From Crowdfunding to Tokenization: The Evolution of Shares in Real Estate

Picture of the inside of a house, living room area with modern furniture and lots of windows.

July, 2021 — Real estate has long functioned as a store of equity value that owners can exchange for money, loans and lines of credit. Yet the typical real estate transaction is associated with a cumbersome, bureaucratic, and fee-heavy process that every homeowner is greatly relieved to finish.  

There are other ways to invest in real estate that do not take the same level of personal involvement and work as direct purchases of real estate do. In other words, investments in buildings and land can be more liquid. In addition to investing in and financing one’s own property, it’s possible to invest in real estate exchange-traded funds (ETFs) and real estate investment trusts (REITs) through stock brokerage accounts, including individual retirement accounts.

With the internet, new investment ideas have emerged.

In recent years the Securities and Exchange Commission (SEC) has developed a crowdfunding exemption under Title III of the JOBS Act of 2012, allowing ordinary retail investors to fund projects and startups together. This expanded angel investment opportunities beyond the wealthiest 5%.

Crowdfunding can support private real estate transactions. Participating investors pay a fee to the platform, and kick in anywhere from $500 (on some platforms, even less) to perhaps $10,000. Investors own shares and receive rental income or profits from property sales. Fundrise is one of the better-known firms among small investors. Investors at Fundrise pay into “eREITs” and “eFunds” to match their personal goals.

Alternatively, investors can use a model like Peer Street to invest in secured debt. Other innovations include services like HomeTap and Point — online platforms for homeowners to sell their personal home equity. Such innovations show the potential for more fluidity in the real estate market, by which risk, profit, and debt can be distributed among groups of investors.

Tokenization is the next step change in real estate investing.

A modern house with three stories and an overhang.

Tokenization converts stored value — including real estate value — into digitized assets, subject to a secure, globally accepted protocol. Fractional shares become securities, and are issued as tokens.

Transactions using tokens are swiftly verified and indelibly stored on the blockchain. Any investor, at any moment, can look over a token’s history, value, and transaction aspects. Actions take place seven days a week, round the clock, on a transparent ledger designed for recording activities that affect a property’s value and ownership.

What’s the big difference between crowdfunding and tokenizing shares?

With tokenized assets, intermediary experts and institutions aren’t needed. The process lets shares of real estate work as fungible assets, transferable from peer to peer.

At this time, this is happening in the arena of startup firms:

  • Red Swan and security token platform Polymath have collaborated to tokenize real estate across North America.
  • Reinno tokenizes commercial mortgages.
  • SolidBlock tokenizes specific kinds of real estate for investment, from spas to college town rentals to sober living sites.

While such projects are still in their early days, the definition of accredited investor is expanding, so these and other platforms stand to attract larger pools of investors. In the future, we might expect similar initiatives to enter the mainstream real estate world.

Blockchain-as-a-Service (BaaS) opens up still more advancements.

An example is Ubitquity LLC. The Delaware-registered firm describes itself as “the leading enterprise blockchain-secured platform for real estate and title recordkeeping.” Ubitquity can support the efforts of cities and title companies to maintain clean, transparent records.

The firm offers features like NotaryBlock™ software, which enables the time-stamped recording and continual tracking of deeds and other instruments. Eventually, such software might do away with a notary’s need to keep a physical journal.

Before jumping in…

Participants should study financial technology, keep up with tokenization hits and misses (there are both in these experimental days), and know the reporting rules. Investors should speak with a tax expert who knows this arena and can assist with tax planning.

Anyone involved in real estate, indeed, is well advised to delve into this topic. We’re glad to share as we learn. As we see it, today’s real estate industry is just beginning to perceive the ways blockchain technology can address longstanding pain points, and create new market opportunities.

Supporting References

Nicolle Lee for Nine Four Ventures: Tokenized Real Estate: Rethinking Liquidity, Ownership, and Transaction Management (May 14, 2021).

Sohail Hassan for Emerging Real Estate Investment Trends: The Future of Blockchain And Real Estate Tokenization (May 24, 2021).

PixelPlex: Real Estate Tokenization: What Is It and What Benefits Does It Offer? (Mar. 11, 2021).

Photo credits: Francesca Tosolini and Bernard Hermant, via Unsplash.