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NAVIGATING PERILS IN THE REALM OF TOKENIZED REAL ESTATE

Joshua Kagan, Co-Founder & CEO at Bonfire

Welcome to the world of real estate revolution and financial innovation in this engaging podcast episode. Join host Harshit Gupta in conversation with visionary guest Joshua Kagan as they dive deep into the realms of real estate democratization and cutting-edge investment opportunities. Discover the ingenious use of blockchain technology to transform the landscape of tax-sheltered passive income. Gain insights into the journey of reshaping the traditional approach to real estate ownership, making it accessible to everyone. Delve into the risks and rewards associated with tokenized real estate, and how Joshua’s tech-driven platform enhances the user experience. Learn how curated real estate offerings are tailored for discerning investors, and find out the strategies used to foster user engagement and repeat visits. Join us in this enlightening discussion that bridges the worlds of real estate and technology, opening new doors for investors of all backgrounds.

Bonfire, a very interesting company that provides investors access to carefully curated Tax-sheltered passive income and capital appreciation investment opportunities, all powered by blockchain.

Joshua Kagan
CEO and Co-Founder

Hello, everyone, and welcome to another episode of WYTPOD.

My name is Harshit. I’m the Director of Business Alliances at WYTLabs. We are a digital agency specializing in SaaS and e-commerce SEO. And I’ve got Joshua with me. He is the CEO and Co-Founder of Bonfire, a very interesting company that provides investors access to carefully curated Tax-sheltered passive income and capital appreciation investment opportunities, all powered by blockchain. A big welcome to you, Joshua, and I’m so happy to host you today.

Thank you, Harshit. It’s great to be here.

Great. Joshua would love to know your journey and how exactly the idea of Bonfire came into it.

Yeah, so I spent 12 years working in commercial real estate finance in San Francisco, Bay Area, and as a side hustle, I bought my first foreclosure of a house in 2011. And then I bought another one and I got really into fix and flips and tear down rebuilds. And then I got into something called the Burr method of buy, rehab, rent, refinance, and built out a portfolio of single-family rentals.

And. For most people in the United States, owning real estate is the biggest source of wealth they’ll ever have because you put down 20%, yet the entire value of the house increases roughly 7-8 percent a year compounded, right? And so, I saw that my friends are in their thirties and forties, and they’ve done everything that society has told them to do to go to college, Good job. And they’re at the point of their lives where they historically would own real estate. But they can’t because we have a major affordability problem in this country. People have student debt. Interest rates are 8%. Private equities bought a lot of the supply up. So, I met my co-founder. He came from India 10 years ago.

Started and sold three companies. He’s a senior entrepreneur. He owns a bunch of real estate in India, as well as the San Francisco Bay Area. We put our heads together and asked, how could we make it easy for people to own real estate as easy as it is to own a stock on Robinhood or crypto and Robinhood, and that was the genesis of why we created Bonfire.

All right. And because real estate has been traditionally seen as an exclusive investment opportunity, I would love to know how exactly Bonfire was to democratize that access to real estate for everyday folks.

Yeah, and I’ll just tell you as an aside, as a founder, when we launched our minimum viable product, our MVP at the end of last year, it was a humble 310, 000 single family rental outside of Charlotte, North Carolina, and we sold what we did are we chopped the asset up into 10, 000 tokens, and we sold them for 31 a piece.

And one of the most amazing things as a founder was just to see who you are. The number of people who posted spontaneously on our Twitter or Discord. Hey, I’m a cab driver in Jaipur, India, or an economist in Argentina, and I now own real estate in the US so what model are we partnering with? We’ve evolved from there.

And we. We partner with real estate operators who are buying an asset. It could be multifamily, it could be a hotel and we’re tokenizing an equity interest into that investment and syndicating it across the world and enabling folks who traditionally wouldn’t have access to these kinds of, very kind of institutional grade projects, giving them access. And that’s what our model is.

That’s very interesting. And what led you to the idea of using blockchain altogether and even making it accessible? How exactly do you market the tokenization and, make these things available to the common folks?

Yeah. I’ve invested in crypto since early 2017. It was because it was coincidental that I had breakfast and dinner with two different people on the same day who both mentioned Ethereum and I’d never heard of it before. And they’re both extremely smart people. So, I said, okay, this is something I need to know.

And I dove into it. And I was like, if I want to know it, I need to invest in it because then I’m going to track it. I’m going to follow it and I’m going to be like emotionally invested in it. So, I got extremely lucky. The timing. I think Ethereum was $80 a token and Bitcoin was like 11-1200 a Bitcoin I, so that’s what stoked my curiosity.

And then when I told my co-founder, when we brainstormed our vision of, enabling everyday people to own, be able to buy and sell real estate. He being a technologist was like, we have to use blockchain and then he went down the rabbit hole of figuring out, oh, is it ERC 20? Is it, do we use Algorand?

Do we use Polygon? What’s the actual technology basis in terms of how we market? We have been just really lucky that it’s been growing organically. I’ve done no paid marketing whatsoever. It’s all through, trying to educate folks through webinars, podcasts, content of value, white papers, and people just making, introductions to other people.

That’s brilliant. And in terms of investment opportunity what kind of real estate assets does a bonfire typically tokenize and how do you curate these opportunities for investors?

Yeah, it’s anything in the commercial real estate sector. So, we multifamily shopping center. We’ve done a hotel. Our next project is likely to be an office project, which I know a lot of people are going to shudder and say, Ooh, Office. Why would you touch the office? Our thesis is that there’s a trillion and a half dollars of commercial real estate that’s going to be coming due in the next three years, which is unprecedented, meaning that a lot of projects that had debt at 3 percent are now going to be having to refinance at 8%.

And these folks are either going to have to give the keys back to the lenders. Or they’re going to have to come up with additional equity because they’re undercapitalized projects. So, we look at this distressed situation as a wonderful opportunity. In Mandarin Chinese, the word for crisis is a combination of danger plus opportunity.

And for instance, this office project, it’s just valued. There were 45 million. There’s 23 million of debt on it. We have a chance to buy it at 17, 18, 000, 000 and get on day one, 11 percent cash on cash return, and it’s only 70 percent occupied. So, if we get it to 100 percent occupied, we’d be closer to a 14 or 15 percent return.

So, our thesis is. Work and partner with operators who are experts in a particular asset type or location, utilize our networks to get access to these deals, and then take an allocation and chop it up into smaller pieces that enable investors who historically would need 250, 000 or more to get into a project like this to be able to get in much, much lower.

Makes sense. And because like real estate investments often come with tax implications, right? How does Bonfire help investors with tax shelter altogether for their passive income? And what should an investor be really?

Great questions. So, I have to clarify, I’m not a tax advisor, and I don’t give tax advice, but in real estate, there are several different ways in which one gets tax shelters. It works because a token represents an interest in a limited liability corporation, an LLC that owns an interest in the asset.

All the tax benefits of the asset flow down to the individual investor. So, it’s things like depreciation. If folks know what that is and. Being able to write off the interest expense. So, what happens is if there’s a distribution year one of 7%, for instance, like I put in 100 I get 7 back because of what’s called accelerated depreciation and something called cost segregation, just like very much in the weeds.

That 7 is not going to be taxed because there’s going to be a corresponding loss against the gain. And so the tax-sheltered returns and, usually when we’re salaried employees, we’re taxed at 25, percent of our wages. But the beautiful thing about real estate is we can oftentimes not pay any taxes for many years and still accumulate passive income. And that’s what we’re trying to facilitate with Bonfire.

That’s brilliant. And what are the potential risks and challenges associated with tokenizing, tokenized real estate altogether? And how does a Bonfire mitigate them?

Yeah. Our biggest competitor Crowdstreet recently announced that they lost 63 million of their customers’ money.

So, there are risks, right? The way They made several mistakes, including one of them was not having an escrow. So, they just wired their customer’s money directly into the bank account of the real estate operator who turned out to be a crook. We mitigate against that by requiring escrow on all our projects.

We do background checks on everyone we’re working with, etc. We walk the properties; we’re doing due diligence on behalf of our investors. But there are black swan events. This event and what’s happening in the Middle East, if this spirals into a global war if we have some sort of oil shock, there are always macro events that can occur in any investment that it’s impossible to fully account for.

But if I only worried about macro events, I would never invest at all. And, that’s just not my temperament. I just think bonfires focus on how do we mitigate things that we can control, but the things that are completely out of our control, it’s how do you even measure that risk or account for it?

Let’s talk a bit on the technology front as well. We’d love to know what kind of infrastructure Bonfire uses to support its platform and also how it ensures a smooth user-friendly experience for the investors.

Yeah, so I should clarify. I’m not a tech guy. I wish my co-founder Vai was on the call. I’ve never written a line of code in my life. I’m just a sales marketing and BD guy. But what I’ll say is that my co-founder Vai – Vaibhav, is a technologist. He’s a genius. He can write in any code and he Kind of dove through all the various platforms and tokens and blockchains and chose ERC20 built off of Polygon, which he found to be the most, most flexible and given that standards will change over time, this gives us the most flexibility to if there’s a new standard that is adopted as, as the industry grows, we can migrate into that.

So, we built our platform on flexibility. Now, as a sales guy, I care about design and user experience, and I probably frustrate our tech team to no end because of how, insistent I am that our UX and our UI are seamless. Are we there yet? 100%? Aot. But I also don’t want the perfect to be the enemy of the good.

So, we are constantly upgrading our platform and attempting to make it more seamless. And if folks. Those who are listening to this or watching this, have a chance to go to our platform and give me direct feedback. I am always open to hearing it because we built this for you,

and just to put some light on the typical, user journey on your platform from the investor point of view.

Yeah, so a user signs up at our platform apt up on fire. Capital. And it’s really simple. It takes 30 seconds. Maybe, first name, last name, email, and phone number. That’s it. So, we have their email. A new deal comes out. We send it out on a first come first serve basis. So, someone gets the email. They said, oh, I’m interested in learning more.

They go to our platform now when they want to buy. And this is the first time they’re buying. They go back to our platform. They have to do KYC, which is to know your customer. Our laws require us to, do that for anti-money laundering purposes. And then once they do that, they look at the project, they decide how many tokens they want to buy.

They fill out some subscription documents. They either integrate their crypto wallet or their bank account into our platform. They click submit and then while they own tokens.

And, how can someone get started with bonfire I’m clear on that front, but what should they consider before investing in tokenized real estate assets?

Yeah. It’s a broader question of like, how much do they have to invest? What are their goals? Is it an appreciation of capital? Is it capital preservation? Is it past passive income and just, very low risk, but, consistent returns, where does real estate fit into their overall investment strategy?

Is it stocks, bonds, crypto, alternative assets like private equity or. Venture capital. I think it’s just a question for folks, where, how, and where does real estate fit into their overall goals? And are they looking for more appreciation? Or are they looking for more passive income? Because, the higher the return, the more risk.

And on the risk spectrum, you have things like ground-up construction, which is You know very high risk, high return on the other end of the spectrum. It’s like buying an apartment building. That’s a hundred percent occupied. You’re not going to get a lot of appreciation, but you’re going to get really solid returns.

So, I think everyone needs to figure out what their goals are. And then from there decide, where real estate fits in and some, feel free to reach out to us and me or one of my teammates, we can have a call and kind of walk you through the platform.

And coming to my last question, Joshua like you mentioned one of the core competencies of your business is using escrow.

Similar to that, are any other basic USPs of your business that you would like to share?

Our main USP is unlike the other platforms out there that their business models, they take a percentage of the amount of money raised from the sponsors or the operators. So, they’re incentivized to put as many deals on their platforms as possible.

We’re not. We. We look at ourselves as an investor club and we’re targeting our goal to one day do one deal a month, but we’re not doing a deal for the sake of it. So, what we do is we do due diligence on the real estate operator and the asset, right? We do background checks. We walk the asset.

We make sure that the assumptions that the real estate operator is using are stress-tested, right? So, if they say that. Rents are going to be 3, 000 a month. We want to make sure that’s accurate, right? Because anyone can make a spreadsheet or a model look good. So, our USP is highly curated real estate offerings for our community.

And we charge our community for that about a one-and-a-half to 3 percent upfront fee for the due diligence that we’re doing on finding these highly selective curated opportunities. So, I think that’s a differentiation.

Gotcha. And Joshua, since you are more focused on marketing and sales I would love to know what exactly you do for user engagement altogether and the revisits and, more repurchases, all of those strategies are something that is working in your Favor, and yeah, please go ahead.

I would say we have a lot of work to do on that end. I wouldn’t say that we’ve mastered that at all, but we put out a bi-monthly insight blog called S’mores, which is focused on what you know, what we find are mind-bending articles, stats, quotes, charts, podcasts that we’re finding in the real estate finance technology realm that aren’t available elsewhere and other newsletters.

So that’s one re-engagement hook. Another is, just checking in with people who say, to immediately sign up on our platform. But we have a lot more systemization that we need to do.

Gotcha. I think let’s have a quick rapid fire at this stage, and this will be like, some quick questions personal questions.

So yeah, are you excited for that?

I’m excited about it. I’ll show you.

What one word do you want people to associate with you?

Integrity.

Okay. What is not a big deal to most people, but is

torture to you?

Long meetings.

Are you more cautious or bold?

Bold.

Okay. What is your hidden talent?

Seeing how something can be and making it happen.

Okay. What was your last Google search?

That’s a great question.

Registered investment advisors.

Okay and the very last question. What never fails to make you laugh?

Chris Rock. American comedian. Yep. I know.

Yep. Thank you so much, Joshua, for all the information, and all the wisdom that you’ve shared in this session. I’m sure viewers are going to appreciate it. And I appreciate your time here.

Thank you so much. I appreciate your time. And thank you for the great questions and conversation.

All my best. Thank you.

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