Tokenized Real Estate Presents Challenges in a Tight Market

The real estate market has seen a lot of changes in the last decade. Since the Great Recession of 2008-09, institutional investors have been buying up rental properties across the nation, single-family and multi-family, which is driving up prices in a market already beset with low inventory. Many would-be homeowners are left out in the cold, unable to buy starter homes or the homes of their dreams.

This climate gave rise to real estate crowdfunding platforms where almost anyone can become a real estate investor or fractional owner of a rental property. Cryptocurrencies are taking it a step further.

3 Ways Cryptocurrencies Are Tokenizing Real Estate

Tokenization is creating new opportunities for anyone anywhere to become a fractional owner of a rental property, a landlord, or a real estate investor with smaller investments than even real estate crowdfunding platforms have allowed. Instead of a minimum investment of $1,000 as is typical with crowdfunding, investors can become owners of a real estate property with $100 or less. This new form of real estate investing, however, has its challenges.

Three separate platforms are offering crypto investors a different way to become a real estate investor:

1. Lofty AI –Property owners sell their property to Lofty AI, which organizes it into an LLC and sells shares in each LLC for $50 a pop. Shares are represented by a token. Token owners earn dividends daily and can cash out at any time, but there is a hard cap of 15 percent for token ownership in any one property. Each person who owns property tokens votes on any necessary actions, such as repairs and maintenance, on that property.
2. Arrived Homes – Arrived Homes also offers investors fractional ownership of rental homes, but their minimum investment is $100. They pay out dividends quarterly.
3. Vesta Equity – Vesta equity takes a different approach to fractional ownership. Property owners gain access to the equity in their properties while investors receive a token that represents their ownership in that equity. For the property owner, there’s no loan, interest, or monthly payments, and no threat of foreclosure or penalties for not buying back ownership interest.

These new breed of investing opportunities give everyone a chance to become a real estate investor with a small investment. Investors can become passive income earners immediately with tokenized real estate.

3 Challenges of Tokenized Real Estate

Tokenized real estate investing does have its challenges. The following three challenges could make tokenized real estate difficult for investors, property owners, and the platforms.

1. Decentralization is slow – With a traditional corporation or LLC, a business owner, CEO, or manager can make an executive decision. If a tenant needs their plumbing repaired, they call the landlord, and the landlord decides whether to spend the money or not. With tokenized real estate based on fractional ownership of the property, everyone who owns a token is an owner and is involved in the decision-making process. That means the platform must put each item up for a vote and that process takes longer. The tenant may not even be aware of the process.
2. Property owners may not be local – Institutional investors have received some pushback on their business practices. Some communities are not happy with the idea of people outside their neighborhoods owning properties and renting to locals. Tokenized real estate comes with the same level of baggage for communities. The property owner’s rental income exits the local economy and municipalities are powerless to change it.
3. Are tokens securities? – Since tokenized real estate is an unregulated industry, platforms that offer fractional ownership through tokenization may be walking a thin line. The Securities and Exchange Commission has yet to issue any rules on the practice, but the Biden Administration is studying cryptocurrencies to determine future regulatory practices. It’s possible that tokenized real estate platforms could fall under the SEC’s regulatory oversight at some point in the future.

Currently, for investors, the upsides outweigh the downsides. This is an exciting time to be a real estate investor, especially for investors who are also into tokenized assets.