Demystifying the Myth: Is Fractional Ownership of Real Estate Risky?Published by
As inflation rates in different jurisdictions across the globe do not seem to slow down, institutional and retail investors alike started to look for more sustainable asset classes to safeguard their investments against inflation. Investment in scarce assets like real estate is one of the reliable strategies shared by many in today's market.
However, not all investors are able to invest in this asset class due to a higher barrier of entry or lack of capital. As a result, the ever-growing technology, ie: fractionalized real estate via asset tokenization might be an appeal to retail or ordinary investors.
When it comes to fractionalized property ownership, investors may start to wonder what are the associated risks with it since it is an emerging technology. Interestingly, the advent of fractionalized property ownership does not create more risk for investors but instead provided innovative solutions to help real estate investors better manage their risks. How can it be done? We will unpack it for you in this article.
Mitigate the Risk of Defaulting on Loan
When it comes to purchasing a property, retail investors or home buyers may need to fork out a considerable amount of capital at the outset. Due to this, the retail investors or middle class have a difficult time finding real estate as a viable investment option because of the high level of commitment required. As a result, the space of real estate investment is often saturated with only institutional investors or high-net-worth investors.
In addition, we also see there is an increased likelihood of retail investors defaulting on property loans due to the imminent rising interest of central banks across the globe. This is because most retail investors are still regaining pace from the strike of the pandemic. The hike in interest rates will result in higher financing obligations being added upon retail investors, which result in a double-whammy for them. This is especially true for investors who own multiple properties, the increase in property loans may result in investors defaulting on property loans.
Tokenization of real estate allows the ownership of a particular property to be converted into multiple digital tokens each of these tokens represents a share of the property. Investors can opt to purchase these digital tokens depending on their respective affordability and immediately become a shareholder of the property. In other words, investors can completely do away with the route of securing a property loan in order to become property owners.
As a result, fractionalized property ownership removes the leverage needed by investors to own a property. Although some may argue that leverage is an effective tool for capital expansion, nevertheless it can be a risky double edge sword if it is not being utilized with the appropriate knowledge, particularly for younger investors. In turn, this led to safer property investment by eliminating the loan obligation of an investor and the risk of retail investors defaulting on property loans is non-existent.
Reduce the Risk of Loss
It's difficult for retail investors who have considerably lesser access to information to know where to invest and where not to. Therefore, investing in a real estate asset can be risky. To reduce the likelihood of loss, tokenized real estate assets on the blockchain provided by fractionalized property platforms allow for partial ownership of a property.
Fractional ownership is improving democracy in real estate investing since it distributes responsibility and risks for an asset's well-being among all the participating investors.
This is especially true when retail investors who have relatively lower capital would be expected to have a concentrated portfolio and would be exposed to higher risk if the sector or area is not performing well. Thanks to the innovation of fractional ownership, this allows investors of all tiers to easier in diversifying their investment portfolio due to the lower capital required to own different properties. As a result, this allows them to enjoy a diversified tenants portfolio, mixing properties with proven yield-bearing records as well as mixing in some high potential upcoming new areas that they might be interested in taking a risk on.
For instance, most of the high-end properties like Pavilion Suites are out of reach for regular investors but they would be given the opportunity to buy into affluent areas even though their capital is limited in the case of fractionalized ownership.
For instance, commercial properties are not viable investment choices among retail investors prior to the intervention of fractionalized property ownership due to their significantly higher cost of entry. With the disruptive fractionalized property ownership structure being introduced by asset tokenization, the opportunities to invest in commercial properties are now readily accessible to retail investors and also help to mitigate their risks in doing so.
The risks that retail investors face when purchasing fractional ownership of a commercial property, such as privately owned hotel or clubhouse are directly proportional to their investment's ownership structure. In the event that the business fails or performs poorly, fractional ownership of the particular real estate will restrict the scope of the risks. As such, having fractional ownership in a property gives investors the ability to recoup some of their investment in the event of a downturn in business.
By utilizing asset tokenization and blockchain technology, a property may be instantly and inexpensively transferred to new owners if there are unfavorable circumstances arise. Investors may also build their portfolios and be given access to the global real estate market.
Reduced Risk of Fraud or Human-made Mistakes
By removing the possibility of data tampering or manipulation, the blockchain technology helps to decrease the risk for all parties involved. Thanks to the immutability nature of blockchain technology, the ownership information and also any involved transactional data in relation to a particular real estate once recorded on the blockchain, are unable to be altered by any potential fraudster.
As such, investments by utilizing asset tokenization not only facilitate the process of buying and disposal, but also acts as a secured method of investing.
In addition, fractionalized real estate that leverages blockchain technology may be used to sell properties, handle payments, and aid with legal documents by employing smart contract technologies. As a long-term benefit, buyers and sellers save money by avoiding the need for intermediaries to negotiate and handle real estate deals and also prevent any human-made mistakes from occurring.
In a nutshell, the technology of fractionalized property ownership does not only provide any additional risks to real estate investors but in turn, helped in solving the underlying risks faced by investors in today’s world. Gaining a foothold in the global real estate industry has never been easier by utilizing fractionalized property ownership structure.
Without a doubt, tokenized real estate is a viable class of assets with significant economic potential, but it needs a careful implementation strategy. To properly profit from the minimal risk real estate tokens have, investors should take it one step at a time, undergo comprehensive due diligence, and handle their investment appropriately.
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