Tokenized Real Estate Investing

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Contributor, Benzinga
November 7, 2022

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Tokenized real estate investing is quickly gaining popularity, and for good reason. It is helping everyday investors get the same benefits of real estate investing without the incredibly high price tags. Keep reading to learn more about how blockchain is changing the world of real estate investing.

Being able to innovate or bring innovation to an established industry is a well-worn path to success. Tokenized Real estate investing is one of the most exciting fields of innovation in investing right now. 

Although real estate investing offers a proven path to both wealth-building and passive income, it’s not without its drawbacks. Acquiring real estate is almost always expensive. Ironically, that high cost is why real estate investments can also be hard to liquidate quickly. Tokenized real estate investing is already changing that. 

What is Tokenized Real Estate Investing?

Tokenized real estate investing is a new and innovative style of real estate investing that seeks to give investors an offering that combines the long-term benefits of property ownership with the ability to liquidate the investment quickly. At its core, real estate tokenization works just like any other syndicated or crowdfunded real estate deal such as crowdfunding and real estate investment trusts (REITs).

Investors pledge money to an offering in exchange for an equity share in the asset. That equity share entitles investors to a proportional share of any revenue generated by the asset and/or its appreciation value at the end of the investment term. They are also able to share proportionally in any tax benefits that come with real estate ownership, such as capital gains and depreciation write-offs. 

The big difference between tokenized real estate investing and a standard syndication type real estate investment is that almost all private REITs and similar real estate offerings with shared ownership designate the investors as limited partners, and the investments usually have an extended hold period. During this hold period, investors are prohibited from liquidating their shares. In a tokenization-style deal, the investor’s ownership share is expressed as a token.

This token still gives investors all of the benefits of a real estate partnership, including revenue, appreciation value and write-offs. But investors in a real estate tokenization deal can liquidate some or all of their equity in their chosen investment through a blockchain operated by the investment sponsor. Although public REITs may have a secondary market where investors can sell shares, tokenization still offers investors increased flexibility and other benefits that traditional investing does not. 

Benefits of Real Estate Tokenization

One of the stated goals of real estate tokenization is to democratize the world of real estate investing. The process of breaking individual real estate investments down into equally valued digital tokens allows deal sponsors to make real estate tokenization offerings available to investors for much less than the typical buyins you see on the highest-performing REITs and real estate crowdfunding deals. 

Low Buyins: 

In many cases, you can buy shares of an offering on a real estate tokenization platform for as low as $1,000. Very few — if any — institutional-quality real estate offerings allow investors to buy in for only $1,000. In fact, many of them require buyins between five and 20 times that amount. 

These low buyins allow investors to build a completely diversified portfolio of real estate investments of their own choosing for the same price of a share in one offering on a traditional real estate platform. So, you can take $10,000 and put it into a single crowdfunded deal on a traditional platform or 10 different deals in 10 different markets with a real estate tokenization platform. 

Investor-Friendly Fee Structure:

As part of their efforts to open real estate investing to more people, many real estate tokenization platforms offer a more investor-friendly fee structure than traditional real estate investments. That’s because tokenizations are heavily streamlined operations that mainly focus on due diligence and property acquisitions instead of maintaining a bloated corporate structure with too many executives expecting large bonuses. There are still fees, of course, but they’re usually less burdensome for investors.

Increased Investor Security:

The world of online digital real estate platforms has ushered in an exciting era. Whereas investors may have previously been limited to deals or offerings in their local area, or those brought to them by a few investment advisers, online platforms give them the ability to scout deals across the country. Unfortunately, the downside of all that access is that it comes at the expense of some security. 

Identity thieves and other digital con artists know that investment platforms are chock full of information belonging to well-heeled investors. Almost all of these platforms take more than adequate security steps to prevent that kind of breach from occurring. However, the fact that real estate tokenization platforms conduct all their deals on the blockchain makes it almost impossible for any hacker to gain access to your shares improperly. 

Increased Liquidity, Leverage and Flexibility:

Investors don’t have to endure a years-long hold period before they can liquidate their assets. An owner of a digital real estate token can sell their token (or a portion of it) on the blockchain or they can leverage it. Real estate token holders can borrow against the value of their token, or even use a portion of it to lend money and then earn interest through decentralized finance platforms. 

By contrast, even if a share in a REIT was liquid, the investor can’t borrow or lend against the equity. Simply put, the level of investor control that real estate tokenization deals offer is unprecedented. There are few traditional real estate syndication deals that give investors the kind of freedom of a tokenization offering. That’s why many people are beginning to ask whether tokenization is the future of real estate investing. 

Potential Drawbacks of Real Estate Tokenization Deals

There is no doubt about the tremendous potential benefits that come with real estate tokenization deals. Being able to liquidate equity without holding periods that can last for as long as 10 years or leverage them on decentralized finance platforms is an appealing package. So is the added security offered by having your ownership shares as part of a blockchain. But that doesn’t mean that real estate tokenization deals are risk-free.

First, every investment is subject to loss of principal, and real estate tokenization deals are no different. The liquidity of your real estate token will always be dependent on the performance of the asset (or assets) that it’s tied to. Being able to liquidate shares on a blockchain or leverage them on decentralized finance platforms is of little use to you if the asset is not performing or missing its stated investment goals. 

It’s true that you may be able to cut your losses and get out of a deal that’s going sideways without having to keep the asset for the full holding period by selling your token on the blockchain. But if your chosen offering is indeed going sideways, you probably won’t be the only token holder looking for the exit. 

So, if a bunch of you are all selling your tokens at the same time, anyone who buys them will know your asset is distressed and their purchase offers will reflect that. You also have to remember that real estate tokenization is still a relatively new concept that more traditional investors may not fully understand or trust. So, the secondary blockchain market may not be as large as you expect either. 

What Are Some Good Tokenized Real Estate Investment Platforms?

Although real estate tokenization is a relatively new style of investing, there is still a pretty impressive range of platforms that feature tokenized offerings. AKRU is an Ohio-based real estate tokenization platform that has a strong customer focus, although its list of current offerings is not particularly large at the moment.

HoneyBricks is one of the newest platforms to hit the market and has already released some of the highest quality offerings. One of the greatest aspects of this platform is how user-friendly the dashboard is, even for those that are new to investing on the blockchain. Investment minimums on Honeybricks are as low as $100, depending on the property.

Although traditional real estate investing platforms still outnumber tokenized real estate investing platforms, that's unlikely to always be the case. As the word of tokenization spreads and more investors become comfortable with this very 21st-century style of investing, there is bound to be a marked increase in real estate tokenization platforms in the next few years. 

The good news is that you can get your feet wet and get out of the water pretty quickly if you don’t like real estate tokenization. On the other hand, extricating yourself from a traditional real estate deal could prove to be much more difficult (or expensive).

  • securely through HoneyBricks's website
    securely through HoneyBricks's website
    Best For:
    Accredited Investors Only

Is Real Estate Tokenization Right for You?

Only you can answer the question about whether tokenized real estate investing is right for you. Although it’s a new style of investing, it’s important to remember that there was a time several decades ago when investing in REITs was just as new and just as innovative. There is certainly risk involved, but real estate tokenization offers investors a level of flexibility and liquidity that most traditional offerings can’t match.

At the end of the day, it really boils down to your investment strategy and risk tolerance. When you consider the impressive potential benefits of real estate tokenization, it’s quite likely that this “new” style of real estate investing is here to stay. So, at a minimum, real estate tokenization platforms are worth a kick of the tires if you’re looking for a way to build wealth through real estate ownership. 

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