Invest in Real Estate Tokens

June 2nd, 2021
6 minutes read

Investing in real estate through crowdfunding has been available for almost a decade. Meanwhile, real estate tokenization, which is the act of putting real estate onto a blockchain, provides both project owners and investors with much more flexibility, increases the liquidity of real estate properties, and thus helps earn a higher yield.

In addition, investing in real estate tokens also enables investors to purchase pieces of real estate with cryptocurrencies, sell off their tokens on the secondary market, and cut transaction costs, among providing other benefits, which include immutability of blockchain transactions, higher speed and automation through smart contracts.

Here is the only guide you need on how to invest in real estate tokens without falling into real estate tokenized scams and ultimately answering the question: how much can you earn from real estate tokens?

How Can I Invest in Real Estate Tokens?

Unlike traditional crowdfunding, investing in real estate tokens means buying virtual tokens created on the blockchain. When a project owner intends to attract investments through blockchain crowdfunding, they issue Ethereum-standard (ERC20) real estate tokens representing shares of the SPV or company owning the property. The total value of token issuance is equivalent to the value of tokenized real estate.

From a legal perspective, a sale of real estate tokens is done in the form of the Security Token Offering. Technically, the process of token issuance includes building a smart contract based on Ethereum, generating tokens on token issuance platforms, such as Securitize, Harbor, or Polymath (in no particular order) and selling tokens through exchanges. All above mentioned token issuance platforms have an exchange layer and provide both for token issuance and tokensale, including KYC/AML check.

To buy tokens, each investor has to go through a KYC/AML check for identification according to regulatory requirements. The rules for KYC/AML are specific to the country of residence and are normally outlined by the platform offering the token sale.

For the moment, the European project owners are not too active in tokenizing real estate. For example, in Spain, the first tokenized property was sold in March 2021.

In Germany, real estate tokenization has been more popular after KlickOwn real estate crowdfunding platform completed its first STO (security token offering) a year ago. In March 2020, KlickOwn sold real estate tokens for a property in Lueneburg, raising EURO 1.5 million with a projected annual CAP rate of 5%.

Although the United States has one of the most regulated jurisdictions, with stringent regulations applied by the Securities Exchange Commission (SEC) to all token issuers, it has been much more active with token sales. Today, U.S. platforms such as  Stoscope.com, Realt.co, and Vave.io, to mention a few, list dozens of active STOs for real estate projects. Besides, blockchain removes borders allowing international investors to participate on par with domestic investors.

Is it Safe to Invest in Real Estate Tokens? 

In the investing world, it is a well-known fact that all investments carry risks, and in most cases, no guarantees are provided. In the crypto world, in particular, too many ICOs/STOs have created losses due to over-optimistic projections by their owners or because they were orchestrated by scammers who ran with investors’ funds.  

For this reason, for now I wouldn’t dare to suggest investors a due diligence checklist for buying real estate tokens as this may well make it into a separate article, ending with a disclaimer as to the consequences. Still, buying real estate tokens backed up by brick-and-mortar or land is, in a general case, much safer than investing in intangible assets such as mobile apps. 

Meanwhile, it would be prudent for investors to check the physical existence of the tokenized real estate and whether the title to such real estate belongs to a party to a token sale. Interested investors might need to consult with a lawyer as various countries hold different views on this question. For example, in the U.S., information about the owners can be found online, while in Germany, these records are not accessible to the general public.

At the same time, the legislation, for example, the Regulation on European Crowdfunding Services Providers for Businesses coming into force in November 2021, provides additional safeguards to investors, obliging platforms to filter scam, check project owners and purchase insurance policies covering the territory of the EU. While the scope of such checks and insurance is yet to be further determined, it would be a great step toward protecting the interests of investors interested in purchasing real estate tokens.

How Much You Can Earn From Investing in Real Estate Tokenization 

Location, location, location is the key in earning from any property, which is also true for tokenized real estate. Meanwhile, as the real estate tokens are based on hard assets, the promised yield is less speculative than in the case of other types of investments.

For most European properties on KlickOwn, the distributed annual yield falls within the 4-5% range, not including the income from token appreciation. However, in the United States, many project owners are more optimistic about the expected return from investing in tokenized real estate, promising investors as much as 9-12%.

It should be noted that real estate tokens benefit the investors not only through renting out the properties and real estate appreciation. The ability of investors to sell out their tokens on the exchanges boosts the liquidity of these investments, making them much more attractive than traditional crowdfunding where secondary markets are seldom available.  

Prospects of Real Estate Tokenization

As the line between the virtual and physical world becomes more and more blurred,  real estate professionals are actively considering the application of NFT (Non-Fungible Tokens), which were used to sell digital real estate, but now have all chances to be used for physical properties. 

Non-fungible tokens are another type of digital tokens based on a special Ethereum standard, namely ERC-721 and ERC-1155, making each token unique and indivisible. They have become widely debated in the real estate world after the sale of the digital Mars house for NFT token, fetching an astounding half a million dollars for virtual real estate.

Although, for the moment, the application of NFT tokens to physical properties is still only theory, the first sales of physical real estate through NFTs have all chances to take place as early as 2021.