Tokenization Transforming Real Estate: A Deep Dive into Digital Assets and Investment Innovation

Embark with me on a transformative journey through the cutting-edge intersection of digital assets and real estate investments. My own venture into tokenization has unveiled a world where smart contracts on the blockchain are redefining what it means to invest in property funds. In this episode, I'll guide you through how these tokenized funds are opening up the market to a wider range of investors, while enhancing liquidity and expediting property transactions. You'll get an insider's look at the challenges and triumphs of launching a tokenized fund, and how this revolutionary shift is set to reshape the investment landscape.

We'll also delve into the exciting potential of tokenization in providing new liquidity options for investors. Imagine having the ability to sell tokens on secondary markets with ease, or use them as collateral for borrowing—all while potentially earning returns. I discuss the nuanced difference between asset-backed tokens and speculative cryptocurrencies, and the critical role of regulatory frameworks in fostering trust in the crypto space. Join me as I share how our fund is embracing asset tokenization to democratize investment opportunities and pave the way for a future where the myths surrounding cryptocurrencies dissolve, opening doors to innovative investment methods. If commercial real estate and cutting-edge investment strategies pique your interest, this episode is a treasure trove of insights.

If you need help finding the perfect location or your ready to invest in commercial real estate, email us at podcast@leadersre.com.

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Transcript

Speaker 1: 0:01

The goal of this show is to help healthcare organizations scale by leveraging real estate strategies and interviewing high-level healthcare executives who are actively in the trenches in order to pull out lessons learned along the way. If you'd like a free site selection analysis from our team, or you'd like to learn more about how we're acquiring real estate through our fund on the blockchain, visit us at wwwreuniversityorg and drop us a line that's RE as in real estate universityorg.

Speaker 2: 0:27

Alright, today I am so excited to talk about what is tokenization and what are digital assets. This is an extremely complicated subject and so I'm going to try and make it as simple as possible. But we have been really diving into this topic full speed ahead and learning a lot over the past couple months as we've been gearing up towards launching our tokenized fund Full transparency. It's just been a lot more complicated than we thought. We also were dealing with some negative headwinds with the fall of FTX one year ago, and so, as we really pushed came to the show, we decided to really dive in to figure out what is the difference between a tokenized fund and a regular fund, which is what I'm going to explain right now.

Speaker 2: 1:07

When it comes to real estate investing, you oftentimes do so through a vehicle that's called a fund, which is where you have here mostly accredited investors, meaning people who have a net worth of at least a million bucks, not including their primary home, in $250K in annual income a year. They are allowed to invest into real estate funds, meaning there's a lot of people who are not allowed to invest in those who are not accredited. In a fund, you essentially buy shares of that fund. Usually, the issue price is $10, it doesn't matter, but just for example sake, there's a five to seven hold period. The goal is that you take that money from the investors and you generate 18% annual return, or 15% or 12%. Sometimes it's higher than 20%, whatever. Sometimes you can blow it out of the park, but your money is essentially held in those illiquid assets while you are essentially executing on the promise, while the fund managers are executing on the promise that they gave to the investors, which could be you're buying a company or several companies and rolling them together into a roll-up, or you're doing a new construction development deal, or you're buying, for simplicity terms, a residential property, like a fix and flip would be. Maybe you're going to buy a bunch of them, package them all together and send them off, sell them to a bigger buyer. You got to hold them while you acquire those properties, so the payout is bigger than just doing an individual property. These are why you have funds. They work great, to be honest, because another benefit of a fund is let's just say you're looking at a property, say they're asking prices of a million dollars and you've got one guy who comes and says, hey, I'm interested in buying it, let me go get my financing in order. I've got the down payment ready, but let me go and secure financing with the banks. That could take 30, 60, 90 days and they could decline after a 90 day. We've had banks take longer than that. If you got a fund and your cash is liquid in the bank and you go to the seller and you say, hey look, I'll pay you $800 tomorrow, ready to go, there's a likelihood that they might choose you at $800 over the person that has to get financing at a million bucks. This is how funds work and they are great structures for getting deals at and getting good returns.

Speaker 2: 3:16

What we are learning with the process called tokenization is that it gives you a lot more freedom than a traditional fund. A traditional fund, if you have your money tied up in shares, you'd have to sell to another accredited investor. What that means is your pool of buyers is significantly decreased. Not only do you have to sell to another accredited investor, but you have to go through an intermediary, which is the part of the fund, a manager of the fund. There's a lot of different steps that result in you taking a haircut as an LP, a loan department, an investor in the fund if you want to exit the fund early for any reason, before the five to seven-hold period is up, then most likely you're going to have to go through that intermediary, they're going to have to find somebody and you're going to have to take a haircut on that investment.

Speaker 2: 4:01

Now let's compare that to tokenization. Take tokenization essentially, what you're doing is you are converting your shares of the fund that you invested in, or whatever the project is, whatever the company is right, whatever shares you have are converted into smart contracts, where they are held on the blockchain. Now, smart contract blockchain. You can spend a lot of time diving into these details and what they mean, the technology behind it. It's like how do you make a phone call? What's the technology behind making a phone call? We don't really know the technology, but we do know the phone is going to make a call from your phone to another person's phone. In the same way, we know that this technology is verifying that the contract or the share is on your account.

Speaker 2: 4:50

So why is this significant when you have the smart contracts? It allows people to facilitate their own transactions. What does that mean? Compare that to the regular fund example. If a limited partner wants to sell their fund, they have to sell the shares of their fund. They have to go to the intermediary, which means the intermediary is facilitating that. Now, why is that important? Because if you have to be an accredited investor, then in order to remain in legal compliance, if you're facilitating that transaction, you have to identify other accredited investors. When you allow smart contracts, the fund managers are taken out as intermediaries. They're no longer involved in the process. That means that you have what's called a secondary market, and so the original investors are now able to sell their shares using smart contracts to whoever they want. The original fund managers are no longer involved in the process. Therefore, you do not have to be an accredited investor to buy the secondary share. See, it's absolutely brilliant. It may not be a big deal up front, and maybe you're thinking to yourself okay, rich people are the only ones who are going to buy in these shares anyways. Accredited investor, what does it matter if some guy living halfway across the country can buy $1,000 for the shares?

Speaker 2: 6:05

What I would say to argue that point would be look at the public markets. Right now, the public markets are essentially the buyers of last resort. They're the top of the market, and the reason is because you have instant access to buy and sell, you have liquidity and it's a frictionless process with no middleman. You know how it's to be accredited, nothing and so the ease and the seamlessness of the process and the transaction is what drives a premium to those markets. The average multiple for companies on the S&P 500, future earnings is between 20 and 22 times. So if you make a million bucks in profit, your company is valued by 20 to $22 million if it's publicly traded and those are just around.

Speaker 2: 6:48

Most companies make a lot more than that on the public markets, but that's to give you an example. So if your company is private, that same company is making $1 million a year, but it's not publicly traded. We see multiple anywhere between three and 15 to 18, right To. Obviously, the higher you go up, the better your business to hire that multiple. But there's still a gap. Even at the very top end of the private market there's a gap between the multiple investors are willing to pay in private markets versus public markets. And so our thesis is and the reason why we think it's so exciting is because, at scale, with enough investors around the world, it doesn't matter if there's one person who wants to buy a thousand dollars a share, because you've now opened up your investment to everybody around the world. Everybody around the world now has the ability to get into this or to purchase this, and maybe instead of one guy buying 5,000, maybe you have 5,000 buying 10, $10 or $20 or $100, whatever it is, you've essentially democratized access to this type of asset, and that's one thing that we've been talking about a lot inside here at our firm at Leader of Real Estate is we want to democratize access to healthcare.

Speaker 2: 7:52

Back to real estate and I don't want to give the impression that we're doing this immediately or tomorrow, because it does take time and due diligence and legal docs, but that is the ultimate goal. There is approximately $215 trillion worth of real estate globally, and guess how much of that is available to retail investors? 7%. So right now, 7% is available to retail investors who want to go out and buy real estate. That means 93% of the total global real estate market is inaccessible to retail investors. I look at that and I think there is an absolutely massive opportunity that is going to take place. Maybe not tomorrow, maybe not next year, but the question isn't if the question is when and I think it's going to be sooner rather than later.

Speaker 2: 8:38

Another very cool thing about tokenizing assets is a process called staking. Staking, in simple terms, just means I take my coins or my shares of this fund, which in this case, they're represented as tokens. So I would take my tokens, I give the money to have in exchange for tokens of the fund, and now my tokens are going to appreciate at the same rate as the buildings appreciate and I'll earn cash flow at the same rate that rents are paid out. So that's my token, that's what it's worth. I'm going to take those tokens and I can stake them, which means I've put them in a secure wallet where somebody is going to lend me the money for those coins at an interest rate that you both agree on. Right, it could be 7%, it could be 9%, it could be 10%, but the cool part is and this is in the current banking environment, where interest rates are higher right now those numbers obviously change. The cool part is now you created another way to access liquidity or capital from your investment.

Speaker 2: 9:38

To recap, we have two ways of accessing liquidity. Number one the initial round of investors do need to be accredited, but they can sell on the secondary market to whoever they want non-incredited investors. So if I have a million dollars or $100,000 worth of shares or tokens in this fund, I can say hey, you know what? I need 10 grand for medical bill, all right, I need 20 grand for my kids tuition. I can set $20,000 worth to whoever I want on the secondary market. They do not have to be accredited. That process becomes much easier, obviously, ideally, you never have to call on the money when you invest in something like you want to maximize the return. But guess what? Life happens, right, there's just so many health things, relational things, life just happens and you just don't know why. So having that ability, I think, is very important and going to be very attractive to investors and other investors, which means, I think, it will drive a premium to those who tokenize early. So that's the first way of creating liquidity.

Speaker 2: 10:32

And in the second way, what we talked about is staking. So say you don't want to sell your shares, right? Say this token is returning you 22% annually in IRR. If you can go and stake those tokens, it's called staking and you borrow against it with a 9% or 10% interest. Even if it's an 11% interest, you're making 22% by being the equity owner of these tokens by being the owner of these tokens, and then you're essentially borrowing money against those tokens at 11%. That's an 11% delta. You know what I'm saying. You're still making money, and so I don't think interest rates will be that high.

Speaker 2: 11:07

But the point is, if you needed access quickly to your money, you don't actually have to even sell them to get access to that. You can take your token, stake them. Somebody's going to hold them as security via a smart contract, so, again, it's trustless, and then you would pay them back at the interest rate that you two agree on, and so I think it's absolutely fascinating when you think about all these things coming together, and really the only thing working against it is stigmatism. They're still a stigmatism when it comes to cryptocurrencies, blockchains and tokens, and now that's changing. Bitcoin at the time of this recording, has broken past 42,000. A year ago it was at 16,000.

Speaker 2: 11:47

That's how we've covered the breaks in our fund, and the problem that's happening is, when people hear blockchain or crypto, they automatically think somebody like Sam Brinkman, friedman and FTX how they can create all these Ponzi schemes and essentially use fraudulent activities to swindle people from their money. And is that possible? Of course it's possible. Bernie Madoff used US dollars to swindle billions of dollars. They're always going to be bad actors, but nobody has said oh, bernie Madoff, has Bernie Madoff used US dollars to create a Ponzi scheme? So I'm not going to use dollars. Of course not.

Speaker 2: 12:27

What happens is you have regulation to address that. Now, regulation can definitely overextend, but it also serves a purpose, which I personally found that out by being an investor in Celsius and BlockFi and losing those investments. I realized, hey, you know what A little bit of regulation is good, and so that's what's happening right now is regulation is entering the market, and so this is not a fly under cover by the cover of night to keep everything hidden. No, this is just new technology that allows people to do transactions like trustless transactions that are seamless and significantly discounted costs or less costs at a fraction of the time. So how could that technology not win once we get past this negative segmentism and you don't really have to think about token as crypto per se.

Speaker 2: 13:18

Now, if we want to get technical, what a token actually developed? The same way that a cryptocurrency is developed, but here's the main difference A token represents a share of a real world asset Crypto. You're relying on that crypto to have intrinsic value. So Bitcoin, that has intrinsic value in the coin itself, dogecoin, ethereum, all these kinds of things, and you can even argue whether or not you think they have value. Even if the value of those go to zero, you could. It doesn't matter, for a tokenized real world asset. A tokenized real world asset is valued based on the price value of that real world asset, and you have based on that real world asset and you have a percentage of that based on your fund, and so that's why it's just really saddening right now. There's so many different things that are happening.

Speaker 2: 14:07

As the stigma kind of goes away, I think we're gonna really start to see this take off, and so our plan is to, absolutely, as it stands right now, tokenize as many assets as we can Tokenize our assets, tokenize our real estate, tokenize our fund. It might not happen all overnight, and one of the things that we're exploring right now is just okay, if we launch our fund, can we tokenize part of that fund? Can we tokenize 50% or 70% or 25%? And what I found to say is the answer is yes, and we are planning on doing that, moving forward, just because we do think that the, ultimately, the investors win, and not only do the first run of investors, the accredited investors, win, but the not accredited investors win, and so I think it's just creating a more equitable world and equitable playground for everybody who's involved. And so we can go on and on and talking about this, but in a nutshell, I hope that explains tokenization. Just think of a token as a digital asset or a share that represents a small percentage of a real world asset.

Speaker 2: 15:09

And it's exciting hope that helps.

Speaker 3: 15:13

If you need help finding the perfect location for your practice or you're ready to invest in commercial real estate, email us podcast at leadersreecom. That's podcast at leadersree, reasinrealestatecom. Or go to leadersreecom and fill out our form. See you next time.