Fractional investing has been around for years, but the idea never truly took off until the early 1990s. Today, this investing method can be used to partly own and profit from various assets such as sports cars, jets, wine collections, and, most commonly, commercial and residential real estate.
Simply, as the value of the asset changes, so does the value of the shares. In this article, we'll dive into what fractional investing is, how it works and the new age of fractional investing powered by the blockchain, otherwise known as tokenized investing.
The attraction of fractionalized investing is that it can provide investors with customized exposure to physical real estate, something that those with lower investment risk tolerances can benefit from as you don't require large sums of cash to buy a property outright.
You can simply purchase a fraction of the property and benefit from rental income as well as get exposure to any changes in the value of the asset, which would be in proportion to your initial investment.
For example, suppose you wanted to gain exposure to a commercial office building without paying many millions of dollars and owning the building completely. In that case, you can pay a significantly lower amount for a smaller share of the equity and rental profit with a pool of investors instead of being the sole investor/owner.
This way, given your capital can be at risk in one property, you can spread your risk more evenly across multiple properties, and this way you have greater control over your investment portfolio compared to traditional real estate methods.
The most common way investors can gain exposure to income-producing fractionalized property is via a real estate investment trust.
However, these REITs take control away from the investor, and who likes handing their money over with minimal input on where it's invested? No one, exactly!
So if fractionalized investing is such an amazing thing, why do we have tokenized investing? Is it necessary?
Fractional investing, as we mentioned, is not a new real estate investing method, and the world has moved on a lot since the 1990s when it first became popular.
Let's dive into tokenized investing, an alternative to traditional fractionalized property investing.
When you tokenize ownership of a property, you take the fractional shares and mint them into tokens on a blockchain.
You're probably wondering, what actually is the benefit of this? Tokenized investing offers all the benefits of fractionalized investing but with smaller minimum investments, lower transaction costs, and greater transparency. Depending on the platform and their individual offers, property tokens can also be traded on secondary marketplaces.
Tokenization also provides market access to people currently priced out of real estate investing; tokenization makes property investing more affordable than standard property investing.
Depending on the platform you invest with, rental payments of tokenized property investments can be sent daily or weekly rather than monthly payments. The payment of rent is usually made in stablecoins, Fiat, or the platform's native token.
Considering the increase in popularity of tokenized investing, one problem that many investment platforms face is feeding the demand of investors.
There are three major benefits to tokenized investing. More affordable investment opportunities, potential passive income, and the ability to sell the token of the property you’ve invested on a secondary market.
In terms of owning equity in the property, this can be done in the traditional fractionalized method.
But tokenization is your way to go if you want a quicker, cheaper, and more efficient investing experience, all of which stems from reducing transaction settlement times which are provided by the underlying blockchain technology. Let's explore these benefits further.
The main benefit of fractional investing is that the investment minimums are much lower than buying a property outright. But, because of the removal of many bureaucratic channels, tokenized investing is much cheaper, thanks to blockchain technology.
Compared to traditional investing, tokenized investing provides the investor with more ways to customise their investment amount, rather than investing millions to own a property, you can invest a smaller amount to gain exposure to the fluctuations in value of that asset. Although, the platform you use might have its own minimum investment requirements, meaning it’s not completely customizable.
When you purchase a property and are the sole owner, you have to refurbish, manage the property, find tenants and do other time-consuming admin tasks. It's not as passive as most people think.
Property owners can give up to 15% of their monthly rental income to property managers to carry out these tasks. Tokenized investing allows investors to gain the same upside without stressing about managing their portfolio or parting ways with 15% of their profits. Of course, depending on the platform you use, there will be fees involved, this is dependent on each platform's fee structure.
For many traditional real estate investors, it can be an expensive and tedious process to sell a property, the greatest benefit of tokenized real estate investing is that you can decide to sell your stake in the asset on a secondary market, removing months of back and forth with intermediaries, which would cost you a pretty penny in fees.
At the moment there is not a huge amount of tokenized real estate investment opportunities out there. There is a significant amount of work involved in the tokenization of real estate assets and the investment platforms need to have the ability to partner with businesses or individuals with large portfolios of real estate.
And tokenized property investing is becoming more popular as the world hears more about blockchain technology, Web3, and DeFi.
Hedgehog is an app that helps eligible individuals invest in the world around us; gaining exposure to real asset investments from real estate to renewable energy. Our in-house team has investment expertise gathered at the likes of Goldman Sachs, Partners Group and HSBC as well as product and engineering expertise honed at Monzo, Revolut and IBM, which has enabled us to build an application that offers the kind of user experience we believe today’s modern consumer demands. Learn more about Hedgehog.
Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.