- All rental payments from tenants are sent to wallets that are segregated by property
- Some amount of the rent (USDC) in each property wallet is sent out at regular intervals
- The calculation that determines how much rent is sent uses a “1/30.416” mechanism, where 1/30.416 of the amount of rent in the wallet is sent out every day.
- This produces a buffer that becomes equal to 56.6% of one month’s rent. Not all of the rent will be distributed by day 30 before the next rental payment is added to the wallet
The 30.416 value comes from 365 days divided by 12 months.
This new system has a lot of benefits, along with some weaknesses that are highlighted in the blog. We released the blog hoping to spark a conversation about the possible ways that the RealT community could minimize the costs and maximize the gains of this new system. We appreciate all the feedback we have gotten from the various channels where RealT is discussed
In this blog, we discuss some of the solutions proposed between both the RealT community and the RealT team that will help smooth this transition, and make it as equitable as possible.
New Token Pricing
In this new model, token holders will be giving up 56.6% of 1-months rent, which is then retained by the new rent payment system. The RealT Team and many of the community members have expressed approval of the existence of the buffer, due to the protection that it offers if a property ever becomes unrented for a period of time. The buffer acts as… well… a buffer that continues to pay out rent to the owners, even if the property has no tenant.
The buffer of 56.6% of 1-months rent is owned, but not yet distributed, to the token holders of said specific property. This presents an issue when a token holders choose to sell the token: by selling a token, they are giving up their share of 56.6% of one months of rent.
The fix for this particular problem seems straightforward. RealT will be adjusting the price of the tokens on the website to reflect ownership over 56.6% of 1-months rent. This way, when a token seller chooses to sell the token through the RealT website, they will be compensated for their share of the undistributed 56.6% of 1-months rent.
For example, the net rent that is distributed for the 9943 Marlowe property is $658/mo. 56.6% of this is $373.11. Marlowe has 1,000 tokens, which means that one Marlowe token has a claim on $0.373 of the undistributed buffer. The Marlowe tokens will be repriced from $63.75 to $64.12 on the website. This difference in price means that token sellers are selling their claim on the buffer and that the buyer isn’t getting access to the buffer that was generated on a previous owner’s stake.
Smoothing the Curve
Below is a graph generated by RealT community member TheDavidMeister (Thanks!). In red, you can see the amounts of rent that are paid on a daily basis, along with the instances of new rent being added to the pool. This graph is on a 400+ day time frame, so it is quite a far projection and includes many months of rental payments.
The thing to note is that months 1, 2 and 3 have the largest discrepancy in the amounts that are paid versus further months. This is because this is where the majority of the buffer is accrued. By month 4, the 56.6% buffer is 98.5% filled. In other words, an example buffer of $1,000 has reached $985 in size by month 4.
In order to smooth out this discrepancy, RealT will be pre-funding the rent wallet with 50% of one month’s rent. By adding an initial amount to the rent wallet, this will significantly cut down on the discrepancy between months 1-3 versus months 4-12. We choose to do this in an effort to ease the transition from the previous rent system to the new one, but this ultimately remains RealT’s money. Over time, RealT will remove portions of the 50% of rent we initially seeded, so that the company can be paid back for the capital it deployed. The goal of this is to displace the discrepancy of rental payments from months 1-3 to span 12 months. This will make the inconsistencies in monthly payments extremely minor, rather than producing 3 months that are very different from the rest.
These two fixes will help bridge the gap between the two rental systems in a way that is equitable and does not disturb the investments of RealT users!
With all this said, it is important to remember that the real estate asset class, liquid or not, is meant to perform as a long term investment. A three months horizon, while possible if the circumstances require, is not the objective of building up passive income or a real estate portfolio.
Balancer Fixes This
One final note on this subject. The Balancer system is meant to be a mechanism to reduce dependence on one single property and mitigate any volatility in the rental payments or asset price of any one property. The RealT Balancer token that is produced by depositing a RealT property into the contract will offer exposure to a basket of assets, rather than one single one.
Any volatility in rental amounts, or any change in asset price, will be largely dampened via the Balancer system. The Balancer system is an aggregator. It generates homogeneity and stability between all the assets that are inside a single Balancer pool. If you want to see what an example Balancer pool might resemble, check out our recent blog “The Aggregate RealT Portfolio”.