involve turning their new home into a mini-hostel has to be a better option. As much as Loftium offers a solution, it also encapsulates the absurdity of the real estate market, where reliance on a startup looks like financial salvation.
If it ever comes to Brooklyn, though, I will still probably be first to sign up.