REITs, Crowdfunding and Blockchain — A Look at the Real Estate Investment Space
Since the 1990s the appetite for cross-border property investment has boomed. Real estate has emerged as one of the top five largest asset classes in the US with today’s institutional investor typically allocating an average of 10% of their portfolios to it. Property investment has become commonplace — for institutional or accredited investors that is. For the general public real estate remains an exclusive venture, reserved for those with substantial means.
Thankfully for the average investor, alternative options such as REITs, crowdfunding options, and most recently real estate blockchain projects, have entered the real estate space, disrupting traditional ways of investment.
In this article we explain the different types of real estate investment and discuss the future of the space.
Traditional Real Estate Investment Trust (REIT)
Established in the 1960s, a Real Estate Investment Trust (REIT) is a company that owns, operates or finances income producing real estate on behalf of shareholders. Those who invest in REITs are fractional owners of multiple properties held within a portfolio that earns annual dividends from rental income. Most REITs are held by companies, but there are alternative ways to invest in them, such as through mutual funds.
An issue with traditional REITs is that they generally have high expenses. This is due to the complexity of the portfolios holding multiple properties which leads to hefty maintenance costs. Another con for investors is that profits are taken first by those who run the REITs, which can translate to a lower return.
Crowdfunding
Crowdfunding campaigns allow for anyone to raise money for projects or business ventures from a large volume of people through smaller contributions. This is typically a benefit for the project creator as it provides an opportunity to raise capital without the hassle of going through banks or venture capitalists.
In regards to real estate, if someone wants to invest in a real estate property, but they don’t have the means to buy it outright, they can become a shareholder through a crowdfunding company. Following the purchase, any profits the asset receives, through rental income or selling the property, are passed to the investor in relation to the size of investment.
Unlike REITs which contain a portfolio of pre-selected properties, crowdfunding gives investors the ability to decide exactly which estates they would like to invest in.
Crowdfunding Projects
Housers: Housers.com is a Spanish real estate crowdfunding company. Established in 2015 the platform allows individuals to select and invest as low as €50 per property. They have properties all over Spain, with the bulk of them in either Madrid or Barcelona. Recently Housers expanded to neighbouring countries Italy and Portugal. Unlike other platforms, Housers only provides the online platform and relies on third-party promoters to find and supply the real estate projects. The legal, administrative and maintenance aspects are paid by the company.
Requirements to participate:
- Monthly income to invest;
- Must be Spanish resident, unless receiving paperwork at your local Spanish embassy;
- A real asset to use as collateral.
Costs:
- Minimum €50 per investment opportunity;
- 10% fee on profits earned. This commission is applied on the dividend itself, after expenses.
Cons:
- Spain, Italy and Portugal market specific;
- Restrictions on a number of countries, including the United States;
- Investors own a stake in the company and not an individual property;
- English translations of updates are in need of improvements.
Patch of Land: Patch of Land is a Peer-to-Real-Estate American lending marketplace that matches accredited and institutional investors to borrowers seeking more timely sources of funding for rehabilitation properties across America. Their goal is to solve the problem of inefficient real estate private lending by underwriting projects for borrowers with properties that are typically bypassed by traditional lenders. They provide loans to both rental and commercial properties.
Requirements to participate:
- Must be an accredited investor;
- Must have a U.S. bank account.
Costs:
- Minimum investment of $5,000;
- 0–2% management fees on interest distribution of investors;
- Fees charged for property appraisal, closing costs and origination points.
Cons:
- Accredited investors only;
- Only US properties;
- Investors do not own stake in property but are investing in a borrower payment dependant note;
- Gains are taxed at an ordinary income rate rather than at the more favorable capital gains tax rate, this can be a major drawback depending on your tax bracket.
Blockchain Projects
In real estate there are countless additional fees and processes involved in purchasing a property that go beyond the initial price. Blockchain technology, through the use of smart contracts and its irreversible ledgers, holds the key to reducing costs by decreasing the need for intermediaries. In addition, as blockchain transactions are irreversible and recorded on an indisputable ledger it reduces that instances of fraud.
Projects that are buying properties and converting its value into a Proof-of-Asset token on the blockchain are creating massive disruption within the space as it expedites the processing time, reduces costs, and makes physical assets easier to split into shares among investors, allowing for the ease of multiple owners and crowdfunding.
Blockchain Projects
Reitium: The Reitium platform enables users from across the world to buy and sell partial ownership of properties across the globe by using the Reitium token. More than just asset backed and tethered to real estate, the Reitium token acts as a legally binding contract, as all legal documentation, compliance and certifications are automatically generated and recorded on the blockchain once a transaction is completed. The Reitium tokens represent direct ownership in the real estate asset. Unlike other platforms, you do not have to be an accredited investor to participate.
Blockchain advantage: The use of smart contracts eliminates fees from intermediaries, including broker, realtor, accounting and notary public fees. Time is also saved as smart contracts enable the automation of legal documentation, agreements and investment certifications, making the process seamless and transparent.
The Reitium Advantage: Reitium has the opportunity to use the yields from the initial crowdfunded property to purchase additional properties, allowing investors to earn leveraged income on not just one, but multiple properties with the same initial investment. This generates more wealth for users and creates investment stability.
Requirements:
- KYC/ AML approval.
Cost:
- Minimum $100 USD investment.
Cons:
- Currently in development.
In conclusion, real estate investment is undergoing a massive transformation. With the introduction of crowdfunded blockchain projects real estate has the potential to become accessible to everyone. For the first time in history, blockchain will allow real estate to level the disparity of wealth distribution, remove virtually all barriers to entry, and practically eliminate processing fees. And Reitium is proud to be at the forefront, helping build this evolving landscape to offer everyone the chance to invest in real estate assets, regardless of socioeconomic status, credit score or global location, finally leveling the playing field, enabling Real Estate for Everyone™.
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