JF1601: How To Identify The Next Hot Neighborhood #SkillSetSunday with Jerry Chu
One way to make money in this business is by identifying an emerging market and get in early before everyone else. But how can we find those emerging markets before everyone else? Well Jerry has some ideas and tips for how anyone can do just that. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jerry Chu Real Estate Background:
- Developed multiple trading platforms
- Founder and creator of Lofty, which uses artificial intelligence to identify neighborhood growth
- Based in LA, CA
- Say hi to him at https://lofty.ai/
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jerry Chu. How are you doing, Jerry?
Jerry Chu: I’m good, Joe. How are you doing?
Joe Fairless: I’m doing well, and nice to have you on the show. Best Ever listeners, because today is Sunday we’ve got a special segment for you called Skillset Sunday, where you will learn a new skill, or perhaps hone an existing skill, and… Well, today we’re gonna be talking about how to identify the next hot neighborhood.
Jerry, our guest today, has developed multiple trading platforms and he’s actually the founder and creator of Lofty, which uses artificial intelligence to identify neighborhood growth. He’s based in Los Angeles, California.
Before we get into the value proposition of Lofty, Jerry, would you mind telling us a little bit more about yourself, just so we get to know you a little bit better?
Jerry Chu: Sure. I’m originally from Vancouver, Canada. I moved down to Los Angeles to attend USC for my undergrad in mathematics and economics. After I graduated, I did my masters in financial engineering at Claremont. Then I worked on Wall Street for a couple months in financial risk management, and I just kind of didn’t really like the big corporate world; I felt like it wasn’t really for me. My interest was always in technology, so I kind of did a hard pivot, taught myself how to code, and took an internship here in Los Angeles at a tech firm, and then that’s where I met my current co-founder, and we talked about this idea, and everything’s history since then.
Joe Fairless: Alright, so you’re a smart cookie.
Jerry Chu: I hope so.
Joe Fairless: [laughs] That’s my unintelligent way of summarizing your background. So you co-founded Lofty… I’m on your website; you’ve got Request Demo and that’s about it, so I’m guessing that you all just started, but when I read what is on your website, which is about two sentences, it says “Trend spotting for real estate investors. Lofty AI is a real estate investment technology using artificial intelligence to identify neighborhood growth.” So as listeners on this show, what can you tell us that will help us after this conversation go identify where the next hot spot will be in our area?
Jerry Chu: Okay, so that’s a very interesting aspect, in that the reason we use artificial intelligence isn’t because that’s kind of the hot buzz word and the hot technology today, but really because the type of data that we’re pulling is really difficult for the human brain to actually understand. For example, it’s interesting – our technology applies to real estate with surprising accuracy, but we don’t use any real estate data. All the data that we’re pulling are free, public data on the internet, and they come from social media sources, forums… Essentially, what we do is we analyze what people are talking about, specifically millennials, kind of like the hipsters, and we find out what they like, what they like to eat, where they like to go… Basically, what trends they’re following. And based on those trends, we can actually find geotag information; then when you overlay that information on a map and filter by an AI, you get surprising accuracy on where the hot growth is occuring… So kind of like predicting Brooklyn in New York before everyone knows about Brooklyn. Predicting Silver Lake before the area got hot, Arts District before it became popular.
That’s really what our technology does, and the reason why it’s so difficult for a human brain to understand that type of data is because for example if we showed you there was a tweet about someone loving five-dollar cappuccinos in the area, and an Instagram post with a social media influencer taking a photo outside an art mural, and a variety of other of these weird data sources, you wouldn’t be able to compare and contrast between the different ones and weigh certain ones more heavily than the other ones. You could try, but most likely you wouldn’t end up with the correct answer. So that’s why it’s difficult for a person to directly find these trends, but it’s easy for an AI to do it.
Joe Fairless: How do you determine what weight to give one person’s voice over another’s, and ten people talking about it who don’t have as high of a degree of weight, versus two people who have a higher degree? How do you come up with that?
Jerry Chu: We look at everything on the social media posts. For example, an Instagram post – people buy fake followers and fake likes, so we don’t look at those. But what we do look at is how many comments you get, and within those comments, who the users are, how many followers they have, how often do they post, and how many people or their friend group they’re tagging in those posts. Because the more people that are tagged — essentially, if someone posts about this cool new brunch place and there’s thousands of comments, and most of those comments are real people, not bots, tagging their friends and saying “Let’s go there”, things like that – we analyze the context of what the comments actually are, we analyze the emojis to figure out the sentiment; are people responding positively to this post or this type of trend?
Based on all of that information, the AI assigns a weight to that specific data point, and that’s how it does it for thousands and thousands of data points across our platform.
Joe Fairless: You mentioned social media forums… Which social media forums or platforms do you scrape this data from?
Jerry Chu: Well, the main ones we’re looking at right now is Reddit. A lot of trends emerge there before it hits the mainstream, but we’re constantly looking for new sources. We’re looking to integrate Medium articles, we’re looking to integrate distinct generic news sources to see if anything is going on, local news sources, and things like that.
Joe Fairless: I didn’t hear Facebook. Is that because you’re not able to?
Jerry Chu: Yeah, we always respect the user agreements for the data vendors that we’re taking data from, and Facebook after the whole Cambridge Analytica situation has made it more difficult… And to be honest, we’re tracking millennial trends, and studies have shown that most millennials aren’t really on Facebook anymore. In fact, I think as recent as last month there was a statistic that came out – within 2018, about 20% of millennials have deleted their Facebook app on their phone. They haven’t deactivated their accounts, but they took the app off their phone, so they’re not really using it actively anymore.
Our whole idea is to find real-time data, as opposed to lagging quarterly reports that the industry always looks at, and we just feel like if people aren’t actively using Facebook anymore, that might not be the best source.
Joe Fairless: Is Reddit gaining membership or gaining traction? What’s the status of Reddit?
Jerry Chu: Reddit is very popular with the millennial age group, and attracts a variety of different people from different professions. There’s subreddits, subthreads on real estate, on real estate investment, on random trends like “What are you guys doing for fun?”, and things like that. So yeah, their user base is in fact growing.
Joe Fairless: And I imagine Reddit is one of the good platforms, or one of the ones that you use, because it’s actually accessible to scrape that data, whereas LinkedIn, Instagram – that’s more challenging or not allowed. Is that correct?
Jerry Chu: Yeah, that’s correct.
Joe Fairless: Got it. So taking a giant step back, basically you’re analyzing conversations, and then seeing what people are saying, what they’re talking about, and then as you said, you’re looking at the geotag information, or you’re overlaying that with geotag, so where they’re talking about it, and then you can see based on who’s talking about certain things, where they’re talking about it, or what they’re talking about, you can see where the conversation is… So it’s really a map of where the conversation is focused on in your area, and then your thought is based on conversation being focused in that area by these types of influencer people, then it’s likely that’s where the next area of growth is. Is that accurate?
Jerry Chu: Exactly. So if an area previously didn’t have a lot of these conversations, like people talking about how much they love $12 cappuccinos, or bone broth, or things like that, and all of a sudden over the course of a few months in a previous under-developed region that no one really thought about investing in before a lot of these activities starts happening, what it shows is that in real time there’s a lot of the demographic that essentially tends to revitalize certain areas… So young college grads that don’t have enough money to live in city centers or areas that are already nice, so they’ve been priced out, so they’re looking for cheaper areas, and as they expand out, they build newer communities, and those areas tend to start growing very rapidly. That’s what we’re tracking.
Joe Fairless: How much of a surprise is it when you look at the data, when you reveal these areas of growth? And I ask that because it seems like… If I’m gonna be talking about a new restaurant in an area — and I’m probably not one of the influencers, so maybe I wouldn’t be the best person… But if someone who is much more influential in the community than me were talking about a new restaurant – well, that restaurant already exists; so if that restaurant already exists, then that leads me to believe that there’s already a lot of attention to that area.
Jerry Chu: Right. So what we’re trying to get people into is right before the big hockey-stick growth curve. You won’t be the first one into an area, and that’s actually beneficial for you, because it kind of de-risks your situation. You’ll never be the first developer in that neighborhood. But what ends up happening is just because there’s one good restaurant in an area that didn’t have any before doesn’t mean instantly the prices for properties and rents and everything just immediately [unintelligible [00:11:30].11] There needs to be what we call sort of a critical mass of amenities and infrastructure in place, and we track areas that have started to approach that critical mass but haven’t quite reached it yet.
Joe Fairless: Got it. What are some areas that you’ve seen that would fall into that category?
Jerry Chu: A couple ones that are pretty interesting — actually, we’ve noticed interesting activity in Paramount; that’s to the East of Compton. That’s pretty surprising. If you look at the listings there for condos and single-family homes, you’ll notice a big contrast. There are homes being listed for over a million dollars, but a few blocks away there are still homes being listed for less than $200,000. So that’s a really good sign. It means that area is going through a rapid development because of that big pricing contrast.
We’ve also noticed places that people kind of have been talking about, like Hawthorne, Torrance, and places like that.
Joe Fairless: When you co-founded this company you had a business model, so this is the value proposition we’ve been talking about. Now, what’s your business model for it?
Jerry Chu: Right now we’re a SaaS-based platform, meaning that if you like what we have to offer and the intelligence we provide you, then you can subscribe for a monthly fee, and you can cancel it at any time; or you can pay upfront a yearly fee, that would essentially be the monthly fees added together, but with a 10%-20% discount. Those are the two payment options right now.
Joe Fairless: Okay. And who’s your ideal audience?
Jerry Chu: Our ideal audience is really real estate investors, people that have kind of done this process before, but in a very manual, intensive way. We’ve talked to hundreds of real estate investors since we started the company, and a lot of these people we thought we would have to explain to them “Oh, you should follow the artists or the hipsters in these new areas, and then prices are really gonna explode”, and it turns out they already know that, because they’ve done it over the past consistently, and have had very good returns. But their problem has been a lot of times it’s very difficult to find these areas consistently. They’re finding it through word of mouth… Some of them are ridiculously driving day-to-day through L.A. traffic, just looking for these areas manually. And what we provide is the same analytics, but not just for L.A. We have data for the entire United States, and even for some other parts for different countries… And you can have these analytics at your fingertip at home, or in the comfort of your office, and you don’t have to do all this manual, intensive labor to find these new areas anymore.
Joe Fairless: And what’s the subscription cost?
Jerry Chu: Right now we price it differently if it’s an enterprise model or if you’re an individual investor. Right now the individual investment is about $500/month, but if you’re a large firm, which a lot of our trial users and existing customers are, we make a custom pricing based on how many users they want and what additional features they might want.
Joe Fairless: Anything else that we haven’t talked about, that you think we should talk about as it relates to your company?
Jerry Chu: No, not specifically. I would just say the general trend is that a lot of real estate investors, in our opinion, are too focused on the macro market. They’ll hear statistics like “Oh, because interest rates are going up…” or “The whole of L.A. isn’t doing so well” or “The market is starting to tank in a city…”, but a city is a pretty large area, and often within the cities themselves there are micro-neighborhoods that are completely contrary to the overall trend. So as perhaps the whole of L.A. is declining, certain areas within it are growing very rapidly.
For a savvy investor, we think it’s a smart thing for them to look at these micro-neighborhoods, as opposed to just the macro city alone.
Joe Fairless: If I subscribe and I am looking for, say, Dallas-Fort Worth, and I have a property that I’m considering in Dallas-Fort Worth, in a certain sub-market, will I be able to see where that sub-market ranks relative to other sub-markets, or is it categorized a different way?
Jerry Chu: Yes, you absolutely will. We have two ways of categorizing it. There’s a ranking based within the city. In your case, Dallas-Fort Worth, it would be, let’s say, the top ten ranked micro-neighborhoods in that city. But then we also have another category that’s a national-based ranking, so the top zip codes within the entire country. So depending on what you’re looking for, you can subscribe to one or the other.
Joe Fairless: And what if the area is not in the top ten micro-neighborhoods? Are the remaining seven thousand ranked?
Jerry Chu: Yeah, they’re ranked, but at the moment we’re not displaying them, purely because based on demand, people have always told us they just wanna see the top ten, or the top 25. But as people put out requests and say “Actually, we’d like to see the entire ranking, or the top 50”, or whatever the range may be, we’ll obviously adjust it for our customers.
Joe Fairless: Okay, so if you have a subject property that you’re considering, and you subscribe, as of this moment you’re not able to see where it ranks if it’s not in the top 10?
Jerry Chu: Correct.
Joe Fairless: Got it. Alright, good stuff. How can the Best Ever listeners get in touch with you and learn more about your company?
Jerry Chu: Well, number one, they can go to our website, which is lofty.ai, or they can reach out to me personally on LinkedIn, as well as my partner. My name is Jerry Chu, and his name is Max Ball. We’re very active on those platforms, so just send us a request with a message in it and we’ll get back to you.
Joe Fairless: Well, thanks for being on the show, talking about this exciting startup that you two have, the implications and the value proposition that the company has, and the business model, too. I really appreciate it. I hope you have a best ever weekend, and we’ll talk to you soon.
Jerry Chu: Thank you so much, Joe, and thank you for having me here.