How to invest in real estate in your town without taking out a mortgage or swinging a hammer.
We’ve all got one: that one building in your neighborhood that you know could really be something great. Maybe it’s a vacant commercial space that would make the perfect neighborhood grocery if it just got a little love. Perhaps it’s a falling-down triplex that would make for much-needed missing middle housing if it just got brought back up to code. Maybe it’s even got a business in it already that you know, with just a little push, could expand into something amazing.
You care about this building. You know this building could be exactly the kind of small step your neighborhood needs to get stronger.
But are you really ready to put in an offer, take out a mortgage, roll up your sleeves and get to work?
Here’s the thing about neighborhood investment: for every would-be developer who’s eager to pick up a sledgehammer and go all Extreme-Makeover on that corner building with good bones, there are probably dozens more who care about their place but don’t want to personally get into the development game. And then there are the dozens who would jump into the game, but don’t have anywhere near the money they’d need for the down payment. Or they have the down payment, but the building needs a lot of work and rehab loans are hard to come by in their local banking landscape…Or they have all the money in the world, but nowhere near enough time to wrangle general contractors unless they quit their jobs—and by then, it makes more sense to skip the great corner building and scale up to a bigger project across town…Or, heck, they already own the building, and they’re just plain stuck on the brink of leveling up and adding an amenity that would really help their business thrive.
At Strong Towns, we talk a lot about the importance of making small bets in our communities. But when it comes to neighborhood real estate and neighborhood business, some of the highest-returning small projects languish in the land of missed opportunities—especially when it comes to cities in decline with high percentages of vacancies. Even if a plucky developer commits herself body and soul to bringing an empty building back to life, the building still might not appraise for a price the bank requires in order to write a mortgage and meet seller requirements. This all but ensures that the property will only be buyable cheaply and in cash by a moneyed private equity-backed developer with an eye to tear it down and rebuild (if the land underneath it is valuable) or a slumlord willing to extract the last bit of tenant wealth from the property before it crumbles (if it’s not.)
There’s gotta be a better way, right? If you’re a developer or a small business owner short on cash, what if your neighbors could pool their money and loan it to you, turning you into the lady with the magic all-cash offer and the Neighborhoods First-compatible mission to boot? If you’re a neighbor who wants to literally invest in your block, what if you could do it as easily as buying shares in a mutual fund—and get a better return than some anonymous stock while you’re at it?
MEET MAINVEST
The Plan received investment to open a sustainable beauty salon. Source.
Those were just some of the questions that Nicholas Mathews was struggling with when he decided to found his company, Mainvest. “Our core mission evolved around the idea of people investing in their communities as a means of economic development for main streets,” Mathews says. “It’s a way for people to get some capital for their business, as well as for residents of communities to participate in the growth of their economy, as opposed to some private equity company from New York coming in and funding a project they don’t want, like a luxury condo that might price them out.”
The way Mainvest works is simple: for as little as $100 on many projects, you can buy what’s called a “revenue sharing note” for a business in your own town, be it a corner bakery, or a would-be apartment complex, or anything else you want to support in your community. Over the course of the investment period—usually around 5 years—the business will share a percentage of its revenue with you, until you’ve earned back your initial investment plus a certain percentage of profit (usually around 60 to 70%, or an annualized 12-14%). If business is booming, you’ll get an even higher return. If they don’t, hey, investment is risky—but you’ve still helped a light on your Main Street stay on for a while. (Mainvest also offers more traditional crowd-funded loans and has way more educational materials on its site if you want to get into the nitty-gritty.)
It should be noted that Mainvest is not the only company out there putting small-dollar investment capital directly in the hands of small businesses and developers that need it; Strong Towns fav Small Change and loads of others have been doing it for a while, usually at around a $1,000 minimum buy-in. But what makes them unique is the scale at which they do it: the smallest of them all.
Mainvest was founded specifically in response to Title III of the SEC JOBS Act, which removed what’s called the “accredited investor” barrier to investing in businesses before they had a public stock offering. If it’s been a minute since you took a business class, all “accredited investor” means is that you’re an individual or an organization with more than a million dollars in net worth or at least two years of $200,000 of proven income. What that meant for Main Street is big: previously, only about 8% of that moneyed population could legally buy into small business, and of course, the richest among us were far more likely to give their money to Silicon Valley start ups like the one Mathews worked for at the start his career, Uber, which had the stated goal to massively increase their valuation over a short period of time before going public. Small and small-town businesses, on the other hand, could take money from up to 35 non-accredited investors—but if your 35 friends only have $100 each to chip-in, you’re not likely to meet your fundraising goals.
Third Cliff Bakery received investment to open a bakery & cafe in a mixed-use development opening this summer in Jamaica Plain. Source.
Once the Title III passed, though, small businesses could legally crowdfund the capital they needed to expand or start up—and offer their investors a return on their contribution beyond a Kickstarter-style backpack or mug. “What we’ve found is that these small businesses actually would rather reward people for making an investment in them than send them a t-shirt,” Mathews says. “But they couldn’t.”
And often, the returns are better than you expect—and certainly better than your average index fund, which many of us in the 92% default to when we’re not given access to more competitive investment products due to accredited investment barriers. “The public perception for small business failure rate is actually much higher than the actual small business failure rate,” Mathews says. “People look at default rates for small business loans, and 1 in 6 Small Business Administration-backed small business loans defaults. But of those, the average time until default is around 4.2 years. So a business defaulting is a failure, but that’s not necessarily true. These businesses created job opportunities in their area, created commerce, for 4.2 years! The idea that 90% of, say, restaurants fail in their first year just isn’t true if you look at the data.”
A MAINVEST PROJECT ON EVERY MAIN STREET?
Mainvest is currently primarily funding projects around Massachusetts, where Mathews himself is from. So what would our cities look like if Mainvest took off in your town—or better yet, in all our towns? If Mathews is right, it could be huge.
“We love this concept of closed-loop capital,” he says. “You take 92% of a community’s population that, previously, if they wanted to invest in their community, could only do it through consuming—buying from local businesses—or by just paying taxes. I suppose you could invest in a municipal bond, but those have a very low return, and there’s no meritocratic process of knowing what your funds are being used for. When you’re investing in a small business in your community, you’re actually weighing out, well, do I want this small business in my place?”
The proof, so far, is in the investor rolls. Eighty-percent of the capital Mainvest has raised for local projects so far has come from investors within a 5-mile radius of the business location.
“And what’s exciting is, these businesses now have 100 investors who really want that business to succeed,” he says. “They tell their friends to go there; they have a birthday party there; they choose to buy their coffee that morning at their bakery instead of the Starbucks across the street. And it’s a more immediate impact for the investor, too; if I’m an investor of Apple and I buy myself a computer, I’m not running to check the stock ticker for Apple to see if it went up. But if I’m a Mainvest investor, I am asking the business owner how sales are going. We really wanted to build out a financial instrument that aligned incentives. Aligning that sense of investor ownership with the businesses’ needs and giving a community the tools to invest in themselves is powerful.”
Top photo via Tierra Mallorca.