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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

February 15, 2023 05:00 pm

Graphic by Crystal Le

share



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 


FHA LOAN

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.  


EQUITY PARTNERSHIPS

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.


HOUSE HACKING

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

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

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

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.


METAVERSE LAND 

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. 


FRACTIONAL OWNERSHIP 

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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