When delving into the world of tokenized real estate, understanding the structure of tokenization and the quality of the underlying assets is crucial. This guide provides a framework to help you evaluate the viability and potential of tokenized real estate investments, starting with the importance of the tokenization structure, location, and asset class.
Understanding Tokenization Structure
Before evaluating the potential of any tokenized real estate investment, it’s important to grasp the specifics of the tokenization structure – basically, “what are you buying?” This involves understanding how the real estate assets are digitized into tokens on the blockchain, including the legal and regulatory elements. Key aspects include:
- Source of Return and Ownership Rights: Ensure that the tokens are backed by real world assets and not counterparties making derivative index investments. When the return is from real estate, you can be more confident that the return is real and the results will be driven from the real estate market. When the return is index derivative based, your return is your counterparty’s loss – and you can’t be sure they will pay. Nor for that matter, can you trust the index provider.
- Liquidity and Token Structure: The type of vehicle tokenized matters. Tokenized individual properties have been shown to have far less liquidity than funds. Funds with whitelist rules have almost as little liquidity. Only permissionless funds (similar to USDC and USDY) have been shown to sustainably draw liquidity.
- Blockchain Technology: Familiarize yourself with the blockchain platform used for tokenization. It should offer transparency, security, and immutability to prevent fraud and ensure that all transactions are recorded accurately.
Villcaso has chosen to tokenize a fund of US real estate. By using a fund of actual real estate, Villcaso ensures that there are real returns to create value for its tokens. Villcaso has also chosen to be a permissionless fund so that it can create the conditions for high levels of liquidity.
Choosing the Right Market: Focus on the US
Once you are comfortable with the tokenization structure, the next step is selecting the right market for investment. The United States offers a robust real estate market with several benefits for tokenized investments:
- Economic Stability: The US has a large and stable economy, which supports strong real estate demand and helps in maintaining property values.
- National Defense: The US is surrounded by water and friendly neighbors; it also has the most powerful military in the world. Other countries cannot say the same. Real estate investors who are too close to Russia or in certain countries in the Middle East and Israel may wish their investments were better protected.
- Legal Protections: The US legal system provides comprehensive protections for property owners and investors, which is crucial for tokenized real estate where legal clarity is essential.
- Currency Strength: Investing in a market with a strong and stable currency, like the US dollar, reduces currency risk, particularly important in the volatile realm of digital assets. While inflation impacts all currencies, the US dollar is the global standard. As a bonus, because US real estate is priced in US dollars, US real estate prices are inflation resistant and often offer returns above inflation.
Villcaso only invests in US real estate. The US real estate market has held up remarkably well during the recent Fed Hiking cycle. In particular, the Chinese, Korean, and many of the Nordic country housing markets have suffered significantly.
Evaluating Asset Classes
With a solid understanding of tokenization and a focus on the US market, the next step is to assess classes of tokenized real estate opportunities. Considerations should include:
- Underlying Asset: Single family rental properties, multifamily assets, and offices all are different. Mortgages, development loans, and home equity investments are also all different. The choice of underlying asset will determine a number of factors including management needs, investable locations and geographies, and return profile.
- Asset Management Risk: Owning real estate assets used for rentals requires investors hire managers to operate the rental businesses. This can be a return drag, especially during periods of inflation during which managers may fail to successful manage rising costs. Compare rental management to the management of debt and mortgages, which are often self-liquidating, meaning limited if any activity is required by investors or managers to receive a return.
- Location: While most types of real estate exist everywhere in the US, some areas are not investable for some asset classes. For example, many single family rental properties are not cash-flowing investments in expensive parts of the US. Therefore investors using rental properties get locked out of wealth, high appreciation areas and are forced to earn most of their value from rental cash flows which come with tax consequences.
- Expected Returns and Taxes: All asset classes have different return profiles. Investors should seek assets with the highest risk adjusted returns. Taxes also come into play as rental returns are taxed at higher rates than returns from capital appreciation.
Villcaso takes a different approach to US real estate than all other real estate tokenization groups. Villcaso buys home equity investments (HEIs). These assets are self-liquidating – so no expensive management, available in the highest price appreciating neighborhoods, and have expected portfolio returns in the mid-teens.
Conclusion
By placing a strong emphasis on the structure of tokenization, understanding the benefits of the US market, and thoroughly evaluating the properties involved, investors can effectively navigate the complexities of tokenized real estate. This approach ensures that investments are not only secure but also positioned for potential growth and sustainable returns. Villcaso has created a tokenized fund of real estate with real returns, primed to capture value from that long-term home price growth within the US housing market, in a tax-efficient, liquid manner.
THIS IS NOT AN OFFER TO SELL SECURITIES. Information contained in this post is not an offer to sell securities or the solicitation of an offer to buy securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.
