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  • Writer's pictureAraa Market Team

21 Benefits of Real Estate Crowdfunding, Tokenization & Fractionalization

Updated: Feb 19, 2023

Now you can invest in real estate assets like the rich and famous and feel like a big shot - all while sipping your morning coffee in your pajamas. No more exclusive clubs or secret meetings to join, just a click away. And the best part? No need to worry about finding a parking spot at fancy office buildings or dressing up like you're going to a wedding every time you want to check on your investments. Welcome to the future of real estate investing! Here are some benefits of property syndication (Crowdfunding, tokenization, NFTs, Fractionalization). If you are asking yourself: Should I invest in real estate crowdfunding? should I buy property tokenization? or is Fractional ownership of real estate beneficial? read below:


 

Diversification

Unless you want to go all in on one single property, tokenization, crowdfunding, and fractionalization, allows you to diversify your portfolios by investing in a range of real estate assets. This reduces risk by spreading investment across different properties and locations. Now if you are a Warren Buffet die hard, you don't consider yourself ignorant, you are a professional veteran real estate guru, and remember everything Warren said, you may not like diversification. Because Warren Buffet said :"Diversification is protection against ignorance". But let's face it, in general, diversification is a good thing.

 

Improved Liquidity

Real estate investments are often illiquid, but tokenization and fractionalization allow for more efficient and faster transactions, and reduces the ticket size for investment. This means investors can more easily buy and sell real estate assets, it opens access to a large number of potential retail investors who previously didn't have access to real estate investment, and hence theoretically improving liquidity. No more waiting around for months for a sale to close, you can buy and sell with a few clicks. So, you can finally stop dreaming about being a real estate tycoon and start living the life...

 

Borderless Investments

Investing in real estate assets is now a global game, breaking down geographical barriers and making the world a smaller place. Cities and countries are now taking notice of this new method of investment, especially those that rely heavily on real estate for their GDP. Dubai is a good example where locally based crowdfunding platforms such as Stake (getstake.com) and Smart Crowd (smartcrowd.ae)

have thousands of registered users and investors from all around the world, interested to buy real estate in Dubai and the UAE.

 

Accessibility and Inclusion

Real estate investment just got a whole lot more inclusive! No more "big ticket" entry fees for the exclusive club of wealthy investors. Property tokenization and crowdfunding allow for increased access to real estate investment for those who previously did not have access. This helps to increase financial inclusion for a wider range of individuals. Real estate investment has generally been a fantastic wealth preserving and wealth building investment, but has been historically reserved only for those who could afford big ticket size investments. Just like listing shares of a large company like Apple or Microsoft enables access to retail investors who could now invest in those companies with little amount, real estate crowdfunding enables the same but for direct investment in specific real estate assets, many times being single real estate, a REIT, mortgage of specific real estate or potentially a pool of mortgages like CMBS. So now, you can easily buy a slice of an Apple or Mango farm just like you buy a share of Apple and Mango on the stock exchange.

 

Faster & Efficient Transactions

Who said real estate investment has to be a slow and painful process? With the magic of blockchain technology and crowdfunding platforms, you can now invest in real estate assets with just a few clicks just like online shopping and without breaking a sweat! No more waiting in line at the bank, dealing with stacks of paperwork, or stressing over due diligence. Just sit back, relax, and let the crowdfunding platform do all the heavy lifting. And, boom! You're now a proud real estate investor, just like that. This assumes the user has gone through necessary onboarding including KYC, AML and have funded their account with the crowdfunding platform. As you know, buying real estate is getting as easy as ordering detergent from Amazon or booking a hotel room in the Mandarin Oriental on Expedia, but, the real estate (fraction of it) is a security and falls under legal scrutiny.

 

Reduce Fraud

The use of smart contracts in tokenization and fractionalization is like the cherry on top of an already delicious real estate investment sundae. No need for intermediaries? Less transaction costs? Less risk of fraud? Who wouldn't want a piece of that? Sure, fraud can still happen even in the most regulated industries. It's like finding a hair in your dessert - nobody wants it but it can still happen. But hey, just make sure to do your due diligence and ensure your crowdfunding platform is regulated by a trustworthy regulator. That's like having a restaurant with high health standards - it's always a safer bet. Also, not all smart contracts are safe (neither very smart) - ensure that the technology used and smart contracts have been audited by trustworthy third parties. But in general, whether using smart contracts or not, having some additional regulations and checkmarks in the process of transacting real estate as the case is with crowdfunding certainly reduces fraud that could be committed easier otherwise. Stay tuned for our upcoming articles where we look at the flip side of this, there is also a potential for increased fraud with tokenization and crowdfunding, new kind of fraud...

 

Access to Capital

Whether you're a young property apprentice or a seasoned real estate veteran, crowdfunding is the new hot spot for capital. Landowners, property developers, homeowners, and even governments and PPP (Private Public Partnership) can now turn to crowdfunding to fund their operations and projects. This is specifically helpful for land and farmland owners, let's face it, traditional financial institutions, aka the stuffy bankers, don't always have an appetite for lending money for land - especially if it's not generating any income. They're worried about having to foreclose and sell it in a tough illiquid market, and about the lack of income to pay off interest on the loan. But fear not!! Crowdfunding and land tokenization are here to save the day! Now, owners (including governments) can reach alternative sources of capital from people who are passionate about funding land-based projects or preserving value in land investment. Watch out bankers, new kids on block crowdfunders are here to compete!

 

Lower Cost

Tokenization and fractionalization reduce the costs associated with traditional real estate investments. This can include lower transaction fees and reduced legal and administrative costs. It is however highly advisable for investors to carefully review the fees associated with their platform of choice and insure there is no misalignment of interest.

 

Added Security

Tokenization and fractionalization use blockchain technology, which offers enhanced security compared to traditional investment methods (blockchainers like to repeat: ''In code we trust''). This helps to reduce the risk of fraud and increase investor confidence. Similarly, crowdfunding through issuance of shares of an SPV that owns the real estate is normally highly regulated, adding additional security and avoiding fake listings. It is recommended however to due diligence the crowdfunding platform to make sure they themselves are not a scam.

 

Invest Alongside Experts

With crowdfunding, investors can access investment opportunities alongside professional and real estate experts. This provides access to valuable expertise and can help improve investment outcomes.

 

Flexibility

Crowdfunding, tokenization and fractionalization allow investors to choose the level of investment they are comfortable with. This offers greater flexibility compared to traditional real estate investments, where larger investments are often required.

 

Improved Control

With real estate crowdfunding, tokenization and fractionalization, investors have greater control over their investments. They can monitor their investments in real-time and make informed investment decisions. When a global or a secondary market (exchange) with high volume is eventually established successfully (something that araa is building), investors would be able to sell their investment much faster.

 

Transparency

The use of blockchain technology in tokenization and fractionalization provides increased transparency for investors. Similarly, regulated crowdfunding requires various disclosures and mandatory reporting, making the investment much more transparent. Be aware however of negligent or scammy reporting.

 

Automation

Crowdfunding, tokenization and fractionalization allow for the creation of automated investment processes. This can help to reduce costs and improve efficiency, making real estate investment more accessible to a wider range of individuals. Additionally, it enables 'robot trading' and AI assistance, as well as the ability to mirror other traders/investors or participate in social investments.

 

Easier Reporting

With tokenization and fractionalization, investors can access real-time data on their investments. This makes it easier to report on investment performance and monitor progress.

 

Improved Data Quality

The use of various technologies including blockchain technology also ensures that data on real estate investments is accurate and reliable, improving the quality of information available to investors.

 

Potential Improved Returns

By offering access to a wider range of investment opportunities and reducing costs, tokenization and fractionalization can help improve investment returns. Additionally, given the ability to diversify the risk and invest alongside real estate professionals, experts and sometimes developers, enhances the chance of improved returns.

 

Home Equity Release

Real estate crowdfunding and tokenization can provide a number of benefits to homeowners, particularly those who do not have a mortgage on their property. By tokenizing a small percentage of their home, homeowners can take out some equity from their property while still maintaining ownership and being able to continue living in their home. It's like finally being able to cash in on that property you've been sitting on for years without having to pack your bags and move out! And the best part? You get to keep all the memories (and your broken chair) in your beloved home. This can provide you with access to additional funds for home improvements, investments, or other expenses, without having to sell your property or take out a traditional loan. Furthermore, this method enables many people to participate in the wealth building through investment in real estate equity with a much smaller equity cheque than previously available, creating a win-win situation.

 

Social Trading

Real estate tokenization and crowdfunding platforms can offer social trading features, allowing investors to share information, discuss investment strategies, and collaborate on investment decisions. This provides investors with increased transparency and access to a community of like-minded investors. It allows beginner investors to 'follow' or mimic the investment decisions of other more experienced investors. This would be ideal in a marketplace that has access and/or aggregates legitimate real estate investment opportunities from all around the world, this way investors can have optimal options and true diversification.

 

Robo-Advisors

Real estate tokenization and crowdfunding exchange or marketplaces that have access to a large number of global platforms can offer robo-advisory services, which use algorithms to automate the investment process and provide investors with personalized investment portfolios based on their goals and risk tolerance. Robo-advisors can help investors make informed investment decisions, manage their portfolios more efficiently, and potentially reduce investment costs.

 

Real Estate De-Fi

Real estate tokenization and crowdfunding can also be integrated with Defi (Decentralized Finance) to offer a more secure, transparent, and efficient investment experience. Defi uses blockchain technology to create a decentralized and trustless financial system, reducing the need for intermediaries and increasing accessibility for investors.

By integrating Defi, real estate tokenization and crowdfunding can offer additional benefits such as increased security, faster and more efficient transactions, and access to a wider range of investment opportunities. This can make real estate investing more accessible to a wider range of investors and help drive innovation in the industry. It may even make Warren Buffet happy... It also may bring new financial institutions or traditional lending institutions like banks the opportunity to offer their expertise across the globe and to a much wider audience.

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