If you’re a property investor whose interest is sparked by blockchain technology, then you will most certainly find this article intriguing. Why? Because it details the advantages of investing in tokenized rental real estate for the purpose of achieving fractional ownership. This forward-thinking method of real estate investing will transform the industry, enabling it to catch up with the technological advances of the day, as well as allow for some exceptional advantages. Now, with all that in mind, let’s start with a brief summary of the question at hand:
What are the advantages of investing in tokenized rental real estate? Tokenized rental properties allow for a truly diversified portfolio, the ability to generate passive income, and the opportunity to take part in easy global investing. Additionally, its fractional ownership capabilities remove the financial barriers to entry, as well as provide an environment for secure and transparent transactions.
What is Real Estate Tokenization?
Tokenizing real estate is the act of producing tokens, also referred to as security tokens, through blockchain technology, with the intent of having those tokens become a digital representation of a real-world physical piece of property. This can include tokens that represent a single-family home, duplex, apartment buildings, and the like.
When an investor purchases the token(s), they’re actually buying ownership rights to a physical piece of real estate, and it’s all recorded in a digital ledger on the blockchain. Additionally, when real estate is tokenized, the property can have multiple tokens representing it, and investors have the option of purchasing the number of tokens that fits their needs and their budget, granting them fractional ownership.
What is Fractionalized Ownership of Tokenized Real Estate?
Traditional real estate transactions typically include the selling and buying of property with one seller and one buyer. In contrast, when real estate is broken down into tokens on the blockchain, it enables multiple investors to buy a fraction or percentage of the same piece of property. This approach is similar to shares of company stock that are bought by many individuals.
This is truly transformative because it means that those who have always wanted to dive into the rental real estate arena, but couldn’t afford to buy an entire piece of property, will now have the opportunity to become cash flowing property owners. This is possible because with tokenized properties, purchasing ownership rights to rental real estate is based on the investor’s budget, not the total asking price of the property.
What’s the Difference Between Fractional and REIT Investments?
If you’re familiar with Real Estate Investment Trusts (REITs), you may be wondering what’s the difference between fractional investments and REIT investments since the two have some similarities. With that in mind, let’s clear up any confusion between the two:
A REIT is a company or entity that purchases or develops income-producing real estate, and the properties are kept within an investment portfolio. Multiple investors can then buy shares of the publicly-traded REITs that hold the pieces of real estate, and will benefit from the appreciation of the stock, as well as dividend payouts. However, the investors don’t actually own the pieces of real estate; they’re just investing in the entity that does.
Just like a REIT, when it comes to tokenized real estate, the property may also be held in an entity, but the difference is that tokenized fractional purchases actually grant the investors ownership rights to the property. There are several other differences, but this is the most important element that I wanted to emphasize.
The Advantages of Investing in Tokenized Rental Real Estate for Fractional Ownership
The ability to have digital tokens that represent a physical, real-world rental property that multiple investors can own is not a concept any of us would have even been able to comprehend in the past. However, over the years, we have been introduced to the beginnings of this technology through the development of the blockchain, the rise of bitcoin, as well as the advanced use of smart contracts and tokens.
Out of all this came the idea, as well as the ability to tokenize real estate on the blockchain, allowing for fractional ownership, and some distinct advantages, which I will discuss below.
1. A Tokenized & Fractionalized Piece of Property is More Obtainable
One of the most notable benefits of tokenizing rental real estate is the fact that it has broken down a financial barrier for those who don’t have and can’t obtain the funding to purchase an entire piece of real estate. Fractional ownership purchases may be as low as $50 per token, which equates to a certain ownership percentage, or as high as $5,000, or more; it all depends on which company you’re working with and what type of property you’re investing in.
This is a game-changer for the rental real estate industry where the only way investors could earn passive income through a rental property was to buy the whole property themselves, or possibly with a partner or two. It’s worth mentioning that there is nothing wrong with an investor purchasing a rental property themselves. In fact, this is a popular method of investing that is here to stay because it’s what most people prefer. But, for those who have a dream of creating cash flow through a lucrative piece of real estate, but can’t afford to do so, it’s now possible through fractional ownership.
2. Enables an Investor to Have Multiple Streams of Passive Income
Because of the affordability and accessibility factors, investors can own several rental properties at once – reeling in multiple streams of passive income. Typically, when a property is tokenized and offered as fractional investments, it’s done through a professional investment company and its platform, which handles all aspects of the rental property process, such as maintenance, rent collection, and so on.
This means that you will not have to do anything except watch your rental income flow in each month, and that’s the beauty of passive income. This is the same concept as when you buy non-fractionalized, off the blockchain real estate through a full-service investment company; they do all the work for you as money flows in your account each month like clockwork.
3. Opens Up Global Investment Opportunities
There are many individuals out there that see investment opportunities in countries other than their own. However, with all the roadblocks of international property purchases, let alone dealing with owning a rental property in one, it’s just not worth the hassle for most.
Tokenization has made it possible to push the red tape aside, making way for worldwide rental real estate investment opportunities. So, as long as there are no specific restrictions in the country the investor resides in, or is buying in, if that individual can access a platform via the web that offers international fractional real estate investing, then there is no reason they cannot own a rental property across the globe.
Additionally, for those who may be a little nervous about investing internationally, it’s worth mentioning that because the transaction would be on the blockchain, it’s extremely secure and transparent.
4. Tokenized Rental Real Estate on the Blockchain Allows for a Truly Diversified Portfolio
A diversified real estate portfolio is essential to achieving financial security. With that said, every smart investor would agree that the old phrase “don’t put all your eggs in one basket” is a good piece of advice.
When you’re dealing with tokenized rental real estate that allows for fractional ownership, you have the opportunity to easily diversify your portfolio. This is true for a few reasons; let’s take a look at them:
- The affordability factor of fractional real estate ownership opens up the opportunity to add a variety of properties to a portfolio.
- Because of the global reach that tokenization makes possible, it allows an investor to own real estate in several countries, providing international diversification.
- It also allows for the possibility of fractional ownership of various property types; this includes single-family homes, duplexes, apartment complexes, commercial office buildings, and more.
5. Offers the Ability to Easily Sell Property Tokens to Reinvest in Other Pieces of Real Estate
A big advantage of tokenized rental real estate purchases is the ability to sell the tokens at any time. This comes in handy when capital is needed quickly, or a more lucrative deal pops up that you would rather have in your portfolio. It all makes for a quick and smooth process for selling and buying percentages of real estate.
Are you starting to see the big picture here? Fractional ownership through tokenization is really like nothing we have experienced before in the real estate business, and it’s going to take the industry by storm.
6. Blockchain Offers a Secure, Transparent & Decentralized Real Estate Transaction Environment
When it comes to real estate purchases, even if it’s a fractional investment, security and transparency are essential and important to every investor.
Having been in the real estate industry for over 15 years now, I’ve heard many stories from fellow investors that deal in traditional property purchases, and they have made it clear that unless you’re using a full-service investment company that takes care of everything for you, you can be at risk when it comes to title fraud, wire transfer scams, 3rd party mistakes, and more.
In contrast, the blockchain, with its smart contracts, creates an environment that ensures complete transparency with secure transactions. This is possible through the blockchain’s digital distributed ledger, where all the data of a real estate transaction is recorded, timestamped, encrypted, self-verified, and designed so that it can’t be altered.
The data is viewable by all parties involved for transparency, and no one person or entity controls the data because it’s a decentralized system, which removes the risks of single point of failure, and lowers the chance of fraud.
You can read more about real estate transactions on the blockchain by heading over to our newest article titled – How Real Estate Purchases are Being Transformed by the Benefits of Blockchain Technology.
How to Invest in Tokenized Rental Properties
There may be a few ways to go about investing in tokenized rental real estate with fractional ownership options, but I’ll just keep it simple and discuss one avenue that seems to be the most common.
As a brief summary, the best way to go about this is to work with a company that provides a platform designed for fractionalized purchases through property tokenization. They should have a website where investors can search its platform to locate properties that are of interest, and have exceptional customer support to work with clients to successfully achieve fractional ownership.
Let’s break this down a bit with a few more details:
1. First Things First – Are You an Accredited Investor?
If you’re an investor residing in the United States, and possibly other select countries, you will find that real estate tokenization companies are required to verify that their clients are accredited investors in order to issue tokens to them.
For the most part, you’re considered accredited if you meet one of the two requirements – your income exceeds $200,000 per year, or more than $300,000 joint income with a spouse, for the previous two years. Or, your net worth, alone or together with your spouse, exceeds $1,000,000, not including a primary residence. Consult with an investment company to obtain any additional requirements of being labeled an accredited investor.
2. Know Your Investment Goals & Find a Company that Can Meet Them
To take advantage of tokenized rental real estate opportunities, you should first figure out your investment goals – your budget, type of property, location, and the like. Once you have a general understanding of what you’re looking for, it’s time to do your due diligence by researching companies that offer tokenization of real estate services – thoroughly read through their websites, search for company reviews, and contact the company you’re leaning towards with any questions you may have, which will give you a feel for its level of customer support.
3. The Rental Properties Listed Should be Held within an Entity
When looking for a company to work with, you should ensure that the properties that are listed on a platform are held within some type of entity. One type of entity that is commonly utilized is a Series LLC. This specific type of LLC is unique in that it includes a certificate of formation that allows for limitless segregation of assets and membership interests into a set of independent series.
To sum this up, there would be one company that forms the main Series LLC, and that LLC would hold many properties. Each property is held within its own sub-series inside that main Series LLC, and each sub-series is treated as a separate entity.
This allows each property to be divided up (tokenized) and sold to multiple owners, while keeping everything having to do with that one specific property and its members, separate from the company and all the other properties within the main Series LLC.
4. A General Overview of the Tokenized Rental Property Purchase Process
Because each company does things differently, I’m only providing you with a general, but informative overview of the process.
- Register: Once a preferred company is found, the investor registers on its platform.
- Wallet Set up: A crypto wallet must be set up, such as an Ethereum wallet, to be able to hold your tokens.
- Purchase Tokens: The platform may require that tokens are purchased to move forward. Typically, the company will have their own token that clients use to pay transaction fees on the platform and they’re normally ERC-20 tokens. The tokens are generally given a name that relates to the company itself. These same tokens are also used to tokenize the real estate, so they’re the digital representations of a particular property.
- Property Search: An individual searches the platform for a rental property that fits well with their overall investing goals.
- A Payment is Made: Once the property of choice is located, the investor selects the desired number of tokens available for sale, and the required payment is made using an accepted cryptocurrency such as Ethereum or Bitcoin, or with a traditional form of payment.
- Signing the Necessary Digital Contracts: As with any real estate sale, there will be signatures needed to seal the deal, such as a purchase agreement. These are the documents that will officially allow the token(s) to be assigned to the fractional owner. This data will be placed on the blockchain via smart contracts, as well as timestamped, verified, encrypted, and serve as proof of ownership.
- Tokens Transferred: After ownership is assigned, the tokens that represent the rental property are transferred into the investor’s wallet and they become an official property owner.
- Rent Payments Distributed: When the property’s tenant pays rent each month, it’s automatically transferred, commonly in the form of USDC stable coins, to the wallets of each investor who owns a percentage of that property.
- Passive Income Options: The passive income that’s in the form of rent payments can be saved, transferred to a bank account, or even used to reinvest in more properties, or to buy additional fractional shares of the same rental property, if available.
- Property Management: The property will be managed and cared for by an assigned property manager so the fractional investors will not have to do anything except enjoy their passive income.
As mentioned, there are several companies out there that provide tokenization of real estate, and they all have their own system, so the above was only meant to be a snapshot of the process.
Are You Ready for This Forward-Thinking Approach to Investing in Rental Real Estate?
I realize that fractional ownership of rental real estate on the blockchain is something totally new for most investors. With that said, this article was just an introduction to an advanced model of investing that might someday become a standard practice – you will most likely have plenty of time before that happens. For now, I hope you enjoyed learning about the advantages of investing in tokenized rental real estate and all it has to offer.
For those of you who have a love for traditional real estate investing, and prefer to have a professional company take care of all the details for you, don’t hesitate to reach out and schedule a complimentary phone call to discuss your investment goals, as well as hear about our affordable new construction properties that may be of interest to you.
If you would like to stay informed on the latest news when it comes to cryptocurrencies and blockchain technologies, then be sure to check out Crypto News Daily below. Also, if you have an interest in becoming a crypto investor, I suggest diving into the following article – How to Invest in Crypto – The Ultimate Guide.
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