Direct Ownership vs. Indirect Ownership
What You Really Own
When you buy a share in a REIT, you’re investing in a company that holds different properties. You do not own a specific building or portion of any property; your investment is tied to the performance of the entire portfolio managed by the REIT’s management team—very similar to investing in a company’s stock. This model offers broad diversification but comes with certain drawbacks.
In contrast, tokenized real estate gives you direct ownership of a particular property or group of properties. Each token represents a share, or a fraction of the actual asset. The fact that this ownership is digital is why we call it a token. When you own tokens, you have a clear and transparent claim on a well-defined piece of real estate. Investors can see exactly which property their tokens represent and track its performance in real time. For example, if you are passionate about a high-quality commercial property in a booming urban center, tokenization allows you to invest directly in that asset rather than in a company with a broadly managed portfolio.
Learn more about the basics of REITs on Investopedia, which offers a clear explanation of how REITs operate and the limitations of indirect ownership.
Transparency and Intimacy
One of the biggest advantages of tokenized real estate is the transparency it offers. Blockchain technology records all transactions on an immutable, tamper-resistant ledger, so every investor can view detailed financial and operational data for the specific asset. With REITs, you typically rely on periodic reports and aggregated data that may obscure the performance of individual properties.
This transparency means that tokenized investments are more intimate and directly tied to the asset’s performance. Investors can monitor occupancy rates, rental income, expenses, and market value of a specific real estate asset. This level of detail builds trust and allows investors to make informed decisions—a crucial factor for institutional investors seeking maximum clarity.
Control and Diversification: Tailor Your Investment Strategy
Limited Choices in REITs
REITs are designed to offer exposure to real estate by investing in a range of properties. While this type of diversification can reduce risk, it also limits your control over the investment. A REIT’s management team decides which properties to acquire, manage, and sell. If their strategy does not align with your investment goals, that’s just the way it is—you have no real choice other than selling your shares. Moreover, if you want to build a portfolio that focuses on specific sectors or regions, you might need to invest significant capital into different REITs to gain such tailored exposure.
Granular Control with Tokenized Real Estate
Tokenized real estate, on the other hand, offers investors the ability to hand-pick specific properties that align with their personal investment strategies or that they are excited about. Instead of investing in a broad, one-size-fits-all portfolio, you can select assets that meet your criteria—whether it’s apartment buildings in emerging markets, luxury residential properties in destination locations, or unique legacy properties.
This granular control allows you to design a portfolio that reflects your risk tolerance, sector preferences, and geographic interests. It also allows you to fine-tune your investment strategy based on where you are in your investment life cycle. For example, if you are late in your investment cycle, you may want to consider established assets that kick off a strong cash flow. If you are in more of a growth phase, you may consider development or redevelopment projects. High-income earners can invest heavily in real estate projects with accelerated depreciation to potentially offset other income sources or the income from the real estate project they invested in! Furthermore, tokenization typically comes with a lower entry barrier than many traditional real estate investments. With fractional ownership, you don’t need a large sum of money to participate. Even modest investments can give you exposure to high-quality properties that might otherwise be out of reach.
For additional insights into how fractional ownership can transform portfolio diversification, consider downloading our Quick Start Guide to Tokenization for more information.
The Tax Advantage: A Key Driver of Superiority
The Tax Structure of REITs
REITs enjoy a special tax status in the United States. They are required to distribute at least 90% of their taxable income as dividends, which allows them to avoid corporate income tax. However, these dividends are taxed as ordinary income for investors. For those in higher tax brackets, this can significantly reduce the net return on investment. Additionally, REIT investors do not receive tax benefits from property depreciation or pass-through losses because these benefits are retained at the corporate level.
Tax Benefits of Tokenized Real Estate
Tokenized real estate is typically structured through partnerships or limited liability companies (LLCs), which means that income, losses, and depreciation pass directly through to the investors. In fact, it is these entities that we tokenize to create the real estate tokens.
- Depreciation Deductions:
For tax purposes, the IRS depreciates real estate over specific time frames. For example, residential real estate is depreciated over 27 ½ years. With tokenized ownership, you get to claim a portion of that depreciation. This deduction can offset rental income, reducing your taxable income and boosting overall returns. Many real estate investment strategies include accelerating the depreciation through different methods like cost segregation. This can make your taxable income significantly lower than the income you actually received. - Pass-Through Losses:
In some projects, like redevelopment, repositioning, use change, and value add, there may be years early in the investment when a property incurs losses on paper—due to expenses or even market downturns—that pass directly through to the token holders. Even though the losses are not realized, investors can use these losses to offset other taxable income, effectively reducing the tax burden. - Favorable Capital Gains Treatment:
When the property is eventually sold, tokenized investors benefit from long-term capital gains tax rates, which are typically lower than the ordinary income tax rates applied to REIT dividends.
These tax advantages can significantly improve the after-tax return on your investment. In contrast, REITs do not offer these tax benefits because investors only receive dividends without the accompanying depreciation or loss deductions. Over time, the cumulative effect of these tax efficiencies can lead to a much better overall return on investment for tokenized real estate.
For a deeper dive into the mechanics of real estate depreciation and its impact on tax liabilities, see this detailed explanation from Investopedia.
Why Tokenized Real Estate is Superior
When comparing the two investment vehicles, tokenized real estate clearly provides several distinct advantages over traditional REITs, particularly in the areas of ownership, control and diversification, and tax benefits.
- Ownership:
With tokenization, you obtain direct fractional ownership of a property. This is not like an oversold, overpriced timeshare. It is an actual percentage of the Net Asset Value ownership. You are able to invest exactly the way high net worth professional investors do. This means you know exactly which asset your tokens represent, and you have full transparency over its performance. This direct link to the underlying asset offers greater assurance and confidence in your investment. - Control and Diversification:
Tokenized real estate gives you the flexibility to choose specific properties that match your investment strategy. Rather than being locked into a company with a managed portfolio where decisions are made for the entire trust, you can build a customized portfolio with lower entry barriers. This makes it easier to achieve true diversification that aligns with your risk tolerance and market outlook. - Tax Benefits:
Perhaps the most compelling advantage of tokenized real estate is the significant tax efficiency it offers. Through structures that allow depreciation and the pass-through of losses, investors can lower their taxable income and enhance net returns. These benefits can accumulate over time, making tokenized investments a more attractive proposition compared to the dividend-focused returns of REITs.
Optimizing Your Investment Strategy
For investors, the clear transparency, direct control, and tax efficiencies make tokenized real estate not only an innovative alternative but also a superior investment vehicle. There was a time when REITs were the innovative way to gain real estate investment exposure, but now, new legislation and technology allowing for tokenization have created a better way to gain true access to real estate investments. As the market evolves, digital assets are proving their value in creating more efficient, transparent, and flexible investment opportunities. Tokenized real estate empowers investors to fine-tune their portfolios and capture returns that traditional REITs may simply not be able to match.
With tokenization, every aspect of the investment—from ownership to asset management and tax strategy—is enhanced by modern technology. Investors are no longer confined to the opaque structures of conventional REITs. Instead, they have the ability to invest with precision, access detailed performance data, and benefit from cost efficiencies that can translate into improved long-term returns.
REITs will still have their place as tokenized real estate moves along the adoption curve, but the question is: how long? It should be recognized that REITs can be tokenized as well, and there are use cases where a tokenized REIT will be a great strategy for some sponsors and investors. There are many other reasons companies tokenize securities. For example, BlackRock, JP Morgan, and many of the largest institutions in the world are adopting tokenization for real-world assets. By using blockchain to break down barriers and streamline processes, this model is redefining the industry for a modern investor. As more sophisticated investors seek to maximize returns and minimize tax burdens, the advantages of tokenization—and specifically tokenized real estate—become ever more compelling.
Let’s face it: when it comes to dinosaur industries, real estate is at the top of that list for major investment types. Tokenized real estate is not just a fleeting trend—it’s a transformative approach that addresses the shortcomings of traditional real estate investment vehicles. With direct ownership, enhanced control over investment choices, and significant tax benefits, tokenized real estate offers an optimized investment experience for those looking to navigate the complexities of the real estate market in the 21st century and beyond.
For further reading on how these innovations are changing real estate investing, or to view tokenized real estate investment opportunities, be sure to visit REtokens.com.
By embracing tokenization, investors can unlock new levels of efficiency and clarity, paving the way for a future where real estate investment is both accessible and highly rewarding. This is why more sophisticated players in the market are taking note—and why tokenized real estate will become the preferred method of investing in one of the world’s most valuable asset classes.
