With even local investment in real estate out of reach for most young people in the West, investing in foreign land holdings seems like an even less realistic prospect for tech savvy 20-somethings. Not only is the process a step above in complexity for an already arduous procedure, but often the most attractive investment properties are limited to home grown or much more wealthy buyers.
The hurdles on the path to investing in properties in other countries are significant and are not limited to material concerns. Most of the time, non-residents have extremely limited knowledge of local markets, meaning many investments that looked good on paper can end up bust.
This risk factor has been a major boon for agents who cater exclusively to a foreign clientele, often charging exorbitant rates and working exclusively with high end properties. Modest investors looking to buy a single-family home or small multiunit complex in a foreign state are often left to fend for themselves, dependent on their own research to make a profitable choice.
With the number of regulations in the real estate market and international banking, small investors are also locked out of investing due to financing constraints. Most major banks do not provide loans for foreign borrowers or allow foreign customers to own an account that can handle property transactions.
This presents less of a problem to more wealthy investors; it’s not uncommon, for example, for a home owner in southern California to put their property up for sale and a few days later find an agent with a suitcase full of cash ready to buy their property outright. For the average middle-class investor, access to financing and leveraging themselves is necessary to enter the market.
So, what options do smaller investors have when looking abroad? Traditionally, they really don’t have many, but recent technological breakthroughs are making traditional investing and finance a moot point.
Enter fractional real estate. With the introduction of digital currencies with real world value, new avenues of finance are opening that allow individuals worldwide to come together to purchase real world assets with digital money. By divvying up the value into a set number of chunks, high value items such as real estate can become far more accessible to the average person, even if they reside in a different country.
This process of decentralizing finance and investiture is known as DeFi, and the community of entrepreneurs and start ups that operate within the space are doing everything they can to digitize and democratize as many assets as possible through the cryptocurrency Ethereum and its unique properties. Ethereum’s use of smart contract functionality allows for greater security without the need for trusted intermediaries, meaning it is perfect for use as a unit of exchange for the transfer of assets.
Using Ethereum, DeFi bases its model on ‘tokenizing’ assets, with each token representing a set percentage of the asset’s overall value. RealT, one company working in the DeFi space, specializes in real estate tokenized assets and explains the benefits of the process here:
“Tokenization creates a more seamless exchange process. Because all tokens exist on the blockchain, and a blockchain is another word for a ledger, a lot of bureaucracy and headache associated with exchanging a valuable asset is automated and maintained by the blockchain. Each transaction that involves a token has sender, receiver, signatures, time-stamp, and amount-paid all baked into the transactions data. This transaction “receipt” is immutable, verifiable, and made available for all to see…
…Because blockchains bring a global audience, assets are able to achieve larger marketplace participation than traditional siloed markets. For many assets, like real estate, liquidity is a significant obstacle that can lower the value of the asset, as the search for finding the right buyer may prove difficult. By opening up the market to a global pool of purchasers, illiquid assets can more likely find liquidity via increased market participants.
… Asset tokenization is growing rapidly on the Ethereum blockchain. Ethereum has become a selling-point for issuing a tokenized asset; because most people are doing it on Ethereum, others will too. Ethereum has become the “Land of Tokens.” Ethereum, as a blockchain capable of running software, has the capacity to create markets that leverage many types of tokenized assets at the same time.”
With tokenization, investors of every class and country can have equal access to markets that have been traditionally dominated by large firms or highly wealthy individuals. This means greater opportunities for wealth accumulation and, with RealT’s daily rent payouts, a steady stream of income for those who invest in the assets.