Today we’re exploring another innovative company, this time in real estate.
The name of this company is RealT, and they’re the company who turned fractionalized, tokenized real estate into a reality.
The real estate market
The real estate market is in a tough place right now.
- Interest rates are rising all over the world
- Mortgage payments are near record highs
- The housing supply is starting to grow again, but inventory is still well below historical averages
Put it all together, and we believe that trouble is ahead.
The price of homes may go down by 15%-20% in several US and international markets.
But for property investors, there are still winners. And nobody is winning more right now than landlords. Rental vacancy rates in the US are the lowest they’ve been since the 80s.
A high home price-rent ratio makes renting more attractive, and can be an indicator of an impending property correction. The US’s house price-to-rent ratio is also at an all-time high.
There are two ways this ratio gets back to historical norms, either housing prices will fall, or rents will rise further. (Or both).
So what does this all mean?
It’s a fascinatingly difficult time to be a property investor. Housing prices are likely to fall, while rental yields are likely to shoot up.
To us, it sounds like a good time to a) Buy foreclosed real estate in cash, or B) Get cash flow from rental properties without taking on the risk of a high-interest mortgage.
And that’s where tokenized real estate comes into play.
Fractional investment in tokenized real estate
Tokenized real estate companies have been gaining ground since 2019. Most follow a similar model:
- Create a unique LLC for each investment property
- Fractionalize the property with shares
- Tokenize the shares
You may be asking, but why use tokens?
Wouldn’t selling shares of a house accomplish the same thing? What does tokenizing do that traditional fractionalization doesn’t?
We’ve got the answers here:
- Removes the middleman. Tokenization can reduce the cost of a property, saving the owner & developer regulatory expenses, and allowing investors to get in at a better price.
- Lower minimums. Because of the reduced cost structure, the sponsor can offer investments at much lower minimums than in a typical real estate deal. Tokenization and blockchain technology make the management of many small investors easier to manage than traditional legal structures.
- Faster liquidity. In a normal real estate investment, the Limited Partners (investors) often have little to no liquidity, with funds tied up for extended periods. Tokenized offerings can trade on participating exchanges or an Alternative Trading System (ATS), if the sponsor has listed the tokens on these secondary markets.
- Stabilization measures. Depending on the structure of the smart contract that governs the tokenization, automatic purchases can be executed by the sponsor if the Net Asset Value of the tokens drops below a certain threshold (i.e., say if the token’s are trading lower than the value of the underlying property).
What is RealT?
RealT is a first-of-its-kind company specializing in fractionalized real estate. Investors can buy tokens on the Ethereum blockchain that represent fractional ownership of a property.
Their offer is simple: You can become an owner with as little as $50. No need to part with hundreds of thousands to diversify into real estate.
In less than three years of operation, RealT has seen serious growth. The team has tokenized over 200 homes in the US. These tokens have gained traction all around the world, servicing more than 10,000 investors in 130+ countries.
Each property is divided into a finite supply of RealTokens. Holding a RealToken gives you a stake in a Limited Liability Company (LLC), which legally owns the property. Then, every week, you receive a distribution (rent), depending on how many RealTokens you own.
Each property has its own RealToken, which is distinguished by a Unique Identification Number.
How does RealT utilize its tokens?
One of the main advantages of RealT is that it has a global market with holdings in single-family and multi-family units around the world. Holders of RealT Tokens can become passive landlords by buying into global properties without worrying about conversion rates.
Transfers can also be done automatically, in minutes, on a global scale, to digital wallets. RealT has added to the utility by paying rent to RealToken holders every 24 hours.
As we mentioned above, tokenization helps solve the illiquidity problem.
Selling properties takes time, and several other fractional real estate companies either a) Don’t yet have secondary markets or b) Have limited timeframes in which investors can transact on them.
But the blockchain never closes.
By working with a token on a cryptocurrency platform, Real Token holders can trade their tokens 24/7, 365 days a year. One of the main advantages of crypto markets is that they react in real-time, including weekends/holidays when other major markets are closed.
Now, part of the problem of course is getting investors to adopt cryptocurrency. There are barriers to entry (lack of familiarity with crypto platforms, uneasiness with digital wallets, etc). So RealT has adapted its platform so that you can buy tokens on the site with a credit card.
They’ve also added the “walletless” feature, so that your RealTokens are “stored” on their site. Users don’t have to self-custody their tokens or use a digital wallet for storage. For customers more comfortable with DeFi exchanges, buying and selling is also available on LevinSwap.
How RealT got started
RealT was founded in 2019 by Remy and Jean-Marc Jacobson.
Their founding philosophy was simple: real estate is an inefficient market. Median house prices have sky-rocketed globally, notably in the United States (17% YoY) and Australia. Even with an impending correction, the barrier for entry is incredibly high.
Many average earners need to over-extend their borrowing power to secure a lifelong mortgage just to put a roof over their heads. Those that can buy real estate as an investment are almost exclusively high-net-worth individuals.
Then there’s the age-old dilemma for RE as an asset – illiquidity. To profit from property, you need a buyer, while accounting for all the other costs associated with a transaction.
The alternative, REITs, is a decent solution. However, they provide reduced exposure to rental yields and property ownership, and a broad exposure across diversified properties and categories, losing the ability to invest in specific attractive assets or markets.
So, RealT set out to solve this multi-pronged issue by fractionalizing and tokenizing real estate.
Leveraging blockchain technology allows investors to buy a liquid asset, receive scheduled rental payments via smart contracts, and access a property they’d otherwise be priced out from.
What sets RealT apart?
There are a few tokenized real estate companies operating. But RealT was a pioneer in the tokenized real estate space and first to tokenize a property on the Ethereum blockchain. The team has three years of servicing thousands of clients under their belt, and strong historical performance to back their offerings.
Most of RealT’s properties (to date) have expected annual returns of 20% or greater (rent plus capital appreciation).
What really highlights the RealT model is how well they’ve utilized the potential of blockchain tech.
The team has ample experience in property investment, business strategy, and tech development. They don’t just use tokenization as a convenient way to fractionalize real estate – it’s a core feature of how they operate.
Another awesome part of RealT is its integration into the decentralized finance world. Instead of owning illiquid shares that can only be redeemed upon a sale event, RealTokens can be traded on a secondary marketplace supported by RealT.
RealT has even partnered with liquidity protocol AAVE to allow liquidity mining.
You can create liquidity by lending your tokens to a protocol or borrowing tokens to grow your portfolio without upfront capital.
Investment opportunity: RealT Offerings
RealT’s current and closed offerings are concentrated in the Midwest. Detroit, Michigan is their primary market, with a few properties in Chicago, Illinois, and Cleveland, Ohio. Some investment opportunities are limited to non-US investors. Here’s what took our fancy:
1418 W. Marquette Road, Chicago, IL – A 22-unit multi-family offering (one of two multi-family offerings live on the RealT platform for US investors); the location allows an investor to diversify outside of RealT’s core Detroit market and the multi-family nature reduces the tenant vacancy risk.
616 E 131st. St., Cleveland, OH – A duplex with a $41,000 renovation budget; once complete, the renovations should increase rental income by 5%; exposure to the Cleveland market.
9795-9797 Chenlot St., Detroit, MI – Expected income of 11%, which is the highest yield of RealT’s current offerings; the duplex nature of the property provides additional tenant diversification.
How to get involved
- US investors must meet US accreditation standards (foreign investors are exempt from accreditation standards under Regulation S).
- Set up an account on the RealT website. This includes performing KYC (Know Your Customer) and accreditation verification (US investors).
- Ensure that you have an Ethereum-compatible wallet (software or hardware-based) if you want the full functionality of the RealT platform (limited functionality available using the new “walletless” account feature).
- Peruse the current RealT offerings on their marketplace.
What we like
There’s a lot to like here.
- Unique company. Industry leader and first-of-its-kind company in tokenized real estate
- High return potential. Strong historical performance with YoY returns close to 20% on multiple properties. The return potential is especially strong given rents are likely to continue rising.
- Stability of government payments. This is a big one. RealT’s properties are mainly low-income/affordable housing. For some properties, the state and federal governments pay a majority of the rent for the tenants, reducing the risk of tenant delinquencies.
- High occupancy rates. It can take an extended waiting period for a tenant to qualify for low-income/affordable housing. In addition, there is a limited inventory of properties that accept Section 8 housing vouchers. As a result, affordable housing has historically had low vacancies & turnovers. (In addition, an economic downturn would actually increase the demand for RealT’s properties.)
- Timely cashflow. Thanks to smart contracts, cash from weekly rent no longer takes a month to clear banks. You will receive your yield every Monday, every week.
- Innovative blockchain tech. Rents are paid in the USDC stablecoin. This can allow foreign investors to receive rent in a stable manner that can also be used on other DeFI sites to generate additional yield. New RealT properties are also tokenized on the Gnosis chain, a lower-cost Level 2 Ethereum blockchain.
- Fiat / walletless options. Though RealT operates using a blockchain infrastructure, they realize that not everyone wants to deal with Web3. So RealT allows users to invest using credit cards. They also just debuted a new “walletless” feature. This feature uses blockchain tech in the background, but doesn’t force the investor to create their own Ethereum-based wallet (Note: These walletless accounts do have limited functionality, as they cannot trade in the secondary market or use the tokens as DeFi collateral).
- DeFi capabilities. Another benefit of tokenization is the ability to use your RealTokens on a RealT DeFi platform (RMM). Through the RMM platform (currently only available to international token holders), borrowers can use their RealTokens to take out a stablecoin-denominated loan. This allows investors to have liquidity without selling their RealT tokens. Conversely, lenders can earn yields on deposits when providing liquidity to the RMM platform.
- Liquidity & diversification. Tokenization allows investors to easily buy, sell and swap their tokens on a secondary marketplace (such as Uniswap). Investors can also sell the tokens on the RealT website for the most recent fair-market appraised value of the property. In addition, diversification based on location is super easy. Don’t like Chicago for property at the moment? Sell your RealTokens for something in Detroit.
- Risky property market. While we are bearish on house prices and bullish on rents, real estate market conditions are uncertain at the moment. There’s no guarantee that RealT’s historically strong performance will be maintained through the current market.
- Residential RE concentration. RealT’s current offerings are 100% residential rental real estate focused. A prolonged downturn in this market would impact returns (though the low-income tenant nature of the properties would help mitigate this risk). RealT does plan to possibly offer new categories on their platform, such as commercial real estate (hotels/office complexes/etc.), loans, mortgages, and even high-end art.
- Deal flow. RealT is a pioneer and leader in the young field of tokenized real estate investing, but there are other similar platforms. As these platforms grow and new competitors enter the space, there could be increased competition for properties, driving up the acquisition costs and reducing returns for future investors.
- Ethereum merge. Ethereum’s long-awaited upgrade to Proof-of-Stake seems to have worked without a hitch. However, the coming months may reveal a bug (or two) in the code that could affect RealT’s marketplaces temporarily.
- Limited to accredited investors. RealT is able to offer RealTokens as unregistered securities under a SEC exemption. As a result of this, their offerings are limited to accredited investors.
- Pending crypto regulations. Future crypto regulations could impact the legal structure of RealT’s offerings, including the RealTokens. Real estate tokenization is an emerging legal field, and future court cases could impact the use of blockchain tech to record ownership of the tokenized LLCs.
- Outsourced property management. RealT outsources the management of the properties to a third-party property manager. Investors are reliant on the property manager to keep the properties leased with high-quality tenants and to maintain the properties to ensure market-level rents.
Residential real estate has historically produced strong returns. But the traditional investment methods have drawbacks in this rising-rate environment. The prospect of locking into a 30-year mortgage at decades-high rates is losing its allure. Owning a single property exposes the investor to burdens like operating as a landlord, property upkeep, taxes, lack of market & tenant diversification, etc.
We think blockchain tech can potentially change the face of real estate investment — for good. Attention to this space is increasing as the benefits of blockchain tokenization grow and more people become comfortable with security token ownership. RealT were one of the first to recognize this.
RealT is a great way to get exposure to rising rental yields with low minimum investment. Their tokenized offerings have the benefit of increased liquidity and native web3 functionality. The company may also decide to expand into future verticals like commercial real estate, loans, mortgages, etc.
If you’re interested in property ownership (and have no interest in elevated mortgage payments and the headaches of being a landlord), RealT might be the perfect solution.
Check out their property marketplace.
- None of the authors of this issue currently own any tokenized shares of any RealT property.
- After researching this issue, I do plan on becoming a RealT customer and purchasing tokenized shares of the Marquette Road multi-family property.
- We have no RealT tokenized property shares in the ALTS 1 Fund, and have no immediate plans to add any.
This issue has been a sponsored deep-dive, meaning Alts has been paid to write an independent analysis of RealT. RealT has agreed to offer an unconstrained look at their business & operations. RealT is a sponsor of Alts, but our research is neutral and unbiased. This should not be considered investment advice, but rather an independent analysis to help readers make their own investment decisions. All opinions expressed here are ours, and ours alone. We hope you find it informative and fair.