As a crypto investor, have you thought about diversifying into real estate? Tokenized real estate gives the benefits of blockchain tech with the tangibility of real-world assets.
Are you already investing in crypto? Even as a cryptocurrency or blockchain investor, you may be curious about adding real estate to your investment portfolio.
The good news for crypto investors is that you can use a blockchain-based solution to gain real estate exposure, or you can take a more traditional approach to real estate investing—but first you need to know some real estate basics.
Cryptocurrency and real estate are undeniably two very different asset classes, each with different investment characteristics. As a crypto investor interested in real estate, you have several investment alternatives, and may be able to leverage the differences between crypto and real estate to your portfolio’s advantage.
Keep scrolling to learn more about real estate for crypto investors.
What is crypto real estate investing?
When you think about investing in real estate, what first comes to mind? You may think about being a landlord, but it may not be immediately obvious that you can invest in the real estate market using a blockchain-based solution.
Crypto real estate investing adds a blockchain layer to traditional forms of real estate investing, enabling investors to use digital payment methods, invest in other jurisdictions, and participate in real estate investing through various ownership structures.
The versatility of blockchain technology can produce innovations in real estate investment structures through improving transparency with public ledger technology, as well as efficiency through the use of smart contracts.
Crypto vs. real estate
Cryptocurrency as an asset class has many investment characteristics that contrast sharply with the investment characteristics of real estate. The contrasts of these two asset classes, when paired together, can provide unique benefits to investors.
Real estate brings key advantages in cash flow and stability, while cryptocurrencies can provide faster transaction times and lower entry costs.
Here’s how else crypto generally compares to real estate:
|Income generation potential||Varies||Varies|
|Average transaction time||Low||High|
|Average transaction cost||Low||High|
|Capital appreciation potential||High||High|
4 ways to invest in real estate using crypto
If you want to use cryptocurrency or a blockchain platform to invest in real estate, then you have multiple options. Keep reading to understand your alternatives for investing in real estate markets using blockchain or crypto.
The TL;DR is that you can:
- Directly purchase real estate using crypto
- Buy tokenized real estate
- Invest in real estate cryptocurrencies
- Stake your crypto to borrow and invest in real estate
1. Direct purchases using cryptocurrency
You can buy and directly own property using cryptocurrency, both in the U.S. and internationally. The seller of the real estate must voluntarily accept digital currency and have a compatible digital wallet.
Using crypto to buy real estate in the U.S. may change or limit an investor’s access to financing. Investors or home buyers generally cannot use cryptocurrency for a property’s down payment, although fintech lending platforms are arising to enable investors to collateralize traditional down payment loans with crypto. Platforms like Milo offer crypto-collateralized mortgages for prospective homebuyers.
Using crypto to buy real estate internationally can have unique perks. In some countries, like Montenegro and St. Kitts, owning real estate can confer residency or citizenship status. St. Kitts in particular is noted for being crypto friendly, with Bitcoin ATMs throughout the country and no capital gains taxes on any investments, including cryptocurrency.
Buying real estate with cryptocurrency directly can trigger tax consequences, regardless of the location of the real estate. Sales and transfers of digital assets are generally taxable.
2. Tokenized real estate
Investors can access real estate offerings by purchasing blockchain-based real estate tokens. Investors can choose specific token investments that correspond with specific properties, and fund those purchases using either digital money or traditional currencies. Owning real estate tokens confers direct ownership of real estate, and investors can trade or sell their real estate tokens with few restrictions.
Tokenized real estate is usually fractionalized, with one token representing one fraction of the property’s ownership. Fractionalized real estate can resemble the real estate shares offered through traditional crowdfunding platforms, and can make real estate accessible to more investors.
The tokenization of real estate provides the typical benefits of blockchain technology—efficiency, transparency, and security—onto fractionalized real estate investing. Real estate tokens, like those on the HoneyBricks platform, can also support liquid secondary markets that may boost the overall value of the real estate sector.
The table below illustrates the key benefits tokenized real estate has over other forms of real estate investment:
Video: Blockchain in real estate
If you want to learn more about the application of blockchain in real estate, watch our 4 minute video which outlines the 3 key use cases:
3. Cryptocurrencies with a real estate focus
Investors can add real estate exposure to their crypto portfolios by purchasing cryptocurrencies with a real estate focus. These purchases can be of coins already in circulation, or coins soon to be released, often through an initial coin offering (ICO).
Many rising cryptocurrencies use varying strategies to profit from the real estate industry. Here are some examples:
- Propy: Focused on solving the problems facing international real estate transactions by creating a novel unified property store and asset transfer platform for the global real estate industry.
- RET: This cryptocurrency supports a decentralized rental platform, enabling peer-to-peer transactions for commercial and residential real estate.
- Quarteria: The Quarteria cryptocurrency supports a decentralized database for international and domestic real estate listings. Listings on Quarteria are controlled by both buyers and sellers in a democratized way.
4. Stake your crypto to borrow and invest in real estate
Investors with existing crypto assets can also borrow against their holdings to invest in real estate. Many centralized and decentralized finance companies offer this product by enabling crypto to be posted as collateral for a new loan.
Centralized platforms typically provide this product with the use of a third-party custodian that holds the assets as collateral, while decentralized platforms use smart contracts to govern the transaction completely with code.
This method of investing in real estate with crypto is best used for stable cryptocurrencies, or using low levels of leverage to avoid the risk of a margin call. A margin call is when the loan to value ratio deviates from the target setting.
For example: if the market value of the crypto portfolio that was posted as collateral was reduced by 50% while the loan amount stayed fixed – then the loan to value ratio would double. This adds risk to the lender in being able to recover the value of their loan in the event of default, hence a margin call requests additional collateral to be posted. In the event additional collateral is not posted, lenders can liquidate the portfolio and often charge penalties or additional fees.
Two unique benefits of blockchain based lending is the distributed ledger technology making all transactions and borrowing levels publicly visible. This means lenders and borrowers can have a transparent understanding of the loan mechanics. Secondly through the use of smart contracts, margin calls and liquidations can be automated with software removing the role of intermediaries in settling a dispute.
Pros and cons of crypto real estate investing
Investing in real estate using cryptocurrency or a blockchain solution can have both benefits and drawbacks.
These are some of the pros and cons of crypto or blockchain real estate investing:
- Integration with blockchain technology: Leveraging blockchain technology can create many benefits for real estate investors. Blockchain-based property deals can be conducted more efficiently, transparently, and securely than traditional real estate transactions.
- Access to fractionalized offerings: Investing in real estate through a blockchain-based tokenization platform can confer direct, fractional ownership in real estate. Investors can access real estate with lower upfront capital requirements and can more easily diversify across real estate investments.
- Potential residency or citizenship opportunities: Investors can leverage international real estate purchases to gain residency or citizenship in some countries. Crypto-friendly countries like St. Kitts may be especially appealing to crypto-focused investors.
- Generate passive income: Unlike buying a property directly, investing in tokenized real estate allows you to generate passive income from rental distributions without needing to be a landlord
- Accepting crypto is voluntary: In most jurisdictions, real estate sellers can choose—but are not obligated—to accept cryptocurrency as legal tender. Directly purchasing real estate with cryptocurrency requires the seller to voluntarily accept digital currency.
- Investor accreditation may be required: Some real estate platforms, including real estate token platforms, require investors to be accredited. Investor accreditation requires meeting certain minimum income or net worth requirements. The good news is that investors outside the US can still qualify as accredited investors if they meet the same criteria. Learn more about what is an accredited investor.
- Potential for tax consequences: Buying real estate using cryptocurrency can have tax consequences. Investors need to understand the potential tax liabilities of using crypto for any purchase.
Should you invest in crypto real estate?
Real estate investing is not new, and the asset class itself is essentially timeless.
Diversifying your crypto investments into real estate can afford many important and unique benefits including cash flow, stability, and diversification.
Investing in crypto or real estate each imposes risk, and investors need to carefully evaluate any crypto or real estate investment opportunity. Crypto and blockchain investors can most benefit from investing in real estate by conducting plenty of research before making any investment decisions, in addition to minimizing their investment amounts until they become familiar with the real estate sector.