March 23, 2021 6 min read
Opinions expressed by Entrepreneur contributors are their own.
Acquiring real property is generally a secure and viable way of investing. Generating profits from these investments is rather straightforward — they can be rented out to get recurring income, or they can be sold when their value appreciates.
“Real estate is a great investment for many reasons. You can enjoy an excellent rate of returns, amazing tax advantages and leverage real estate to build your wealth,” says noted real estate broker James Harris.
Real estate provides better returns compared to stocks, has a tangible asset value, virtually always increases value over time, and comes with many tax perks.
Investing in real estate is nowhere near foolproof, though. It has its limitations. But thanks to modern technology, these limitations are slowly being bypassed or reduced to insignificance. There are ways to make the real estate ownership process better than ever and more accessible for everyone.
Obstacles in real estate investing
Geography is one of the biggest obstacles in real property investing. Many countries have legal prohibitions on the ownership of real estate by foreigners. Thailand, Vietnam and Greece, for example, mostly disallow non-citizens from owning land in their respective territories.
Some of their laws against foreign property ownership may have some loopholes. Thailand, for instance, allows foreigners to become part owners of condominiums, as long as their ownership does not exceed a 40% share. Foreigners can also buy entire buildings in Thailand, but the land on which the property is erected will never be theirs.
These aspects do not make real estate investment too enticing; however, through asset tokenization, foreigners can invest in real property wherever they want. The LABS Group, a startup that pioneered end-to-end real estate investment through “fractionalization,” offers a setup that allows anyone to invest in global properties legally.
This is possible by allowing investors to obtain tokenized assets, which are basically digital assets that represent real properties. The tokenized assets are held by local investors, who can legally own local properties, on behalf of the investors. The assets can then be sold by the local investors once the value appreciates or they can be rented out. The tokenized asset investor then claims the profit or income derived from the property’s sale or rental.
“Many times, I have friends asking me why not invest in foreign properties, such as those which are highly desirable in Vancouver, Melbourne, and London,” says Yuen Wong, CEO of LABS Group. “However, the time and effort involved are just too great, given that you need to have the local market knowledge and the legality stuff might prove too much. On top of these, middlemen costs are high too.”
This kind of solution can be regarded as disruptive for the real estate investment market. It makes it easier for anyone from anywhere to cash in on the profitable real estate markets in different countries.
It is also worth mentioning that asset tokenization allows investors to reduce or even avoid transaction taxes and regulatory fees, which can go as high as 20% of the total value of the asset being purchased.
Real estate investing is not cheap. Generally, it is not meant for retail investors. Not many have hundreds of thousands or millions of dollars to purchase houses, lots, or luxury assets as investments.
With the concept of investment fractionalization, though, small investors can pool funds together to buy real properties as investments. Such an investment service promotes the idea of part ownership.
The investment service makes it possible for small or retail investors to pitch in for the acquisition of a million-dollar beachfront property, for example. The property can earn income from rentals or profit after it is sold at a considerable premium. The fractional investors then get their share of the income or profit based on the amount they pitched in or the investment.
“Thanks to micro-investing and fractional ownership, people of all economic backgrounds can invest for the future if they possess the discipline to save from each paycheck,” says Entrepreneur contributor Imran Tariq. “This method is great for putting extra cash to work instead of letting funds earn a measly 2% at a bank savings account.”
Investment fractionalization, by the way, does not only work with real properties. It can be applied to various forms of investments. It is backed by blockchain technology to ensure that ownership claims cannot be contested and there is a secure way for investors to identify their shares in the investments and claim their shares in the revenues or profits.
A smart contract is essentially a self-executing contract that automatically documents relevant points or events in a transaction and executes the terms agreed upon by the transacting parties. Its application may seem far-fetched when it comes to the real estate market, but it is one of the disruptive technologies that create conveniences or advantages for real property investors.
Powered by blockchain technology, smart contracts enable complete transparency in real estate investment transactions. “The combination of smart contracts with blockchain adds certainty, security, and resilience. Terms can be verified by independent parties,” writes Prashant Shah in a piece about the evolution, benefits, risks, and challenges of smart contracts.
Going back to the idea of fractionalized investments in tokenized real properties, it is apparent how complicated the transactions can be. There are many details in the terms to keep track of as well as numbers to calculate. It would be great if all of these details are kept in a tamper-proof contract (blockchain) and all possible computations and courses of action are automatically implemented once the smart contract conditions are met.
Smart contracts have the potential to make all real estate-related transactions faster and more accurate. The calculation and payment of the respective shares of fractional investors, for instance, can be automatically undertaken to ensure fast and relatively error-free investment transactions.
The future of property investing
New technologies have indeed changed the way people invest, especially in places where environmental and geopolitical situations are unfavorable.
Through asset tokenization, investors can take revenues or profits from real properties located in jurisdictions where it is illegal for foreigners to own other assets. With investment fractionalization, small or retail investors can grab enticing real estate or luxury investment opportunities in other countries. Moreover, the deployment of smart contracts simplifies the complicated processes involved in real estate investing.
These technologies are just the tip of the iceberg when it comes to the tech innovations that will soon become available to the real estate market and other industries. There will be more innovative and creative methods, products, or solutions to watch out for, and they are set to make investing more accessible, faster, and even cheaper.