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Introducing RealT: Tokenizing Real Estate on Ethereum
RealToken is a system for tokenizing property ownership in the United States, that retains all legal rights and protections that are provided by traditional ownership of real estate.
In order to tokenize U.S. real estate properties, RealToken LLC was established. RealToken LLC is a series LLC, a unique form of an LLC in which allows for unlimited segregation of membership interests, assets, and operations into independent series. Each series of the series LLC is treated as a separate entity.
“Series” function as an intermediary entity between a token-owning individual, and a piece of real estate property.
Ownership of the various Series is tokenized to unique ERC20 tokens, RealTokens on the Ethereum blockchain, each of which represents one share in the Series, and thus in the real estate property owned by the Series. Because the sole purpose of the LLC Series is to own one single property, the LLC can be abstracted away; ownership of the RealTokens is effectively ownership of the property.
Through the services of a property management company, each property can be maintained with little-to-no engagement from any token holding individuals, while the individuals themselves retain full legal rights over to the property.
Real Estate: The Inefficient Market
Three significant factors play into the difficulty of the real estate market:
Real Estate is Expensive
The median U.S. home price is $200,000. The typical 30-year, 4.5% APR mortgage, at $200,000 will cost $365,000, after interest. For a strong ROI, mortgage-based real estate investments make no sense.
As a result, investing in real estate has become exclusively available for wealthy individuals, who have access to the significant capital required to make real estate an attractive investment.
The low cost alternative for investment into real estate is with REITs. However, a REIT offers no ownership of any property, and insufficient exposure to rental revenue.
Expensive Real Estate = Only Wealthy Market Participants
Real Estate has High Transaction Costs
The typical exchange of a U.S. home pays 6% to realtors. Settlement of funds take 30 days, minimum. Every exchange requires a laborious documentation process of agreements, disclosures, insurance policies and deed transfers.
All of these things contribute to the opportunity costs of capital, as the friction of selling a property increases the barrier one has to overcome in order to access their capital.
High Transaction Costs = Low Market Participation
Real Estate is a Siloed Marketplace
Selling a house requires manually finding a buyer. Buyers typically must be in the same region as the property being sold, significantly reducing the number of potential buyers.
International investments in real estate is difficult. Capital controls by restrictive governments make investing in U.S. properties nearly impossible. Additionally, the complexity and bureaucracy of international capital transfer in the banking system barres the most typical investor in purchasing property abroad.
Siloed Marketplace= Only Local Market Participants
Illiquidity: Real Estate’s Achilles Heel
Illiquidity: The state of an asset that cannot easily be sold or exchanged for cash, without a substantial loss in value
Real estate’s illiquidity comes from:
- Low number of buyers
- High costs of exchange
In order to offload an illiquid asset, asset owners must wait for the right buyer to come along, or to reduce their price in order to attract sufficient interest.
This “illiquidity tax” can remove between 20%-30% of the value of illiquid assets.
Solving Real Estate Illiquidity with Tokenization
- Transferring a token is a push-button experience
- Exchange costs the price of gas
- Instant settlement
- Furthest market reach
- Largest market participant pool
- Minimum costs of ownership
- Inclusionary to all investor types
- Enables new financial tools built using the tokens
Receiving Rental Payments
For the first phase of RealT, all listed properties will be rented properties. In order to prove the reality of tokenized real estate in its fullest, it is important to illustrate the full rights of RealTokens owners. Receiving rental payments from tenants is one of the most salient mechanisms in which full rights over the property are conveyed. While ownership of property via a token is noteworthy; adding in rights to the cash flows generated by rent from tenants makes things far more interesting.
Daily Rent Payments
With the advent of smart-contracts, there is no reason to retain the archaic system of payment every 30 days. Instead of one lump sum paid out every month, a RealToken Rent Contract will manage the dispersal of funds to RealToken owners, so that they are able to collect rent on a daily basis.
But, how can RealToken Holders be Landlords?
It is unrealistic to expect numerous individuals from across the world will be able to coordinate property management decisions. Instead, a property management company is required in order to upkeep the property and manage all landlord responsibilities. Property management companies are paid by the rent collected from the tenant, and are responsible for converting fiat to USD Stablecoin to send to RealToken holders. Using a property management company allows for minimum necessary involvement on behalf of the RealToken owners. In the most ideal scenario, nothing of significance will ever be asked of RealToken owners, and ownership of the property is as simple as owning a RealToken.
The property management service provider will be paid a cash fee equal to 5% of rents collected on the real property asset held by a Series and a cash fee equal to 1.5% of the cost of all repairs to an Real property while the asset is owned by the Series.
RealT is being designed to be aligned with the values and goals of Ethereum and cryptocurrency at large. USD Stablecoins will be used to distribute rental income streams to the RealToken holders, representing a jurisdiction-agnostic currency on the Ethereum blockchain. Upon receiving USD Stablecoins in their Ethereum wallets, RealToken owners are able to exchange for any other currency, including US Dollars to their bank account.
Ideation Surrounding Potential Utilities
The tokenization of real estate enables new utility functions for how ownership of a real estate property is managed. We discuss different ways which the tokenization of real estate invents new mechanisms for property ownership and investment strategies.
If a tenant finds themselves renting a RealT property, they have the option of purchasing the RealTokens for the property. While purchasing all RealTokens might be outside of the means of the tenant, the fractionalization of the property enables them to purchase a more reasonable number. Upon purchasing the RealTokens, the tenant is effectively paying rent to themselves. If they are only able to afford ⅓ of a house, they can purchase the rights to ⅓ of the rent they are paying. Through the purchasing of ⅓ RealTokens, they are effectively reducing their rent by ⅓. The reduction in their cost-of-living can help enable the purchasing of future RealTokens, and can help snowball a tenant into owning the home outright.
A homeowner may want to leverage the capital locked up on their house, but without seceding ownership of the property to anyone else. A second mortgage, reverse mortgage, or a collateralized loan are all options available from a bank, but the bank charges high fees or interest. A homeowner could tokenize their house on the RealT platform, and using decentralized finance platforms like Dharma or MakerDAO, can leverage some or all of the RealTokens to secure a collateralized loan. The MakerDAO offers collateralized loans from 0.5–2.5%, far more compelling than the interest rate offered by a bank. This service requires MakerDAO governance to accept RealTokens as collateral, and is purely hypothetical.
Tokenized REITs Without Cooperation Costs
By combining a collection of RealTokens from various RealT properties, a smart-contract created REIT is possible. This REIT is a basket of diversified properties across the U.S., offering risk protection and investment across diversified geographic areas. The REIT itself can be tokenized, in order to reduce the costs of entrance. This tokenized REIT could be offered at an comparable price to RealTokens themselves, but offer fractionalized ownership to multiple properties, not just one. All rights to cash flows are retained by the tokenized REIT owners.
Digital Identities for Real Estate Properties via IPFS
IPFS provides a mechanism for giving access to documents to anyone that is able to connect to Ethereum. DigixDAO is a leading example of leveraging the decentralization and immutability of IPFS to prove the solvency of their gold vaults in Singapore.
RealT intends to use the same IPFS mechanisms to provide all RealToken owners with access to their relevant documents. In future the phases of the RealT project, the Certificate of Formation, deed, affidavit, and operating agreement will all be made available by ownership of the relevant RealToken, via IPFS. Additional property information such as a home inspection report, title insurance, history of maintenance, and logs of all repair or renovations are also documents that are of interest to property owners, and future development of RealT will enable the appending of documents to the associated properties. This will allow for each property on the RealT system to have a provable and immutable history grow, providing clarity and security for potential real estate purchasers. As RealTokens diffuse throughout the Ethereum ecosystem, the perpetually available documents on Ethereum’s IPFS will always be present and accessible to the RealToken holders.
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