Crypto Real Estate: Full Or Fractional Ownership?

March 18, 2022March 18, 2022

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Cryptocurrency continues to gain popularity as an investment vehicle, as well as a means of payment for goods and services. Naturally, the concept of using crypto to purchase a home has recently come to life. Let’s dive into crypto real estate ownership.

Using Crypto to Buy a Home (Full Ownership) : Everything You Need to Know

Not all lenders have the same rules when a borrower uses crypto as a down payment. Here’s what you need to know:

Fannie Mae and Freddie Mac’s current cryptocurrency guidelines

As of 2021, Fannie Mae and Freddie Mac allow the use of crypto when specific guidelines have been met:

Crypto assets must be liquidated and transferred to an eligible asset account, such as a checking account. The funds must remain within the account for at least two months.
It must be confirmed that cryptocurrency purchases were made using eligible funds that can be documented through a purchase trail.
All bank and investment account statements are required to show (1) when the crypto was initially purchased, (2) crypto balances throughout the ownership period, (3) the value of crypto at the time of liquidation, and (4) proof that the funds derived from liquidation were deposited into a checking account.

In December 2021, Freddie Mac released Bulletin 2021-36 to address the use of cryptocurrency. The Bulletin reads that income paid to the borrower in cryptocurrency may not be used to qualify for a mortgage. Cryptocurrency may not be included in the calculation of a borrower’s assets, and monthly payments on debts secured by cryptocurrency must be included in the borrower’s debt-to-income ratio. Cryptocurrency must be converted to dollars if funds are required to be paid at closing, or for reserves.

Non-Agency Lender guidelines can fluctuate as much as cryptocurrency itself

Crypto guidelines and eligibility will vary between lenders. For many mortgage lenders, the current consensus is to avoid crypto when possible. However, this doesn’t mean that using crypto is completely off the table.

Borrowers could also encounter the following scenarios:

Accounts, where any crypto transactions have been recorded, are prohibited.
The use of crypto is prohibited, but accounts, where transactions have been recorded, are allowed. Crypto funds are ‘backed out’ and not used in any way towards the home purchase.
Some jumbo investors may allow crypto funds to be used directly. However, higher rates should be expected and documentation requirements are strict.

As a general rule of thumb, banks require a 2-3 month history of your assets. If you plan to liquidate your cryptocurrency within this timeframe to purchase a home, keep in mind that you will need documentation of the money that was used to initially purchase the cryptocurrency.

It’s important for borrowers to stay informed on how crypto assets and liquidations effect mortgage qualifications. Guidelines can and will change. Much like how the treatment of restricted stock units has changed, borrowers should expect to see guidelines surrounding cryptocurrency evolve as well.

If you plan on using crypto for a down payment, speak to your lender for confirmation on their specific guidelines.

Now let’s switch the gear to crypto real estate fractional ownership!

Fractional Real Estate Investing With Crypto

Securitization means taking something that is a stream of income and turning it into a cryptocurrency that distributes out the stream as dividends and goes up and down in value based on how much money people think that stream will make.

For instance, a musician’s royalties. Here’s roughly how it would work. Let’s say Kanye West takes the earnings of his next album and has the money go to a cryptocurrency he starts rather than to him.

He can call the currency YeCoin. $YE, for short. Let’s say he lets people buy up to 20% of $YE. People will pay based on what they think 20% of the ongoing royalties of his album will be.

They can then trade their share of his royalties on any DeFi platform. If his album is used in a top box office movie five years from now then $YE would go up in value. And each year, 20% of his royalties will get distributed to holders of $YE (and I assume, in this example, he keeps 80% of $YE at the beginning).

Why would he do this? To get some money upfront from sales of his album. He can do it because everyone knows his next album will have some value greater than $0.”

In December last year, total securitization of assets on the blockchain was just under $920 million.

In the past 8 weeks alone, that number has quadrupled to surpass $4.1bn.

Although this may seem like a lot, it’s actually just the tip of the iceberg.

In conversations with experts who works in this industry, clients are lining up around the block to evaluate securitizing assets ranging from music royalties, to real estate, boats, and yes, even private jets.

These assets, when securitized on a blockchain, are known as ‘security tokens’ which trade similarly to cryptocurrencies.

To put the size of the opportunity into perspective – according to a report from consulting firm Bain & Company in 2019, approximately $10 Trillion in real estate trade on public stock markets globally. This is just a tiny fraction of the more than $310 Trillion in total real estate assets owned globally.

Now most of the growth we saw in security tokens in the past 8 weeks took place on just one exchange – CryptoSX Exchange.

This exchange went from a market cap of roughly $83 million at the beginning of January to more than $3.2bn in market cap by February with the launch of a new asset called DIGau.

DIGau is a security token backed by unmined gold deposits in Arizona and Nevada. The security token behaves similar to a stock in a high-risk gold mining company.

However, security tokens have a few benefits over traditional equities investments.

For one, the process of using a blockchain to transfer ownership from a buyer to a seller eliminates unnecessary middlemen which reduces cost and risk.

In a typical stock exchange, a brokerage will act on behalf of its client as the registered owner of shares in a company.

But that’s not the end of the story.

Brokerages actually deposit those shares with an institution that tracks which brokerages own which shares. Although its invisible to the investor, when you buy a stock, it can actually take 2 days for all the paperwork to be completed and shares to change hands. This adds major cost and unnecessary work to a transaction that blockchain can accomplish in a matter of seconds.

Because of all the players involved and complex regulation, issuing tradable stock to the public was previously only available to companies of a certain size.

However security tokens are changing that as well.

Of the more than 220 security tokens now trading online, more than 180 of them are individual pieces of real estate.

These range from big commercial size pieces of property, like the St. Regis hotel in Aspen, Colorado (current market cap of nearly $20 million)…

Down to small residential properties like 1389 Bird Ave, in Detroit Michigan (current market cap of $876k)…

By using the security token model, real estate owners can get quick cash by selling a portion of their investment portfolio. This allows the original owner to maintain a stake (and control) of an investment they like while also freeing up cash for other investments.

Real estate is not the only securitized asset you can buy

Other interesting assets include fractional investments in VC funds, investments in bitcoin mining capacity, and the HCS Whisky fund which allows investors to invest in a barrel of single malt aged whisky.

Now, before you take out your wallets, a word of caution about security tokens.

Despite the monster market size, only $11.3 million of security tokens actually traded in February.

What this means is that, for the most part, the security token market is highly illiquid.

Fracruional ownershipo, a good and bad thing

First, it’s a good thing because you might be able to get an amazing deal on an investment. For example, let’s say an investor in HCS is going through a nasty divorce and desperately needs cash. Well, because HCS is illiquid, he might not be able to find a buyer willing to buy from him at a reasonable price. Every so often, we’ll see the price of a security token drop dramatically as some unfortunate investor is willing to accept whatever he can get for his investment.

In Summary, this cuts both ways

As an investor in an illiquid security, you might find that when it comes time to sell, you might not be able to find a buyer willing to pay a reasonable price.

An investment in a security token such as HCS might appreciate in value over time, but you might not necessarily be able to get your money back. The reason for this is that even though it’s worth more, you might not be able to find a willing buyer to buy it from you at a fair price.

For now, there aren’t any security token investments I’m especially excited about. Given the illiquidity of these markets, it’s better to be a lot more cautious about the types of investments I would make in security tokens simply because it might be a very long time before I can sell them. However, Expectation is that as more assets become available for trading, liquidity could grow for some of the bigger investment opportunities. I plan to keep watching this market and give updates as I see investment opportunities that look appealing.

Disclaimer: The information provided on this page does not constitute investment advice, financial advice, trading advice, or any other sort of advice and it should not be treated as such. This content is the opinion of a third party and this site does not recommend that any specific cryptocurrency should be bought, sold, or held, or that any crypto investment should be made. The Crypto market is high risk, with high-risk and unproven projects. Readers should do their own research and consult a professional financial advisor before making any investment decisions.