Digital Real Estate Explained

Key Takeaways

• Digital real estate is only one of the many different types of alternative investments, which also include art, venture capital, cryptocurrency and more.

• In a macroeconomics sense, digital real estate is any virtual asset a person owns. That could be a website, blog, mobile app, digital billboard, or non-fungible token, for example.

• While no investment is risk free, more investors are turning to alternatives such as digital real estate to help create a more modern portfolio.

While digital real estate and physical real estate are both forms of increasingly popular “alternative” investments, they are quite different. The chief difference is that the former involves digital property — with overall market values in the trillions. Here is what to know about digital real estate and other alternative investments.

What is Digital Real Estate?

In a macroeconomics sense, digital real estate is any virtual asset a person owns. That could be a website, blog, mobile app, digital billboard, or non-fungible token, for example.

But as the market grows, more people conflate the term with the virtual property that can be bought and sold in a virtual world. In other words, they are likely to think of “real estate,” sans physical locations.

For several decades now, real estate has been a popular and dependable form of investment. It has only been recently that investors have had opportunities to acquire property or start a business in “metaverse” – a new three-dimensional virtual universe.

Within the universe, digital real estate means virtual plots of land, whether they are empty or have structures. These are digital iterations of traditional real estate, sans physical locations. As with real estate in the physical world, digital properties are classified as lands, also called parcels. There are a finite number of parcels available per digital platform, which establishes scarcity and helps create stable values.

Depending on the investment platform one uses for virtual real estate purchases, the land bought can have various attributes, such as lot size and location. Platforms that are more focused on gaming might have even more attributes, including natural resources for mining and selling.

Digital Real Estate vs. Physical Real Estate

As has been discussed, digital real estate refers to owned virtual properties. Note that transactions are recorded on the Ethereum blockchain, to keep them safe. A blockchain is a public database that is shared across a number of network computers.

When people talk about physical real estate, though, they usually are referring to the physical assets with which everyone has grown accustomed. These properties can range from undeveloped land and commercial buildings to houses and apartment buildings.

Still, in some ways, the physical and digital worlds do collide. For instance, properties in both realms appreciate. They may also be bought, sold, rented, leased, and developed. Digital real estate can also be built upon to create something even more valuable.

Some benefits of physical ownership include:

• Control. The investor controls every aspect of the purchase, from property management to improvements.
• Stability. Physical real estate is generally less volatile than digital real estate. Thus, there likely will always be value in physical real estate.
• Ready liquidation. The investor may be able to raise cash speedily.

Limitations to physical ownership:

• High entry costs. This is not as true as it once was, as alternative platforms offer real estate opportunities with low minimums.
• Requires long-term commitment. Depending on the type of real estate investment, the commitment period is usually over the long haul.

What are the Pros and Cons of Digital Real Estate?

As with any investment, there are benefits and drawbacks associated with digital real estate, which is a relatively new market, to boot.

Pros

• Market opportunity. A trillion-dollar market opportunity does not come along every day. Because it is new, it is still uncertain for many investors, however.
• Appreciation. If you earn digital real estate, you can sell it and profit from it, as it appreciates in value.
• Returns potential. There is an opportunity for high returns, particularly as the popularity of digital real estate increases.
• Diversification. It is important to diversify one’s portfolio to guard against the risk of total loss.
• Self-employment. If one’s digital investments perform well enough, it may be possible to swap day trading for buying and selling digital real estate.
• Scalability. Many digital investments can be scaled quickly since they usually do not require trading physical labor for money.

Cons

• Market unpredictability. There is no historical data for usage, due to the relative newness of digital real estate investing. While the market is currently performing well, there is no guarantee that will continue.
• Property maintenance. Yes, digital property must be kept up to ensure its value, particularly in the event that it is sold. In the virtual world, this means maintaining advertisers and sponsors, keeping up followers, or, say, continuously identifying new tenants for one’s digital real estate.
• Blockchain conversion. Blockchain profits are not in dollars; rather, they are in cryptocurrency. Conversion to U.S. currency costs money, which eats into profits. Also, cashing in will hinge on the particular cryptocurrency’s stability.
• Possible tax implications. Laws and regulations governing the metaverse are inchoate; they are still being developed.

What are Some Examples of Digital Real Estate?

In addition buying and selling virtual land, other primary ways to earn money from digital real estate include:

• Websites. Whether it is constructing a flourishing website or purchasing an established one, developing a Web presence is one of the most common forms of digital real estate investing. If a large audience is built, the site can be sold for more than the initial investment, earning capital gains.
• Crypto/NFTs (Non-Fungible Tokens). A rollicky performance last year notwithstanding, digital currency still enjoys growing popularity. The currency’s value is expected to increase as more companies enter the metaverse. Some fashion brands are using their virtual property for selling novel apparel items for avatars, using NFTs.
• Flip domain names. Some investors focus on finding domain names that businesses can easily brand, and that are concise and easy to remember. This is quite risky, as one can sell a name for quite a bit of money, or not profit a thing.
• Rent website space. Just as physical investment properties can be rented out, digital real estate may be invested in or rented out. The rental can earn cash flow while gaining capital appreciation the site produces.
• Create a blog. Rather than operate an eCommerce store, an investor can produce a blog. Once a following is gained, the blog can attract advertisers. If the blog is very successful, it might be able to be sold for a profit.
• Advertising. One can advertise to make money in digital real estate. Affiliate marketing can be used to earn commissions and have sponsors post content. One can also advertise on other investors’ site, enhancing their own sales.
• Social media. Using social media platforms to earn money is another way to invest in digital real estate. Many people already know someone who is a social media influencer. If the investor is able to build a substantial following, they can gain commensurate advertising and sponsored posts.
• Create a shopping center. Individual sections can be rented out to tenants to generate passive income.

How Valuable is Digital Real Estate?

This is a trillion-dollar market with one investment platform reporting up to a 500% property value hike, supplying investors seeking to diversify their portfolios with assets not directly correlated with public markets.

Currently, digital real estate is where the Internet was more than 40 years ago. So, some people are still hesitant to buy virtual property. However, there is a lot of upside to the market, which is widely expected to continue to grow.

As with physical real estate, digital properties have attributes that add to their value. Attributes that help explain that value include the fact that each virtual plot is unique due to its location relative to other properties or attractions, or due to one-of-a-kind resources the real estate possesses. Recently, rapper Snoop Dog replicated his expansive California residence on one of the popular platforms. Subsequently, an investor paid $450,000 to be his virtual neighbor.

Note that when one purchases real estate, they get a kind of ownership “deed” that is stored as an NFT on the blockchain. If the property is sold, one’s deed – token – goes to the buyer.

Until then, the property is secured with one’s NFT. It can be rented, sold, or even demolished. The property may be built upon by the owner and someone else bestowed with the right.

How to Start Investing in Digital Real Estate

An investment platform is required for the purchase of digital real estate. It may be a good idea to sort parcels in order of newest or oldest, and lowest and highest price. When deciding on a platform, consider the type of cryptocurrency required to buy such property.

After tokens are bought, they must be stored on the selected platform. Subsequently, the digital wallet may be used to invest in digital assets. The investor may act right away or wait until an appropriate property is found.

When buying digital real estate, it is important to consider the technology, currency, and the overall land value. As with physical property, areas that are highly desirable tend to be pricier.

Is Digital Real Estate an Alternative Investment?

In fact, digital real estate is one of the many different types of alternative investments to create wealth, examples of which are art, venture capital, and cryptocurrency. Alternative investments, which generally include assets other than stocks, bonds, or cash, are increasingly popular to help offset inflation, high interest rates, or other market changes.

They can also create steady secondary income. Consider, for example, that physical real estate has outperformed the S &P 500 for nearly the last quarter century. Art, too, has surpassed the index since 2000, returning more than 360%, according to the Artprice100 Index. What is more, returns on venture capital, previously accessible only by the ultra-wealthy and institutions, have averaged 32% over the same period.

Because they are not directly tied to the stock market, alternatives are also used to create investment portfolios that are not as subject to volatility. After all, diversification is an important key to successful investing.

Alternative Investments and Portfolio Diversification

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

While no investment is risk free, more investors are turning to alternatives such as digital real estate to help create a more modern portfolio of holdings. The idea is to gain a hedge against market volatility and inflation, as well as the potential for consistent passive income.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.