Understanding The Benefits & Pitfalls Of Tokenized Real Estate

Tokenization Is Advancing

Real estate is not the only sector that is busy being reshaped by blockchain and tokenization. However, it is definitely one of the more appealing sectors. The reason for this is that it literally opens up the world of real estate investing to anyone for as little as $50. Recently, I published an article in which I took a look at Lofty.ai. Many will also be familiar with other companies such as RealT and Honeybricks. Additional research in regard to RealT has actually made me a lot more bullish on this particular platform. I will address this in another article at a later stage.

Judging by some of the comments, I think that many people are thinking of tokenized real estate in a similar way to a REIT. Tokenized real estate is not a Real Estate Investment Trust. The only similarity is that investors are able to own exposure to the real estate market. The two ideas are similar, yet inherently different. A REIT will generally allocate investor funds as they see fit. Tokenized real estate is similar in that you can have a smaller exposure to real estate, as opposed to purchasing a property outright. However, you actually own that percentage of the property that you choose to invest in.

Owning a property, or part of a property will obviously incur a level of responsibility and risk. This is where some have expressed concern. For instance, a tenant is unable to or refuses to pay rent. What happens now? The fact that these scenarios incur consequences for the owners is actually evidence that there is true ownership. You will note how many of these “mining platforms” are able to offer a steady and predefined return regardless of price, hashrate, and mining difficulty. This is proof that there is actually no real mining operation taking place. So let’s look at how potential pitfalls affect investors.

Better Risk Management Than Traditional Real Estate Investing

Before I address these potential scenarios, it is important to note that fractional owners are in a much stronger position than traditional real estate investors. Firstly, due to the size of the investment, there is no mortgage. This means that apart from basic services and taxes, investors are not held captive to heavy financial obligations. Secondly, an investor can simply sell their tokens on the marketplace and exit a property that they believe is problematic or could become increasingly problematic. Traditional real estate investors don’t have this luxury. It is also very important to note that costs are split between a large group of investors.

The projected rent of any particular property is given after all of the relevant expenses have been deducted. This can be viewed in the screenshot below.

Image Source – Lofty.ai

There is also an initial maintenance reserve that is set up upon purchase. This is generally 5% and is maintained by small monthly increments that will very modestly affect the monthly rental income. Because token holders are the owners and it is run via a DAO, token holders vote on whether maintenance is necessary or not. There is also a vacancy reserve set up upon purchase, which is 2% of the property value.

Image Source – Lofty.ai

Some also showed concern in regard to the assigned property manager. Once again, as owners, you get to decide. Token holders can vote to have a property manager replaced if they are not satisfied with their performance and management of the property in question. Voting will also occur in the scenario of a non-compliant tenant, in regard to eviction or alternative measures. As you can see, none of the traditional risks or downsides are removed, and yet this particular model makes real estate investing a lot more stress-free.

Real Estate – A Good Opportunity?

As I mentioned in my initial article regarding fractional real estate, I delayed investing in this idea because I factored in what we are currently seeing and have recently experienced due to interest rates and other issues. As property values begin dropping, it might be a good time to begin gaining exposure to this market. The fact that it can be done via blockchain makes it even better. Although real estate valuations are dropping and will likely drop further, in the long run, I believe owning property will become increasingly difficult for the average person. I know of some who have chosen a Lofty property portfolio as a first step to owning their first home.

One needs to conduct their own research and exercise good risk management and portfolio construction, regardless of the sector. The same applies to property. Nothing here should be considered investment advice or accurate. This is merely informative. Please do your own research before making any investment decisions in any regard.

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