New Crypto Real Estate Grift To Beware Of

Q: I recently read an article about buying blockchain-listed slices of properties.  Do you think that’s a good idea? Patrick, South Orange, NJ

A: People are now investing in real estate by purchasing digital tokens representing fractional ownership. The interest in buying slices of properties in this way for individual investors is obvious-it’s more convenient than buying real estate the traditional way. Real estate has become very expensive in many places and this, at least in theory, is a way for smaller, independent investors to own a slice of a property for less money than buying properties outright. The benefit to builders, developers and hoteliers is that it allows them to recapitalize faster the way they did with condo-hotels and time shares. Similarly, many venture capitalists like crypto because the financial model offers them payouts potentially faster than a buyout or public stock offering would in the past.

There are a host of risks and problems associated with buying blockchain-listed ‘slices’ of properties. One big problem in this new market is liquidity and the lack of secondary buyers. This raises the risk of getting stuck with an investment, or selling at a loss and it makes it very difficult to value or price an investment. Another big issue is what a partial or fractional owner can do if and when a tenant stops paying their rent—does the fractional or partial owner have the authority to evict a non-paying tenant?

Proponents of and apologists for cryptocurrencies often use the blockchain technology that underlies cryptocurrencies (which obviously has utility like any technology), as justification for ignoring the obvious problems with crypto. As legendary Berkshire Hathaway vice chairman, Charlie Munger once said, “if you mix raisins with turds, they’re still turds.”

Cryptocurrencies have no intrinsic value, offer little to no transparency, and anyone can issue, operate or manage them. Also, their price is often driven by rumors on social media so price manipulation & fake trading are rampant.

I am a real estate investor. I’m not a speculator, I’m not a trader or a gambler—if I was a speculator, trader or gambler, my answer to your question and my take on this troubling new market niche might be different. If you are a speculator or gambler, you can potentially make money in the short term by gambling on any volatile asset.

Is the tokenization of real estate a flash in the pan or a sustainable way to invest safely in real estate? I’m skeptical that it’s a safe, sustainable way to invest in real estate. Thanks for your question, Patrick.

For more real estate tips and information visit my blog at geraldlucas.com.