BLOCKCHAIN IS NOT BITCOIN
Invented in 2008, the blockchain technology is one that has the potential to change the entire world. When talking about blockchain, many think solely of Bitcoin without knowing that it is only one out of many test cases. For instance, the blockchain seems like the perfect solution to keep track of records, such as voting ballots or legal contracts. But while the word “contract” seems dull, the reality isn’t, as anything could be tokenized, your car, a Picasso painting, or… a house.
REAL ESATE IS REAL
Real estate is fighting with equities for the most profitable investment vehicle. But real estate is not without risks. While many young investors focus on equities (stocks, bonds, crypto), they often fear the mighty and terrifying world of real estate for a simple reason. It is hard. Buying shares of Apple takes only one click. That’s it. If you don’t like it anymore, all it takes is another click to sell and, hopefully, take your profits.
With real estate, you have to find the right location, know the market value, analyze your ROI while taking all expenses into perspective, including unexpected ones. And how about fees? Property taxes, insurances, legal fees, you name it. Murphy’s law tells us that anything that can happen will happen. This is why nuclear plants explode and why planes crash. Chances of buyer’s remorse are high in the real estate business. Oh, and did we mention price? In 2019, the average down payment in the US was 12%. You then have to shop for a mortgage. The risk of having an unoccupied house or apartment and not collecting rents for months. Real estate then becomes a thing for the rich because too difficult, too risky and too expensive.
REAL ESTATE MADE SIMPLE
But one new fintech company thinks it has the solution to the above problems. Founded by two brothers slash entrepreneurs in the spring of 2019, RealT created a new business model that is so innovative that it has the potential to change the entire real estate business the same way Apple changed the smartphone industry forever with the release of the first modern smartphone. The comparison fits perfectly, as RealT is taking a system that has not evolved for decades and offers a radically new and simpler approach that makes the “old” process instantly outdated and from another century (or two). Let’s explain.
Today, Amazon shares are trading at $2,890. Many small investors do not have enough buying power to purchase one share. There comes fractional investment. For instance, if you use a modern stock broker, you can buy half a share of Amazon. The stock being so expensive, some might want to buy just a fraction of that entire price.
RealT is doing the same with real estate. They offer houses which you can buy in fractions. In our tests, you could purchase fractions at around $50 a piece.
PAPER IS NOT REAL ESTATE
But don’t think that you only buy paper. Real estate mogul Grant Cardone often says that paper is not real estate. That is why he doesn’t own stocks and does not want to even talk about REITs. A REIT, for Real Estate Investment Trust, is a trust that usually owns and operates multiple housing products.
What RealT does is something different and much more interesting. When purchasing fractions of a house, you actually legally own those fractions of that particular house. The house, or that part of the house, is legally yours. In the background, RealT sets up a dedicated LLC for each house. This means that members own the LLC that owns the house. Pretty clever.
ONE FRACTION, ONE TOKEN
That alone could have been a game changer, but the business model goes much further.
Not only RealT offers the ability to purchase fractional shares of houses, but the company uses the power of the blockchain in order to deliver the value of the house to you. Once the contracts are signed, you then receive the token(s) directly into your wallet (such as Argent).
When we asked one of the co-founders when we would receive the first rent, we were quite surprised by the answer. “Tomorrow.” That seemed highly improbably, but this is where the beauty of the blockchain comes in. Since you purchase fractions of a house that already has tenants, you start to collect the rent quickly. But not only that, RealT has a very innovative way to send the rent. You actually receive the rent in USDC (crypto stablecoin pegged to the US dollar) directly to your wallet. While obviously the tenants do not pay on a daily basis, RealT takes the rent and then dividend it by the number of days and send it incrementally. This makes for quite a neat user experience, receiving rent almost on a daily basis. On average, the rent are paid every two or three days, depending on gas price (Ethereum network fees).
Crypto enthusiasts could then even take this a step further and reinvest the rent on some crypto earning platforms such as Celsius Network or Compound and then earn interests on it.
Since we believe in fair, professional and detailed-oriented journalism and following a conversation with one of the co-founders of the firm, we’ve decided to test the process with real money. This is our transparent experience with the platform:
The registration process was very simple. Still, we faced the following error message when submitting our KYC: “Error. There was a problem with your validation request. Please try again or contact support.” But then, we clicked on the KYC link again and it said “KYC Status Updated. Congratulations, your KYC application has been approved!”. Not great but it worked, probably a small bug. The good thing too is that our KYC was approved in a matter of minutes. It may not apply to all, but the process was very straightforward.
CHOOSING A HOUSE
Then came the fun part: choosing a house. In real life, many real estate moguls would suggest you to purchase a piece of property near your home. But it might be impossible. What if you are living in the middle of Manhattan? Or Paris? Or a bad neighborhood? Things are not so simple. And where do you start where your canvas is the entire surface of the Earth? Buy a nice house in the South of France? Or a fancy place in India? RealT is providing a very elegant way to do it. We simply clicked on their Marketplace page and browsed the houses in a kind of online catalog. We could see right away technical information such as expected yield, gross rent, rent per token, total tokens, square feet, lot size.
Any investment obviously comes with risk, and real estate is no different. We talked about it with Michael Courvoisier, a third-party developer actively working for RealT. He explained to us that not only each house is insured, but there is also a dedicated maintenance reserve of cash for each house. Once again, we were impressed to learn that each reserve is actually stored in the DeFi application Compound, and earning interests. RealT is actually quite transparent and shows this reserve on the listing of each house.
Some of the listed houses fall under Section 8. For those not familiar with that term, Section 8 is the common name of a US legislation that authorizes the payment of rental housing assistance to private landlords on behalf of low-income households in the United States.
We see two major benefits from an investor perspective. First, there are often long wait lists for Section 8 properties by tenants. Some families wait for three to six years before getting a Section 8 voucher. There are such waiting lines that some localities offer the vouchers through lotteries. This makes those properties very rare and ultimately leads to little vacancy if any.
Second, the US government is subsidizing part of the rent, ensuring a regular income to the landlords. For example, if a Section 8 household earns $1,200 a month and chooses to rent a house at its area’s fair market rent or below, it pays, in most cases, approximately $360 a month in rent (30 percent of $1,200). HUD (US Department of Housing and Urban Development) covers the remainder.
More on Section 8: https://en.wikipedia.org/wiki/Section_8_(housing)
US Department of Housing and Urban Development: https://www.hud.gov
PAYMENT & CONTRACTS
The payment process was quite efficient. We used a credit card, but since RealT is crypto-friendly, you also have the option to pay with crypto, although we did not test that. The process went smoothly. Once the payment confirmed, we instantly received a confirmation via email as well as the contracts to sign. Again, don’t expect physical contracts to receive in the mail a week after. The contracts are to be signed electronically through the Hellosign application. It worked again very quickly and the system lets you keep a digital copy of the contract.
LANDLORD IN 15 MINUTES
At the end of the day, we became landlords in about 15 minutes. Not owners of REIT, but legal owners of a piece of property – even though through an LLC.
The marketing statement of RealT seems to write itself: becoming a landlord in 15 minutes and earning rent starting the next day. Difficult to top that.