For a long time, real estate investing was the game of the rich. You needed to have a lot of capital to participate. The barriers to entry were simply too high for the average investor – but not anymore!
With the help of modern technologies like blockchain and online crowdfunding, anyone can invest in real estate with very little money. We are seeing disruptive technology change the real estate investing landscape like never before.
The History of Real Estate Investing
In the past, investing in real estate required a lot of capital, time, and effort. Publicly traded stocks, bonds, and mutual funds were the only viable investment option for the middle and lower classes. They could contribute to an IRA or a 401(K) with their employer and hope to have a nice retirement. But only accredited investors or those with a lot of capital could invest in the often more stable and lucrative private real estate market.
Then in 1960, real estate investment trusts (REITs) came on the scene. REITs pool together several real estate assets into a financial instrument that can be traded like a stock in a mutual fund. For these, you don’t have to be an accredited investor, and the barrier to entry is much lower because you can participate by buying just one share.
Crowdfunded Real Estate Investing
Today, technology is democratizing real estate even further. Starting in 2012, the JOBS Act allowed real estate syndications to adopt crowdfunding strategies. Crowdfunding is raising funds from a large number of people even if they can only make small contributions. This means real estate deals no longer need to be funded by one investor or a handful of accredited investors. Instead, many small investors can pool their resources together to fund a large real estate deal.
Crowdfunding changes the real estate investing landscape for both investors and syndicators. Now, you can organize a national or even international real estate syndication that both accredited and non-accredited investors can participate in. This means investors with different risk tolerances can benefit from greater diversification, dollar-cost averaging (CA), and better returns.
Ultimately, crowdfunding opens the real estate market doors to lay investors. Some real estate crowfunding platforms include Fundrise, DiversyFund, BuyProperly, Roofstock, and Bricksave. They allow you to start investing in properties and REITS online in no time, and some for as little as $1,000.
Tokenized Real Estate Investing
When most people think of blockchain, they think of cryptocurrencies like Bitcoin. But blockchain is just the mechanism behind cryptocurrency. It’s a digital record-keeping technology that uses distributed ledgers in a shared network. And in 2017, entrepreneurs started seeing blockchain’s potential to streamline real estate investing transactions.
As with crowdfunding, blockchain technology can leverage fractional real estate ownership by creating tokens that represent shares in a real estate investment. It does this by turning real estate investment securities into what are called smart contracts. Smart contracts are a form of digital contract that don’t require an intermediary to verify them. They are executed automatically as soon as predetermined conditions and rules are met. This way, you can eliminate slow and costly middlemen like brokers and make transactions faster and more transparent.
Blockchain solves traditional real estate information and access bottlenecks. On the one hand, it democratizes information like rent roll, audits, compliance data, appraisals, and insurance binders. Everyone can see the information on the public ledger. On the other hand, it gives more investment opportunities to the average investor by lowering investment minimums and globalizing investment options. Overall, this leads to increased diversification, liquidity, and efficiency and turns a traditionally illiquid asset into a liquid one.
Of course, blockchain real estate investing is not without its challenges. Governments are still trying to figure out how to regulate it. Getting around the red tape of the Security and Exchange Commission (SEC) is also not easy. But it’s easier with private and consortium blockchains because they are tailored to specific use cases.
Though it still has a ways to go, tokenized real estate investing is already being tried by companies like RealT, Vave, BlokHaus Real Estate, and Lofty.ai. These and other platforms have a lot of potential to disrupt real estate investing as we know it.
Real estate investing is easier than ever. Time will tell how it looks 10, 20, 30 years from now. If you don’t have a lot of capital but you want to take advantage of this hot market, now is the time to explore the crowdfunding and tokenization options out there.
In the long run, you’ll benefit from increased diversification and high returns. It’s a win-win for the small investor.