Becoming the Landlord of the Future

Digital real estate is much more than just a new mechanism for owning an asset — it’s democratizing access to Landlordship.

The concept of ‘Landlordship’ goes back to ancient feudalism.

Broadly defined, feudalism is a way of structuring society around the ownership of land in exchange for service or labour.

Feudalism was the first social organizational structure to emerge. Before there was feudalism, hunter-gatherers roamed stretches of land in order to follow food, never settling down in a single location. ‘Real estate’ did not exist.

Then some humans discovered they could grow their food, rather than hunt their food, kicking off the agricultural revolution. Hunter-gatherer nomads traded in their bows and spears for scythes and plows. Sustenance (and therefore survival) became fixed to a single geographical location, forcing people to establish permanent dwellings. Real estate begins here.

Humans, now locked into one single geographical location, had the motivation and time to develop their living environment. Structures were built in order to establish permanent shelter from the forces of nature. Agriculture enabled a plentiful supply of new food, which enabled local populations to explode and the first towns and cities to be established.

The development of agriculture and the growth of cities came with a Faustian bargain: leaving the ‘the tribe’ behind and turning towards large populations in large cities created a commitment to inequality.

Farming and agriculture produce surpluses, and surpluses = wealth. The food produced by farming can be stored for long amounts of time, which is necessary for feeding populations outside of the harvest season. Additionally, some farmers are simply more skilled, harder-working, or have better tools, and produce food (wealth) at higher rates. Not only are food surpluses necessary for agricultural societies to survive, they also become highly desirable to control. In fact, recent research shows that ancient societies that had greater food surpluses tended to have higher levels of inequality.

Not all real estate is equal. Along with unequal amounts of production came unequal quality of housing. The commitment to stay in one place brought the time and motivation for building and improving the places where people lived. Shelters turned into structures, and structures turned into houses. Likewise, different skills, abilities, tools, and dedication made some places to live more desirable than others. The wealthy and the productive would be able to access the best places to live. This was the birth of real estate.

Real Estate is the World’s Greatest Capital Asset

A capital asset is an asset that is productive. These assets produce some ongoing source of value for their owner. They generate cash flow.

Feudalism is the economic system of allowing workers or laborers access to land, and landowners charging a percentage of the workers’ labor for this access.

In modern times, we call this Rent.

Those who own land are able to rent it out to those that want it, and the owners are able to collect revenue simply based on their ownership. This fact, along with the scarcity of productive, valuable land itself, is why real estate valuations represent 30% of the world’s total value.

Illustration of this principle: Forget Burgers, McDonald’s is a Real Estate Company.

The Real Estate Thesis: “The Land Will Pay for Itself”

Owning real estate grants the owner rights to the cash flow it produces. This means that the costs of owning real estate are (generally) negative. Real estate pays you to own it. If you can afford the purchase price of the asset, it’s downhill from there! With this perspective, it seems plainly obvious why real estate has generated a global $275 trillion valuation.

The Land-Owner/Laborer Conflict

Owning real estate is owning something that other people pay to use. While real estate isn’t the only thing that people pay to use (cars, airplanes, machinery, etc., are all things in industry that also produce cash flow), real estate is different. Human beings take up physical space. If you live in the world, you must take up space to do so. The real estate industry is all about who owns the space that people need. Whether it’s shelter for sleeping in, farmland to produce crops, or office space to work on your company, people need space, and landowners have it.

This means that landowners are able to charge fees for people to live. People are basically forced into paying these fees. Urban areas have almost exclusively become the center for opportunity and wealth, and so the demand there for space to live and work is high. People could not simply move elsewhere, to land that no one owns, because there are no job opportunities elsewhere. Job opportunities, cities, and real estate are all intertwined.

This makes the land-owner/laborer class distinction more salient. Viewed through this lens, it does not appear that we as a civilization have progressed much beyond the feudal ages, where landowners were able to take a share of the crops harvested by peasants simply because they owned the land. The average rent in the United States accounts for 30% of an individual’s take-home pay. Millennials have it worse, at 45%. If you live in New York, the average is a whopping 60% paid to landowners.

Millennials are the newest generation to enter the “home-ownership” years from 22 to 37. This is the time when previous generations would be purchasing homes and taking part in land-owning. Millennials are significantly behind schedule and, surprise, it’s because the price-tags on real estate are too high.

The median home price in the U.S. is $200,000. With the average mortgage being 4.5%, a buyer can expect to pay $164,800 in total interest. If you are purchasing a house with a mortgage, you are buying a place to live more than you are making a financial investment. When the buyer picked their house, they evaluated it based on how much they liked it, not based on the financial soundness of the investment. While being able to live in a purchased home is invaluable, as an investment opportunity it makes no sense. They are technically landowners, but they still do not get to enjoy the fruits of someone else’s labor.

RealT: Democratizing Access to Landlordship

So far, we’ve illustrated:

Why real estate is so valuable

How it stratifies society into two tiers

The burden it creates on the generations that never had the opportunity

The most significant factor that makes and keeps these things true is the prohibitively high price of real estate assets. Table-stakes for real estate are orders of magnitude greater than the average person will ever save up in today’s economy. In order to reduce the barrier to entry to participation in real estate ownership, and blur the lines between land-owner and laborer, access to real estate must be made cheaper.

Here’s how RealT does it:

Step 1: Fractionalize the Asset

In order for an individual to be able to directly own real estate, it must be priced at a level comparable to company shares in the stock market. Between $50 and $250 is ideal. This makes investment into real estate much less of a life-altering commitment, and much more of a habitual “put your change in the piggy-bank” activity.

Even when real estate asset prices are hundreds of thousands to millions of dollars, there is a huge difference between $0 of investment and $50–$250 of investment. This is especially true when low investment minimums allow people to the ability to make regular additions to their portfolios, and their portfolios begin to compound.

With RealT, properties are fractionalized into shares. Each property is divided into a number of shares that make each share valued at roughly $50–$250 in order to keep real estate affordable for everyone. RealT is able to do this by representing ownership of the property as digital tokens on the Ethereum blockchain. Learn more about this process here.

Step 2: Make it Globally Accessible

Real estate properties are, by definition, a stationary piece of land. Blockchains, also by definition, are intangible pieces of software that exist ubiquitously across the globe. These two things could not be more opposite of each-other.

And that’s why they are so complimentary. Blockchains can make any real estate property accessible to anyone with an internet connection. Reducing the costs of the asset in step 1 is important, but equally important is enabling world-wide participation. With a blockchain, you can fractionalize the asset into affordable units, and then disperse these units across the globe, so that everyone can gain access to real estate investments.

Step 3: Pay Out Rent

Real estate pays you to own it. REITs, real estate hedge funds, and other real estate exposure instruments are great, but none of them put cash in your pocket. The benefit of owning real estate is that you get to add another source of income on top of your pre-existing one.

“Save money by skipping that $4 latte” has become a meme. In this author’s opinion, it’s a meme that also says “stop enjoying life to save money.” A much better alternative is to “save money in order to purchase assets that produce $4 a day, so that daily latte is free.”

The income from real estate makes the cost of living cheaper, as the owner has increased financial bandwidth to afford the world they live in. Once rental payments are made accessible to the average individual, these people can enjoy the same financial security and freedom previously only available to the land-owning elite.