Investing in Real Estate: REITs and their ETFs vs Tokens

Real estate investments have been increasingly popular in the last decades. And there are good reasons for that. Investing in real estate can be highly profitable, giving individuals both short-term returns and a long-term appreciation while adding diversification to an investment portfolio.

While this type of investment has historically been illiquid and accessible just to institutional investors with large amount of capital, things have gradually evolved over the past sixty years. A big change in that sense happened with the creation of the Real Estate Investment Trusts (REITs).

As per Investopedia definition, a REIT is “a company that owns, operates, or finances income-generating real estate.” The first REIT was established in the US in 1961, after that President Dwight D. Eisenhower signed an amendment to the Cigar Excise Tax Extension — a key first step to allow small investors access investments to commercial real estate portfolios.

But while this was undoubtedly a major milestone for real estate, we now live in different times that need new solutions. In fact, we are now entering the era of tokenization, consisting of the issuance of tradable tokens representing tangible assets (e.g. properties), real estate investing is experiencing a seismic shift with potential advantages for all the parties involved.

Here we take a look at the main differences and benefits offered by real estate tokens compared to REITs.

Stock Market Fluctuations

REITs are in the equity asset class, which means that their price is somewhat correlated with the price of stocks. If you are looking for diversification to protect yourself from the stock market fluctuations, REITs are not the right tool. Instead, real estate backed security tokens can better diversity away the stock market downturn risk, because their price closely follow the one of the underlying properties.

Cash Flows

REITs and ETFs based on them can provide good returns if you are investing long-term but are not that good if you want to see some short-term rewards from your investments. The real estate backed security tokens make it possible to solve that problem too. For example, with the ReTok token, you’ll get a stable monthly cash flow, which comes directly from the rent paid by the tenants of the underlying properties. In fact, each token gives the right to a share of that rent.

Frictions

Real estate tokens use blockchain, smart contracts and distributed ledgers, which means trading frictions will soon be just a thing of the past. While brokers and intermediaries played a crucial part with REITs, the whole market is now moving towards disintermediation using these new technologies to bring trust and transparency to the system.

Systemic Risks

REITs usually make heavy use of leverage in their investments, reaching approximately an average of 50% in debt to equity ratio — this is not a big issue as long as things go well, but not in turmoil. Investing in such a highly leveraged investment trust means that your exposure to a systemic financial crisis, like for example the one we experienced in 2008, is very high. Tokens don’t need that leverage. For example, at ReTok, we are creating a token backed by real estate purchased with 100% equity, which means there are no loan default risks and that you are shielded from the system risks intrinsic to REITs debt exposure.

Resistance to Economic Crisis

This point links to the one above, but it refers to the economy in general and not just the financial system’s stability. The REITs’ risk profile and exposure to local and global crisis are pretty high, as these trusts focus their investment strategies on commercial real estate and large projects whose value is generally more correlated to the economy’s health compared to residential properties. With our ReTok token instead, we are building portfolios composed of apartments, multifamily houses and small buildings, which have historically resisted better in times of crisis and economic turbulence.

The Issue for First Time Home Buyers

While REITs have been beneficial for real estate investors, the same can’t be said for young adults looking to buy their first home. As we showed in our previous article, it’s now much more challenging than ever to become a homeowner. This is serious for a whole generation and at ReTok we believe it is unfair that young families run the substantial risk of being renters forever. We don’t see why people with a good income should not be able to become homeowners. With our token, we aim to help resolve this significant generational issue, proposing an investment product that is not just good for the investors but also has a positive impact on the tenants. Our vision is to use technology and innovation to provide a better alternative to mortgages and make it simpler for young families to buy their first home. If it sounds ambitious, it’s because it is, but we think it’s a journey worth taking. Are you in?