Learning about cryptocurrency and how to use it appropriately in real estate transactions can be a huge benefit to any real estate investor.
Real estate investing can be the best approach to build and preserve wealth. The value of real estate assets typically increases over time, yet regular and predictable currency devaluation can exacerbate increases. Plus, real estate is notorious for a lack of liquidity and a slow pace for buying and selling. It can be hard to move out of one property and into another. Sometimes increasing the velocity of money may be necessary to preserve assets or take advantage of opportunities.
The ultimate in liquidity is cash, but cash doesn’t help you move out of real estate. And cash has its own issues. You can rely on the fact that next year any cash you have will be worth less and have reduced purchasing power. Having cash for any length of time is a losing investment.
Enter cryptocurrency. Yes, it’s a new type of asset and it’s poorly understood — not least because it is evolving so quickly. But cryptocurrency provides potential to solve problems with real estate. Learning about cryptocurrency and how to use it appropriately in real estate transactions can be a huge benefit to any real estate investor.
First, how can cryptocurrency improve the liquidity of real estate? One reason real estate is illiquid is the size of the sale. Even the smallest properties cost tens of thousands of dollars and the best properties are tens of millions. The number of investors who can purchase larger properties are limited and committing the kind of funds necessary to trade such large investments mandates a detailed due diligence process. In addition to the necessity to commit time to verifying and validating the property quality, larger sales require substantial legal and technical work. Larger properties are usually purchased with leverage, which involves lenders with their own conservatism and (sometimes interminable) timeframes.
Security Token Offerings
Cryptocurrency can improve the liquidity of real estate in a couple of significant ways. The first is by tokenizing the real estate. Using a security token offering (STO) breaks a large real estate property into much smaller pieces that can be individually sold and traded on exchanges (provided all SEC regulations are observed). Tokenizing properties allows you to sell part of a property rather than having to sell the entire thing. The time to sell may be greatly reduced and the amount sold can be reduced as well. You can continue to own part of the property (which may better support your goals) while moving part of your equity elsewhere. This approach provides diversification and increases the velocity of your money. It also may provide opportunity for smaller investors to participate in quality real estate offerings, democratizing the ability to invest in commercial real estate.
An STO is much like a current private placement offering, but with the ownership of the offering represented as a cryptocurrency that may be traded on an exchange. STOs are an even newer concept than cryptocurrency in general and, therefore, less understood. Most STOs have been used to raise money for companies but several have been used to tokenize real estate. The process is well defined and legal, but there are few securities attorneys who know how to do them and a small but growing number of cryptocurrency platforms that can assist with issuing them.
How would an STO work for real estate? Suppose you have an apartment building worth $15M. You might issue APTCoin as a cryptocurrency. You first create a private placement memorandum just as in doing a syndication. The PPM would include a discussion about ownership being held as a cryptocurrency and would describe all the risks of holding cryptocurrency in addition to the usual doom and gloom of the average PPM. You collaborate with an appropriate company to issue the cryptocurrency. Perhaps you issue $15M APTCoins so that each coin is initially worth $1. The APTCoin would be created as a smart contract embedded with all the SEC (and perhaps EU and other country) regulations and would enforce these regulations on any subsequent sales. The APTCoin might include a requirement for the coin issuer to approve sales. The cryptocurrency would be sold on an exchange and could be resold on the exchange as long as all the regulatory body rules were observed. The issuer can also own APTCoin, so it is possible to sell part of the property to raise capital while maintaining substantial ownership.
From the issuer’s perspective, the STO approach is like a regular syndication except that the crypto platforms (like many of the current investor management platforms) provide capability to support investor management like distributing returns, supporting investor voting, and providing tax documents and property reports. But from the investor’s perspective, the STO is much better than a private placement. If Jane Investor puts $250,000 into the initial investment and two years later really needs to get $50,000 of her money back, she can sell that portion of her investment on the exchange, keep the $200,000 invested, and have many more options for exit or transfer than with a PPM.
The Speed of Moving Money
The second way that cryptocurrency helps with liquidity is by increasing the speed of moving money for real estate. Cryptocurrency is virtual and can be transferred with low fees anywhere in the world in minutes. This improves the ability of foreign investors to move funds across country boundaries (again, while following all applicable laws). It also opens real estate investing to a new and growing market of successful cryptocurrency investors who have made a killing in crypto and want to diversify into something as steady and conventional as real estate. Accepting cryptocurrency as payment (or partial payment) further speeds real estate transactions. It allows sellers with difficult properties to complete a sale much faster, and potentially, with much better terms than on the conventional market.
The speed of cryptocurrency funds, while improving liquidity, is also improving the pace of transactions. The first all-online real estate transactions have been completed this year. Using smart contracts (cryptocurrency), payments in cryptocurrency, or cryptocurrency converted to fiat (e.g., dollars or euros), and recording title on a blockchain, the pace of real estate transactions is about to move into high gear. While the first transactions have occurred this year, the advantages of the technology are so great that it may be a short time until they are ubiquitous. Several countries are piloting programs for recording real estate title on blockchains.
Cryptocurrency provides many capabilities that improve the liquidity and pace of real estate transactions, making real estate itself a more flexible resource. This method can sustain a real estate investment by providing additional capital or increasing the market for a property.