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What is tokenized real estate?

Real estate tokenization converts the value of real estate into digital tokens stored on a blockchain.

Each token can represent ownership of all or part of a real property, plus a right to a share of the profits and losses generated by that real property, among other things.

This method enables fractional real estate ownership, which allows a broader group of investors to invest directly in real estate of all kinds, including commercial, residential or trophy. It’s similar to the crowdfunding process championed by Cardone, which allows everyday investors to pool their money to purchase property (or a share of property) as a group.

“People don’t want to own a home anymore,” said Cardone, who argued that baby boomers would rather retire and go on vacation, while younger generations “don’t want the obligation of ownership, even if they could.”

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It’s not that easy, though

Tokenized real estate has a few key benefits, Cardone wrote in a blog post last year: Blockchain technology enables “lightning-speed transactions at a lower cost,” the investments have a higher liquidity than brick-and-mortar real estate and the process is very secure.

But Cardone has one big reservation about trading real estate as a digital asset: “Everybody … forgets one little group called the SEC (Securities and Exchange Commission).”

Generally, the SEC considers real estate tokens as “securities,” meaning they’re subject to disclosure and registration requirements, unlike pure brick-and-mortar real estate investments.

Cardone, who is known for his 10X (go big or go home) philosophy, expressed concerns about whether the current regulatory structures would allow him to “do giant deals” on the blockchain.

“Show me how to get a $100-million deal on the blockchain,” he said. “I'll buy the deal, throw it on the blockchain, and then get me an approval from the SEC so I don't go to prison.”

Those regulatory structures do exist, according to John Belitsky, co-founder of Balcony DAO, a Web3 investment bank that provides crypto financing solutions for real-world assets, including real estate.

Tokenized real estate is “what every private equity firm in the world is eyeing as the future of the real estate industry,” Belitsky argued on Wolf Financial’s Twitter Spaces.

Paypal co-founders Peter Thiel and David Sacks appear to have a finger on the pulse of this trend, investing in multiple startups in this space in recent years.

Thiel was quoted in a recent Forbes article on tech trends like tokenization transforming the real estate industry this year.

"The market for property is probably the oldest market in the world, and only now is it beginning to change rapidly."

If you’re not yet ready to take on digital assets, here are two other ways you can build your real estate portfolio.

Invest in REITs

Investing in a real estate investment trust (REIT) is a way to profit from the real estate market without having to buy a house or worry about screening tenants, fixing damages or chasing down late payments.

REITs are publicly traded companies that own income-producing real estate like apartment buildings, shopping centers and office towers. They collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.

To qualify as an REIT, a company must pay out at least 90% of its taxable income to shareholders as dividends each year, in addition to other requirements. In exchange, they pay little to no income tax at the corporate level.

Essentially, REITs are giant landlords. Some have seriously blue chip tenants, including the U.S. government, while others house e-commerce giants like Amazon and Walmart.

Of course, not all REITs are made equal — many took hits during the pandemic — but, generally, they’re described as high-return investments that provide solid dividends and the potential for moderate, long-term capital appreciation.

As REITs are publicly traded, you can buy or sell shares any time and your investment can be as little or as large as you want — unlike buying a house, which usually requires a hefty down payment and then comes with a mortgage.

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Use online investment platforms

Building a brick-and-mortar real estate portfolio requires serious cash, time and sweat equity, but it is possible to grow your portfolio without all the red tape.

With the help of new online platforms, you can gain access to institutional-quality commercial real estate investments without the leg work of finding deals yourself.

You can browse curated deals or join funds invested in diversified real estate portfolios that will maximize your returns while keeping your fees low.

Many platforms are supported by a team of experts who can help you build a portfolio that best fits your needs.

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.