There is no doubt that real estate has a history of serving as a lucrative option for investors to generate and store wealth. However, while commercial and residential properties alike are known for being income-producing and have historically appreciated over time, one key feature is missing that differentiates them from many common investment vehicles, such as equities: liquidity. Liquidity is a concern from the old world, one that has vexed many product sponsors and kept many types of investors on the sidelines, but this may soon change as the tokenization of real estate through means such as cryptocurrency becomes a reality. If done successfully, investors could buy and sell real estate assets quicker than ever via asset-backed coins (ABCs). This vision is one that many consider to be the “new world” of investing.
In the new world’s concept of tokenization of real estate, one asset-backed coin may represent one share of common stock in a property through indirect ownership, thus enabling real estate investing for a much broader audience. Those who previously only invested in real estate as a means to purchase a home now have the opportunity to access liquidity and store wealth through an asset-backed coin offering.
Tokenizing real estate appeals to those who have been apprehensive about the cryptocurrency process, as many coins fluctuated arbitrarily based on supply and demand. While traditional currency is usually tied to a specific country and issued by a government and the exchange rate fluctuates based off of this, digital currency is decentralized. Using a real estate property as a hard asset to back the coin gives it stability on the market, which works well for traditional real estate investors, as well as crypto investors who are looking at this as an opportunity to generate long-term wealth while also maintaining liquidity.
Tokenization vs. other real estate investments
As many real estate investors know all too well, direct investments in commercial real estate often leads to a mountain of paperwork and time spent trying to secure bank loans or filling out and reviewing legal documents and dealing with brokers, as well as a number of other extensive and onerous tasks. This process is often very confusing for the investors, as private real estate deals often lack transparency and liquidity, and in some cases accessibility. The benefit of an asset-backed offering (and asset-backed coins) is the immediate and direct access to an investment product that simplifies the entire process and also often reduces fees by cutting out the middle men. This option to invest in an asset-backed coin also allows you to invest in more than one project at once to effectively diversify your assets, which may not be possible in a direct investment of commercial real estate.
Some may argue that a REIT is the safer and more established option, but with a publicly-traded fund it is possible that the extra expense incurred to run this type of investment would lead to lower dividends for investors. As for a non-traded REIT, there is the obvious drawback that this is not liquid and fund operations tend to not be as transparent for a private fund, and the increased layers of sales at the broker dealer and wholesale level often generate significant expense to the investor. Also, with a non-traded REIT you are tied to a certain timeframe before seeing any return of principal, usually at least five years. For those looking for real liquidity, an asset-backed coin real estate deal may be a welcome addition to your portfolio of real estate investments. Just like with a REIT, there are risks to consider when investing in real estate via a token offering, such as the type of the property you’re investing in. A REIT is a comingled pool of assets which creates an exposure strategy, rather than one particular asset. Obviously, properties in high demand areas such as major cities may carry less risk overall, so this is up to your style of property investing.
Tokenized real estate merges the old world, more traditional real estate investing benefits such as wealth protection and creation with the new benefits of liquidity—representative of the new world. As digital currency become more common in our day-to-day transactions due to the spread of blockchain technology that makes these transactions transparent, real estate investors should pay attention to how their potential partners view cryptocurrency. Gaining an understanding now of the benefits of tokenized real estate offerings will soon be a theme everyone in the real estate investment category is familiar with.
Stephane De Baets is the founder and president of Elevated Returns, an asset management company.