Here’s How Blockchain Can Revolutionize Private Equity for Real Estate Investors

In 2017, bitcoin went parabolic. Everybody and their best friend hyped the revolutionary blockchain technology that the cryptocurrency was built on (although many didn’t even understand how blockchain functioned). Then, the hype faded. Bitcoin prices fell. Many investors forgot about cryptocurrencies. Many also forgot about the blockchain technology that cryptos were built on.

Here's How Blockchain Can Revolutionize Private Equity for Real Estate Investors

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They shouldn’t have.

Not only are cryptocurrencies making a huge comeback in 2020 — bitcoin prices are up 30% year-to-date — blockchain technology is starting to revolutionize industries far beyond the scope of the currency markets.

In particular, blockchain is starting to revolutionize real estate investing, making traditionally non-liquid real estate markets far more liquid and enabling average retail investors to jump into real estate investing with as a little as a few bucks. It’s investment democratization like we’ve never seen before.

Sound interesting? It is. But first, let’s take a step back. What exactly is blockchain? How does blockchain work in real estate investing? Why does any of this really matter?

Let’s answer those questions by taking a deep look at how blockchain works in real estate investing, and what its implications are for investors.

What Is Blockchain?

To understand how blockchain works in real estate investing, we must first understand the concept of the blockchain.

From a pure definition perspective, blockchain is a distributed, decentralized, public ledger, which immutably records and shares information. There’s a lot to unpack but, at its core, the concept isn’t so complex …

Consider a group of distinguishable digital blocks. Each block stores some unique information, and all of these blocks are linked within the same network. That network has a bunch of nodes (third-party computer servers) which have an immutable copy of the blockchain.

Whenever some action in the ecosystem happens, a new distinguishable block is created, with more unique information. But, before it can be admitted to the blockchain, the nodes must all agree that this action actually happened. Once they do, the new block is admitted into the chain. The whole blockchain gets updated to reflect this change.

In this way, blockchain is a revolution because it creates a digital and decentralized way to track and share information without needing a central authority (and therefore without having to pay a central authority to do so).

How Blockchain Works in Real Estate Investing

Blockchain is being applied to the real estate world through a process called “tokenization.”

Tokenization takes a real-world asset (such as fine art) and does the following:

  1. Creates a digital copy of that asset
  2. Splits the digital copy up into several little pieces (or tokens)
  3. Sells those tokens to investors
  4. Creates a liquid market for that asset on the blockchain.

In other words, tokenization is simply injecting liquidity and fractional ownership into assets that don’t have those features.

That’s a pretty big concept. And it’s especially relevant to the real estate world.

In that world, you have hugely valuable assets that produce significant long-term returns. Those are the types of assets that investors want to own. But, traditionally speaking, real estate markets have been closed off. Only accredited investors could play in that game. The markets were non-liquid. And fractional ownership wasn’t really a thing.

Until now.

Albert “Pete” Kyle, the Charles E. Smith Chair Professor of Finance at the University of Maryland’s Robert H. Smith School of Business, wrote in an email to InvestorPlace:

“Private equity is inaccessible to individual investors because it is costly for investors, large or small, to monitor less regulated and opaque private equity investments and because it is difficult for private equity fund managers or private companies to manage large numbers of investors and shareholders. Blockchain can make it easy for individual investors to purchase a stake in a company or a fund.”

With blockchain, property owners can now issue tokens to divvy up fractional ownership in their real estate assets while simultaneously making a liquid market for those tokens so that any investor can buy, own and sell private real estate like stocks.

The flip side, according to Kyle, is that “[blockchain] does not make it easier for the individual investor to obtain information about the quality of the fund or the investment. Instead, it makes it easier for the fund or the private company to keep track of who their investors are by creating a potentially transparent cap table.”

That said, the implications of real estate tokenization are enormous.

Why Does Real Estate Tokenization Matter?

For the first time in history, average retail investors with as little as a few bucks can invest in private real estate. That’s a big deal. Over the long run, private real estate investments have yielded as big of returns as the stock market. So, retail investors now have more opportunity than ever before to diversify their portfolios with strong assets outside of stocks and bonds.

Over the next several years, that’s exactly what they will do. Retail investors will increasingly rush into tokenized real estate assets. Because more buyers lead to higher prices, those assets will likely appreciate at a strong pace over the next several years.

Real estate tokenization is the next big wave in the investment world. Over the next several years, individual investors will increasingly pile into newly liquid real estate markets. As they do, early owners of tokenized real estate assets will see their asset prices appreciate thanks to strong buyer demand. But not everyone is convinced. “I think it is best for individual investors to avoid blockchain-based private equity investments,” says Kyle, who continues:

“[Blockchain] does not solve the problem of determining whether the investment is a good one from the perspective of the investor. Monitoring the quality of private equity funds is difficult and time consuming. The current structure of delegating monitoring of private companies to private equity funds with such expertise and delegating the monitoring of private equity funds to sophisticated institutions which invest in them, such as large pension funds and endowments, directly addresses this problem. Investors with less than about one billion dollars to invest should probably avoid private equity.”

My two cents? Get in on the real estate tokenization movement early. Go check out crowdfunding real estate platforms like Cadre, ArborCrowd and RealCrowd. Peak at some the investment opportunities on those platforms. Buy into some high quality ones. And wait for the crowd to catch up and push up the price of your real estate assets.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

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