REIA 266 Matthew Sullivan: QuantmRE - making home equity accessible, investible and tradable

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now here is your host, Dr. Allen Lomax.

Hello, enlightened investors. Welcome back to Real Estate Investing Abundance. I'm delighted to be back with you again today. As we take a look at Quantum RE, making home equity accessible, invisible, and tradable. Matthew Sullivan is the founder and CEO of Quantum RE, the real estate marketplace that makes home equity accessible. With a background in finance and technology, he worked with Richard Branson and his corporate finance team on a number of Virgin companies, And was appointed director and trustee of Virgin's London Air Ambulance Service. As an entrepreneur, he was an early internet pioneer. He has founded financial, tech, telecommunications, technology, and real estate companies in the United States, United Kingdom, India, and Australia. Welcome to the show, Matthew, and tell us about—

Thank you very much. Thank you for having me on. I didn't realize my bio was quite so long, actually. I must make it a bit shorter next time.

Oh, it's cool. All right. It's an interesting bio. So share a memorable experience from your formative years that helped you to be who you are today.

I was thinking about this actually when you, when you gave me the heads up at the beginning, and I think probably the most exciting moment that I can recall is when I first soloed a helicopter.

Wow.

So the first time that my instructor got out, put a couple of lead weights on the seat to help the weight and balance, poked his head around the door and said, go on then, off you go. And don't crash. Which I think is very good advice actually, because the amount of paperwork that's involved in a crash is actually quite astonishing. So yeah, that was it. So I remember just gulping and thinking, this is it. I've got to take— I've got to fly. I can't just sit there. And so it's one of those things where You press the buttons and check your temperatures and pressures and pull one lever and push another and hey presto, you're off flying. And I still remember it to this day. And it was about 30-something years ago. And it's like a video playing in my mind where I remember what it looked like at ground level, what it felt like to be flying. And it's a great memory. Absolutely no idea how relevant it is to what's happened subsequently. But, you know, I think everyone should solo a helicopter at some point in their lives.

I have no desire to even get in a helicopter.

And may I also say that I did try horse riding.

Oh yeah.

And it didn't resonate quite as well as flying helicopters. So that's what makes a market.

Yeah.

Not enough moving parts in a horse, I'm afraid.

In a horse. Yeah. Well, I don't know. There's a lot of moving parts within it.

Actually, you're probably right.

A very complicated organism. But anyway, I've been told, I've never been in a helicopter, really have no desire, but that you lose your equilibrium because you don't have that same kind of, what do you call it, the inertia. When you're making a turn, you don't have that inertia going against you. It's just kind of a weird feeling up there. Is that true?

It's, Short answer is no, it's not. No, you do.

You—

what does— what can happen is you can get something called the leans, um, where if you do a right-hand turn and then a left-hand turn and a right-hand, and then you go up and down a bit, what happens is your ears get terribly confused and they— you think you're going right when in fact you're going left. And that's funnily enough a cause of a number of accidents where, um, people don't check their instruments properly and think that they're going in one direction because their, you know, brain is telling them that when in fact you get terribly confused because all the sort of stuff that's sloshing around your head is sending the wrong signal. So, so you're sort of part right in the sense that yes, you can, but you can do that in any aircraft where you're sort of doing aerobatics and stuff like that. So it's always best to look at the instruments cuz they, they tend not to lie.

Yeah. So I, I mean, I hadn't thought about that, that, but do helicopters rely on instruments more than than planes or—

Well, no, it's about the same. I mean, any, if you're doing any sort of aviation, there's a number of things that you need to give you the information to be able to, you know, fly. And many of those instruments are common across different types of aircraft, whether they're fixed-wing or helicopters or, you know, other types of, you know, just gliders, for example. So yes, there are a whole number of instruments that are common across those different aircraft types. There are some that are specific to fixed-wing aircraft and there are some that are specific to rotary wing. But, you know, there are, there's a core set of instruments that you absolutely need. You need to know if you're flying straight and level, you need to know what your altitude is, you need to know what your speed is, things like that.

Yeah. And I mean, it's very difficult to tell all of those things from the air. So yeah, I'm sure instruments are very important. And as interesting as flight is, let's get into real estate.

Well, there are so many parallels with real estate that, as you say, instruments is, you know, the indications of things that are happening, whether it's with your helicopter or with the market. There's, you know, and the ability to read instruments as opposed to just trusting your intuition. The fact that your intuition is based on a sample of one, whereas instruments are providing you with incontrovertible evidence. So it's funny, there are a number of parallels here with investing and, you know, real estate generally.

Well, I, yeah, I'm sure there are skills and talent and like you say, the ability to look at instruments and look at those objectively rather than relying upon your fallible intuition.

Yes.

Well, tell us, what do you mean by house rich and cash poor?

Well, I think it's something that many people are familiar with where you own your home, you've built up a significant amount of equity, particularly over the last couple of years. I think the amount of equity in residential homes is higher than it's ever been. And the problem with equity is you can't spend it. You know, it's, you could be worth hundreds of thousands or even more on paper because of the value that's trapped in your home equity. But if you want to access that, you can't spend it. You have to go back into debt. So you have to go to the bank and take out a refinance or a HELOC or a reverse mortgage or some other type of instrument like that. And so when we talk about being house rich and cash poor, it's like, yeah, okay, I might be worth a quarter of a million dollars on paper, but you know, I can't afford the gas to put gas in the car. So what we do is we have a solution for homeowners, which is a non-debt solution. It's called a home equity investment where we invest with the homeowner, We provide the homeowner with liquidity in exchange for a share of the appreciation in the home.

That sounds very interesting. It's a new concept to me. I've not heard of this particular instrument. I guess we'll call it an instrument.

Yes.

And so explain to us, how does that work?

Well, again, key thing is it's an investment and not a loan. So we have investors that Provide the homeowner with liquidity. So in other words, they give the homeowner a cash lump sum, which can be up to half a million dollars in exchange for a share of the, you know, value, the future value of the home. So what that means is that the homeowner, when the homeowner comes to sell their home, a share of the value of the home goes to the investor, and that share gives the investor a return on their investment.

So the investor is, I'm I mean, here the investor is banking on growth in the equity. Well, for the return on their investment.

Yes. But the great thing about the home equity investment structure is that there is a significant amount of value that's built into the contract itself. So the value of the property can fall by up to 40% and the investor can still get a positive return. And effectively the way that that works is the home equity investment is a bit like an option agreement that struck in the money. So there's a lot of embedded value within the agreement. So from an investor's perspective, they are ring-fenced or protected from short-term down markets, which you don't get in any other type of real estate investment that I'm aware of. But the homeowner benefits because they get a cash lump sum. And when we say cash, obviously it's delivered into a bank account, but they get a cash lump sum that's tax-deferred. They to pay income or capital gains tax on it when they receive it. They can use the money for whatever they want, and they have up to 10 years, in our case, to repay that agreement. And during that period, there are no monthly payments. So it's very different to a loan. It doesn't go on your credit report as a loan. It enables you to pay off credit cards and other types of debt, which can make a really significant impact on your cash flow. You don't have any monthly payments, so you don't have to service it or support it. The investor gets paid when you sell the property or if you refinance the home equity investment, which you can do at any time during the agreement period without penalty.

So are all the agreements 10 years, or is there—

There are other companies that work in our space that offer up to 30 years. Well, we focus on 10-year agreements, um, because from an investor's perspective, that's an investment horizon that is much more attractive. 30-year agreements, a bit like 30-year mortgages. None of them we think will run anywhere near to that duration. Most of these agreements are paid off within 3 to 5 years.

Really? Okay. So just, just so I can see this just a little bit more concretely, can you just give us the numbers on say a $100,000 home with equity of $50,000?

Yes. Well, let's, let's add a zero to those numbers because, I mean, now we— then we can talk in real terms because we have some minimums. But million-dollar home, half a million-dollar mortgage, so you've got $500,000 of equity. Now, the most that we will invest is 75% of the combined lien-to-value. Now, what that means is our investment together with your existing mortgage has to be 75% or less of the current value. So in this case, you've got $750,000 is your upper limit and you've got a half a million dollar mortgage. So that means that there's potentially $250,000 available with that test. The second test is we say the most that we will invest is 25% of the value of your home. Guess what? That's a quarter of a million dollars. So you've picked a perfect number to do the example. So in this case, we can invest 25% or $250,000. And what we then say is we multiply that 25% by, on average, about 1.6, depending on, you know, how much equity you have and your credit score, et cetera. So that means that in exchange for 25% of the current value of the property, you agree that you'll pay us 40% of the future value of the property when the agreement comes to its end or way if you decide to pay us off early. And all of that is under the umbrella of what we refer to as an annual return cap. That's normally between sort of 18 and 19%. So what that means is if you pay the agreement off early and we say, well, what's 40% of $1 million? That's $400,000. And that would be too much. So we say, if you pay it off in the early years, it's the lower of the maximum return on investment that we can make, which would be about 18 or 19% a year, or 40% of the value of your property, whichever is the lowest figure. So let's say you paid us off after a year, you sold the property or you refinanced, or it was a fix and flip and you used our capital to bridge that sort of short-term capital need that you had. If you paid us off after a year, your $250,000 And we would, you know, we would say, what is $250,000? What is 19% of that? $47,500. So after a year, you would've had use of that $250,000 with no monthly payments. And at the end of the year, you would pay us $297,500. And that's, that would not appear on your credit report as debt. And so the risk— All I was going to say, the last thing is that we also take the risk. So if the value of your property goes down significantly, Then, you know, we might end up getting back less than we originally invest. So that's the real difference between what we do and a loan.

And a loan. Okay. So if they pay it off in a year, they're going to pay $297,500. What is the interest on that essentially?

Well, again, that's where we try and say this is not a loan. So that would work out to be a return to us of about 19, 18 or 19%. But that's not an interest rate because what we're saying is our agreement is entirely based on the value of your property. And you agreed with us that you would pay us 40% of the value of your property. Now, 40% of your property, let's say it's still worth $1 million. That's $400,000.

Right.

So what we're saying is if our return, which caps out at 19% a year, if that is less than 40% of the value of your home, then that's all you need to pay us. So it's not an interest rate in the sense that that is charged.

Right.

It's a cap. And what that means is normally after about 3 or 4 years, the share of the value of your property is less than what that annual return cap would be. But it's designed to protect homeowners who want to settle this early from paying a figure that would be too high.

Yeah, that would be astronomical. Yeah. And you'd be much better off with just a home equity loan.

Well, that's right. And again, the important thing is, if I may use an expression, it's horses for courses.

Yeah.

So, um, for people that cannot borrow money but have lots of equity, these people that are house rich and cash poor, it's a great solution because you get access to that quarter of a million dollars and you can use it. And just think, if you've got— I mean, we speak to lots of people that have large credit card bills and credit card interest rates are now approaching 30%. So if you've got $30,000 on credit cards, which many people that we speak to have, paying $9,000 a year in interest, and that's without paying any of the credit card, that's just to stay still.

Interesting.

So to be able to wipe that credit card debt out, and have no monthly payments by using your equity, um, is— can be very valuable. And also, if you are— if you want to diversify out of your home, because remember, your home can be your single largest source of wealth, but you're breaking all the rules because, you know, you've got all your eggs in one basket. You've got all of your wealth in your single asset, which is your home. And guess what? It's not liquid, it's not tradable. You can't, doesn't generate cash flow for you. So all the rules about spreading your investment across multiple things, you, you, people break that as it were when they have all of their wealth trapped in their home. So it's a good way of accessing your equity so that you can invest in other instruments that provide cash flow. So if you've got home equity, why not tap into that and put it as a down payment on another property? Why not invest in, use your equity to kickstart or bootstrap your next equity or your next real estate investment.

Well, it sounds like a really interesting instrument and a really smart way to go. You had mentioned that there are minimums. What are your minimums?

Yeah, the minimum is $30,000. The maximum is half a million dollars. Minimum property value is going to be around $200,000. Maximum property value's about $3 million. So those, but that covers, you know, a large number of houses, probably the bulk of, you know, properties. We currently invest directly in California, but we are moving into other states. So that's, and we do partner with other companies and it gives us coverage across about, you know, 30 states at the moment. So, you know, we're not restricted just to California, but we only invest directly in California at the moment.

So the other question I have here is, I mean, this is an investment and of course, Investors are willing to take some risk. Are you in the UK now? Are you in the—

No, no, no. I mean, um, we're based in California. I'm actually coming from North Carolina.

Oh, are you? Okay, well, that's where I am. So things are looking really, really bad in Europe right now, and I don't see how that is not going to bleed over into the United States. What do your investors have to gain in a— in what looks like is could really be a pretty devastating downturn.

Again, I think really what I was saying at the beginning is the way that these home equity investments work, and this is the most important point about the structure, is they automatically provide downside protection. Now let's go back to our example. You've said to me that you are going to give me 40% of the value of your property in exchange for 25% of the current value. So I've bought $400,000 worth of your home for $250,000.

Okay.

Now, if the value of your home falls, give a figure, 20%, is that a lot?

That's quite a lot. I mean, even in 2008, most properties didn't fall below that mark.

So if it falls from $1 million to $800,000, I've got 40% of $800,000 and that's $320,000. So I've invested $250,000. My investment is still worth $320,000 even though the value of your home has fallen by 20%. Now, there is no other investment that I know of that provides that same level of inbuilt downside protection. And the reason is because you are giving the investor a percentage of the future value of your home at a 40% discount. That's, that's how it works. Now, the homeowner doesn't mind that because they get what they want and they get what they need, which is cash today without monthly payments, where we can work with people with, you know, credit scores that otherwise would prohibit, would, would you know, be rejected by the banks. So coming back to our first point, how do we help people that are house rich and cash poor? You know, it's a, it's a, a trade where they're trading some of the future value, and that value could well go down, as you were saying. If it goes down, then the investor takes the risk. But there's so much, you know, in-the-money element built into these agreements that home prices would have to fall by about 40% in order for you just to break even. And we don't think that, that's going to be sustained because if you look at real estate, residential real estate in the US over any 10-year period, it always has outpaced inflation. So even though you might get a dip, if you sell at that dip, you're still going to make money. Remember, if you sell at a 20% discount or a 20% fall, you're going to get $320,000 on your $250,000. So that's still a, you know, 10-15% return. Um, but as house prices continue to recover, those agreements deliver solid returns. So that's, that's why I think the time for home equity investments is now, because there's significant demand from homeowners faced with, you know, high inflation, high interest rates, a declining economy, all these things that you were saying coming across from Europe, yet they're sitting on house values that have never been higher. So it's a great opportunity for them to tap into that equity. It's a great opportunity for investors to have a risk-adjusted equity-backed investment that delivers returns with that downside protection.

Well, Matthew, there's, I mean, there's things of course in the real estate industry I've never heard of, I'm sure, But not many things. And I've never heard of these before. How long have they been around?

They've been around for about 10 years. I suppose it's a bit like the reverse mortgage industry when it was very much in its infancy. You know, it's a new type of product that takes a while for people to understand what it is and for it to be adopted. But today, about $1 billion a year of home equity investments are written for homeowners. So, you know, it's quite a large amount, but it's a drop in the bucket when it's, you know, compared to the mortgage industry.

Sure.

But that's going to grow. So I think you may not have heard about them, but I think in a year or 2 or 3 years' time, they will be approaching mainstream as an alternative to homeowners, um, who cannot borrow money or don't want to borrow money. So I think we're at that inflection point where, and they're going to become a much more popular and a much more used financial instrument.

Are they going to be institutionalized?

Uh, well, they, they are. So the investors are institutions, and there have been 4 securitizations so far. So in the same way that the residential mortgage industry grew through securitizations, which enabled the risk to be spread to other institutions, the same thing is happening with home equity investments. So we've seen about, uh, just under a billion dollars worth of securitisations over the last 18 months. And that's very positive because it shows that there's institutional demand in the primary market, but also we're seeing an evolving secondary market.

Well, sounds good. Well, Matthew, tell us how we can get in touch with you and take advantage of this.

Great, thank you. And again, you know, everything's on our website, which is quantumre.com. Q-U-A-N-T-M-R-E. That's quantum without the U. quantumre.com. There's a calculator there where you can put your property details in and it will give you an estimate of how much equity we can access for you. And there's all sorts of other information. There's a downloadable guide, an ebook that explains what home equity investments are, and there's lots of other videos and podcasts where you can, you know, find out more about how they work. And there's always the ability for you to reach out to us by telephone or email, and we'd love to, you know, speak to you and see how we can help you.

Well, Enlightened Investors, all of that information will be in our show notes. And it sounds like a wonderful product, particularly if you're looking for equity. Find out more about Matthew Sullivan and his company Enlightened Investors. Delighted to be with you again today. Look forward to being with you in our next episode. Matthew, thanks for being with us today.

Alan, thank you for having me on.

Thank you for tuning in to Real Estate Investing Abundance, brought to you by Steve Talker Capital. A company working for passionate professionals like you to develop financial independence built on solid passive real estate investments. As part of our efforts to make the world a better place, Steed Talker Capital contributes to activities and organizations committed to better understand the equine. These endeavors attempt to enhance the human treatment of horses worldwide. Steed Talker Capital, working.