Whether you like it or not, Blockchain has already begun to disrupt many financial sectors. First came the interest and loan market with DeFi (decentralized finance) and now real estate. In an age of on-chain technology, investing in real assets will become redefined.
What does it mean to actually own a property? How can digital assets be linked to the real tangible world? These are all questions tokenized real assets will have to account for and RealT is the first step in that direction.
In this review, I am first going to explain what RealT is and how it works. We’ll then look at some safety aspects of investing in tokenized real estate. I’ll go through RealT’s investment selection and examine their type of properties, locations, and return on investment.
We’ll also talk a bit about the liquidity of these assets and what kind of fees RealT charges for their services. In the last section, we’ll look at RealT’s app functionality and design and see who the team is behind RealT.
So, let’s get started!
What is RealT?
RealT offers fractional investments in tokenized real estate on the blockchain. Sounds great right? Ok, but what does this actually mean?
In short, RealT is a real estate crowdfunding platform that simply makes use of blockchain technology to manage asset ownership, voting rights, and distributions. In many regards, RealT is not that different from companies like Cardone Capital or Holdfolio. The only difference is that real-world ownership is mirrored digitally through tokens.
Besides the tokenization, RealT works just like any other real estate syndication. But let’s go through this step by step!
How does RealT work?
Create an Ethereum wallet
Before actually starting the investment process with RealT, you need to have an Ethereum wallet to hold your tokens and to receive distributions from your RealT investments. You can find an excellent article with detailed instructions right here.
Select a property
The first step to investing with RealT is to browse their marketplace. You’ll see all the current investment options as well as the past ones which have already sold out. Buying a token of a property is as simple as adding it to your card and checking out.
You then pay with the cryptocurrency of your choice. Available payment methods currently include Bitcoin, Ethereum, and Dai.
If you have not completed your KYC information before, you will have to do that now. It is somewhat unfortunate that the trustless world of blockchain has to deal with real-word regulation but this will likely be the case for a while at the intersections of FIAT and cryptocurrency.
Sign the PPM
Following the successful payment transaction and identity verification, you will receive an email asking you to review and sign the Private Placement Memorandum (PPM). This is a legal document outlining the terms and conditions of private investment in real estate.
This document contains important information regarding the makeup of the LLC holding the property and your rights as a member. You’ll also find information on fees and distribution splits further at the bottom. Once you have read through this carefully you can place your signature via HelloSign and done!
Now, wait. Once all parties have signed the memorandum you’ll get an email notification from HelloSign. At the same time, you will also receive an email from RealT confirming that your order is complete and that your tokens have been dispensed to your Ethereum wallet.
Alright, so your tokens have been dispensed what know?
Check your wallet
You want to make sure that the token has actually been received in your wallet. In most wallets, the RealT token will not be automatically displayed but you’ll have to add it manually.
To do this you simply navigate to your portfolio page and click the Ethereum symbol in the top right corner. This will bring up the property token information such as the symbol and address. Then copy the token address.
In most wallets, you will have the option to add a custom token. If you’re using Metamask simply go to the main menu and you will find the option to add a token at the bottom. Select ‘Custom Token’, paste the token address, and voila: you can see your RealToken in your wallet.
As with all our investments, safety should probably be the number one concern. The number one priority of investing is and always will not to lose money. Once we know our assets are safe we can then start to think about maximizing their return.
Unfortunately, real world assets are not yet encapsulated in the trustless blockchain eco-system legally or technically. This means that with every transaction outside the network, there is an inherent third-party risk.
Is RealT.co safe?
Since RealT is a fairly new company and offers an entirely new approach to investing in real estate, we’ll have to check their credentials extra carefully.
If you navigate to RealT’s educational page you will find information on how RealT is organized legally. There are two main entities:
- RealToken Inc. and
- RealToken LLC
RealToken Inc. is the manager of the LLC. It is the name RealT is doing business as and used for administration of the LLC.
RealToken LLC is a separate legal entity that is used to manage the legal processes of issuing investment security offerings, such as fractional real estate investments.
Of course, it is always good to double-check o I did a quick search on the State of Delaware’s website to check that both entities are properly registered; and they are.
Furthermore, RealToken LLC does not own any other LLCs or properties. Each individual property is held by a separate LLC. This means they are financially and legally separated. If one property were to fail or the LLC holding that property would go bankrupt it would not affect any other property.
Does this mean RealT is absolutely safe? Well, no. Nothing is 100% safe. But having the proper legal entities in place can at least give us some peace of mind that RealT will honor their commitment of equating their digital token with a fraction of ownership in their assets.
RealT is new to the market and is still in the process of building their portfolio. However, they already managed to acquire an interesting array of residential properties ranging from single to multi-family in the state of Michigan.
They currently have 10 properties listed on their marketplace, of which 7 are already sold out.
As of 2020 RealT focuses solely on residential type properties in the Detroit area. There are no commercial properties available. The properties are mostly on the low-end of the market spectrum.
Detroit is not really a booming housing market currently but there are a lot of cheap properties to be snatched up. However, with lower-end properties, you generally tend to have lower-quality tenants. Lower quality in the sense of their ability or willingness to pay rent on time and take care of the building. This is not always the case, but it is a risk factor worth considering.
Return on Investment
The ROI is expected to be between 11-12% for most properties. To my understanding, this does not include any profits made from the sale of a property. The Internal Rate of Return (IRR) will likely be significantly higher.
12% cashflow a year is very solid for any real estate deal. Most other properties I have invested in so far did manage to reach those numbers eventually but only after a few years of value adding and raising rents.
The minimum investment for every property is the price of one token. This is the true benefit of fractionalizing real estate investments. The barrier to entry is much lower and risk is distributed among more investors.
Most properties are split into 1,000 tokens. Thus, the value of one token is simply the value of the property divided by 1,000. Most tokens are valued somewhere between $50-$150. This is your minimum investment. For some properties, the number of tokens varies somewhere between 850-1200 tokens. You can always calculate the value of one token with a simple formula:
Token Value = Property Value / Number of Tokens
Compared to other real estate syndication available to non-accredited investors $150 is extremely low. For instance, Cardone Capital starts accepting investments at $5,000 and Holdfolio somewhere around $20,000.
Traditionally, real estate is known for two things: high, inflation-proof returns and illiquidity. When we invest in real estate assets directly (not through a REIT) we can expect to have our funds locked up for 5-10 years.
This is where RealT is different. Not only do they currently offer to buy back tokens at up to $2,000 per day, but you can even trade your tokens on Uniswap and sell them for ETH or swap for another token.
Let’s have a look at the fine print. The fees.
As with every real estate syndication, the fees is where the syndicator recuperates their expenses and potentially makes some extra profits. You will find all relevant RealT fees and the distribution split in the PPM and Operating Agreement
What are RealT’s fees?
The following fees are collected by RealT and substracted before distribtions:
- Property Management Fee: This is the fee charged for managing the property. RealT has outsourced the management of properties to a third-party service provider. As the exact fee varies between 5-10% per property you will need to have a look at the PPM for details.
- Platform Listing Fee: This fee is charged by RealT for “listing the property”. 10% of gross proceeds are deducted for this,
- Series Management Fee: RealT may determine to charge this fee for certain series of properties. If such a fee is charged you will also find this in the PPM.
- Capital Event Fee: A capital event is for instance the sale of a property. In such a case 10% of gross proceeds go to RealT and 90% to investors. A distribution split of 90/10.
If you compare this to other real estate syndications out there, they seem rather high. If you add all of the above fees up you easily end up paying 30-40% of gross proceeds in fees to RealT.
This is similar to a conventional profit split of 65/35 with a 1% acquisition fee, disposal fee and management fee. However, with RealT the fees are somewhat hidden. I would appreciate if they were a bit more forthcoming and transparent about all fees charged.
The entire process from signing up to buying the actual token was extremely smooth. The website is well-designed and easy to navigate. You can track all of your holding on your portfolio page and see distributions by viewing the token contract on etherscan.
RealT’s team is composed of a renomated group of business and legal professionals. David Hoffmann – the CEO – started advising and consulting blockchain start ups in 2017. Since then he has continued to develop his vision to merge the world of real estate and digital assets.
RealT.co Pros & Cons
– Great app, easy to use
– High liquidity
– Separate LLC for each property
– Fractional investments
– Daily distributions
– Pay & earn in cryptocurrency
– Young team with little experience
– Hidden fees
– Limited investment selection
RealT is a young company with an innovative idea: fractional real estate investing through tokens.
The investment process is clean and simple. All you need is an Ethereum wallet and some ID. Their investment selection, however, is quite limited. Currently, only residential properties in the Detroit area are available.
The promised returns, on the other hand, look excellent. Unfortunately, some of the profits are shared by up to 40% with RealT due to their array of fees.
Nonetheless, RealT provides an appealing option for forward-thinking real estate investors.