The Crypto Native’s Guide to Real Estate Investing
This guide will go through traditional “low investment” methods for real estate and cover how crypto natives can gain exposure to the real estate market without breaking the bank
Graphic by Crystal Le
Traditional real estate has been the “safe” investment of choice for decades. Because of the simple fact everyone needs a home, this need has long-provided stability against sharp declines in value that investors find indispensable. Because of these fundamentals, real estate saw some of the sharpest appreciation in its history of the last few years. While it has slowed a bit, it was still the major relative outperformer in 2022. Combine this with the rampant housing shortages and the prospects of buying a house for both Millennials and Zoomers seem pretty bleak.
Real estate experts suggest workarounds such as house hacking or equity partnerships to get exposure to these markets. But for most millennials who don’t even have a credit line and struggle to clear their student debt, these methods are often neither feasible nor smart.
In this article, we’ll go through traditional “low investment” methods for real estate, and how crypto natives can gain exposure to the real estate market without breaking the bank.
Traditional ways to invest in real estate with little to no money
It’s no secret that the US Government wants its citizens to own their own homes. While it’s never been more difficult to do so, the government-backed FHA loan program is one that puts a home in reach for many. As long as you agree to live in the home as a primary residence, the program offers favorable loan terms and lighter eligibility requirements for buyers. And this couldn’t come at a better time. For many prospective buyers who could qualify for a conventional mortgage, the next hurdle is having enough capital for a down payment.
This is really where the FHA loan shines. Contrary to the commonly held belief that you need a 20% down payment to get into a home, you only have to put down 3.5% with an FHA loan. For the Q4 2022 median home price of almost $470,000, that’s the difference between putting down $94,000 and $16,450. While there are downsides to the FHA like agreeing to live in the home for a certain amount of time and paying monthly mortgage insurance for the life of the loan, this difference in down payment requirements is more than worth it for those who would otherwise be unable to afford a home.
An equity partnership is a business deal between two or more investors who pool their funds, resources, and respective skills to purchase, develop, or lease property. Both the risk and the profits are divided depending on each partner’s level of contribution to the business.
Just like in normal business deals, there is potential for conflict between the partners, especially if there’s a disproportionate distribution of responsibilities. On one hand, usually the person with less capital in the deal will offer more sweat equity on the property, often leading to the aforementioned conflict over feelings of one party pulling more weight than the other for less profit. On the other hand, if things go south with the partnership, the investors who own the most equity have the most to lose. Because of these reasons, entering an equity partnership must be made carefully with these dynamics in mind.
The house hacking trend emerged out of a desire to live rent-free. The hacker’s real estate strategy is to acquire a house for a low down payment and offset their mortgage payments by renting out parts of their property — essentially covering living expenses.
The issue with house hacking? You’re legally required to live in the same house as others, so if you’re not used to having roommates, it can get uncomfortable. Plus this operation is impossible to scale. So, while this might be a good strategy if you don’t have enough upfront cash for a starter home, it’s not for everyone.
Rental arbitrage is a way to make rental income without owning property. Instead of utilizing low down payment options, this close cousin to house hacking provides rental income through signing long term lease agreements that let the leasee list the property as a vacation rental.
While this strategy may offer an additional income stream, it doesn’t provide full real estate exposure. If done successfully though, the rental income can provide enough of a down payment to make a purchase. There are regulatory risks since zoning laws differ across the country. For example, in California, the person listing the rental is required to live in the unit for a majority of the year.
Microloans are small-scale loans, typically under $50,000, financed by individuals instead of traditional financing sources such as banks.
Microloans are great when you need fast financing, but their short repayment terms of just under a year and high interest rates are not ideal for long-term real estate investments. Thus, microloans can be used as a way to supplement your capital, not finance your entire real estate journey.
REITs are a popular way to gain more liquid exposure to the real estate market, without buying physical properties.
In REITs, you buy publicly traded shares of a revenue-generating real estate company such as warehouses, apartments, data centers, commercial developers etc. The company uses that cash to finance its operations and gives you a substantial portion of its generated income as dividends.
But, of course, that’s not without its downsides. All property investment decisions are managed by the general manager – excluding any input from investors. REIT companies are usually heavy in debt and highly centralized. And since you have no control over how the REIT manages or buys properties, nor where they are located, you are unable to manage the risk of the property investment.
Digital real estate investing
With traditional real estate being inaccessible for most people, digital real estate investing has seen significant interest. New asset classes such as fractional ownership via NFTs, metaverse land, and tokenizing real-world assets have opened the market to a wider pool of investors.
In this section, we’ll look at the major digital real estate investing avenues and how they have performed.
Imagine a world where you can go to a music concert, explore a museum, play a car race, all while sitting at your desk. That’s exactly what a metaverse like Decentraland offers — a virtual substitute for a real-life experience. Buying land in Decentraland equates to owning a part of this ecosystem — similar to owning a plot of land in the real world.
During Facebook’s rebrand to Meta, most metaverse projects saw exponential growth in trading volumes for their land NFTs — with the average price reaching up to $17,000 in the January of 2022. However, the onset of the bear market has been the reality check that this ecosystem was always bound to contend with.
There have been few answers to the simple question of how should someone ascribe value to a potentially infinite resource. There’s nothing keeping developers or community members of a metaverse land project from creating more real estate, and this has been at least partially responsible for the drastic price decline in the asset class (with an average 85% decline to $2,500). This volatility has led many investors to rethink the viability of investing in virtual land for the long term. As of now, it appears that this asset class may depend on the “greater fool theory” for future price appreciation.
As the name suggests, investors own a fraction of an asset in fractional ownership, allowing them to get in at a significantly cheaper cost and get exposure to high-value assets. Even though that might sound like the best of both worlds, it presents its own set of challenges and comes at a cost to homeowners.
Fractional ownership offerings are typically limited to a handful of high-value assets, constraining the options for investors to choose from. Naturally, the demand for specific properties is usually disproportionate – leading to lower-quality deals. If the demand goes down, this asset becomes highly illiquid.
To understand the real risks of fractionalization, we’ve to first understand the current real estate landscape. The low supply of real estate and the perpetual demand of needing a place to live makes it an attractive investment choice.
But the increasing financialization of this market has unsustainable consequences for the cost of living. Patrick Condon summarizes this problem in his article about Push, a documentary covering the ways big finance is driving housing prices,
“The “financialization” of housing is an out-of-control global pandemic, driven by the hunger of the financial management industry to find things to buy that will increase in value in a world where too much money is chasing too few assets — and where those assets are returning less and less profit as a result.”
Digital fractional ownership is a double-edged sword in that it contributes to the same problem by increasing speculative demand. More companies are removing supply from the system by buying homes with the intention of raising more money through fractionalization. This directly hurts millennials’ ability to buy a starter home.
More significantly, it creates a first come first, served system that favors institutional players. So even though retail investors may have a lower cost barrier, the deal quality is much lower than traditional offerings. This system also lacks a breadth of offerings needed to compare investment decisions – increasing risk to investors.
DeFi and real estate – the volatility problem
In 2021, $32 million worth of real estate had been tokenized. By February 2022, that number had already grown to $50 million — almost double. This clearly shows the potential of the tokenization of real estate.
The main issue, though? If the DeFi summer of 2020 taught us anything, it’s that without real-world utility and adoption, DeFi protocols can be massively volatile and prone to manipulation by larger players. These larger players like FTX and other centralized parties have shown the world with painful clarity how the cryptocurrency industry is far from being immune to the greed and corruption seen elsewhere in more traditional financial systems. These high profile implosions have only reinforced the need for DeFi to continue building solutions that provide stable backing to protect against volatility.
Combining the power of DeFi with the stability of real-world assets and synthetics brings about such a solution. This combination can effectively level out crypto portfolios through more stable asset classes like real estate. The Parcl Protocol is making that a reality. Let’s see how.
Using derivatives to invest in real estate
The Parcl Protocol allows you to get exposure to the residential real estate market, with digital assets called ‘Parcls’. Each Parcl is tied to a price feed powered by the blockchain, which tracks the average price per sq. ft in popular real world neighborhoods. So, when you invest in a Parcl, you’re not buying actual land or even fractions of it — you’re buying a stake in a digital market that tracks real estate prices in a particular neighborhood.
Here’s how Parcl can tilt the real estate game in your favor:
1. Higher investment scope
Instead of restricting your investment scope to a particular house, like in fractional ownership, The Parcl Protocol allows you to invest directly in high-demand neighborhoods. So, even though finding the right investment properties might be tough in New York, you don’t have to worry about limited inventory with Parcl.
You can invest both at a granular level or a broad level. The granular level allows you to invest with no minimum, so you can start gaining exposure with as little as $1.
And at the broad-level, you can access the returns of an entire city or neighborhood which is far more stable than an individual property.
2. Highly liquid and accessible
The Parcl Protocol solves the age-old problem in the real estate market: affordability while maintaining liquidity. It achieves this through synthetic assets that aren’t tied to a specific property, but a neighborhood instead. Then, using its automated open market, you can freely trade your tokens with others who want exposure to that area.
Therefore, synthetic assets allow investors to gain broader exposure to the real estate market, without worrying about the illiquidity of fractional ownership or inflating prices.
3. Hedging your investments with derivatives
Apart from price tracking, Parcl Protocol helps you hedge your investments by taking positions on them. It works similarly to taking a bet on the price of an asset. If you predict that a particular neighborhood’s real estate will decline in price, say everyone is moving due to political reasons, you can open a short on it. If you’re right, you can see a tidy return on your investment from your short.
Conversely, if you’re confident about a neighborhood — maybe there’s solid infrastructure growth — you can go long. If the asset price increases, you benefit directly. Depending on how you want to structure your portfolio, you can use shorts and longs strategically to support your investment thesis.
Real estate is still one of the leading hedges against inflation and a primary source for creating generational wealth. However, the real estate market has clearly taken a turn for the worse, with rising rates, unfair monetary policies, and shortages. As such, this market is out of reach for the new generation. Solutions like Parcl’s synthetic asset technology are fundamental to bridging the disparity in real estate markets and helping rising generations take greater ownership of their future.
This content is sponsored by Parcl.
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