Real estate tokenization is about to disrupt the way people invest. Real estate investing has some incredible advantages over other forms of investing. Unfortunately owning real estate can be difficult for the average person. That’s because in most cases an investor needs a large sum of money to use as down payment. Well, a down payment is no longer required when you buy tokenized real estate.
But that’s not all. Real estate tokenization has some other incredible advantages. Sure, it has some disadvantages, but overall this form of asset tokenization is sure to disrupt the real estate industry, for the better. Below we examine 10 great reasons why real estate tokenization is the way of the future.
What are the benefits of tokenizing real estate?
- Lower barrier to entry
- Instant liquidity
- Access to global market capital
- Security and transparency
- Lower transaction costs
- Automation
- Scalability
- Diversification
- Growing market
- Peer to peer transactions
Lower Barrier to Entry
One of the biggest reasons to consider tokenizing real estate is because it lowers the barrier to entry for investors. That’s because in most cases tokenizing of an asset is done for the purpose of fractionalizing that asset. In other words, through tokenization, individuals are able to own a fraction of a real estate property.
This means that investors will no longer be required to have a large down payment to purchase real estate. Instead, investors are able to buy real estate with as little as $100, sometimes even less.
In short, investing in real estate is no longer just for the wealthy. This lower barrier to entry is at the core of what people in the tokenization space refer to as market democratization.
Instant Liquidity
Real estate is considered an illiquid asset. In most cases selling real estate takes several weeks and often months. Selling often requires advertising, showings, the process of offer and acceptance, inspections, etc.
Real estate tokenization changes all of this. Tokens representing ownership in real estate can be traded in Alternative Trading System marketplaces like tZero, as easily as buying and selling stock. By trading tokens investors can exit their investments whether they are selling $100 or $1,000,000 worth of real estate tokens.
Additionally, through Decentralized Finance (DeFi) it will be possible for investors to borrow against their real estate tokens rather than selling. This could be beneficial for tax purposes and may provide opportunities to leverage capital.
Access to Global Market Capital
Real estate is local, but real estate investors are all over the globe. Through real estate tokenization investors across the world can invest in whatever market they chose, provided regulatory compliance is in order.
This is good news not only for fractional ownership buyers, but also for owners, developers, funds, etc as this provides the opportunity to raise capital from investors all across the world.
Security and Transparency
Blockchain is a decentralized immutable ledger accessible to everyone. This goes to the heart of security and transparency. Security comes from the decentralized nature of the blockchain. The more decentralized the block chain the better. Transparency comes from the fact that every transaction is viewable in the blockchain itself.
This doesn’t mean that everyone can see your personal data in the blockchain, but it does mean that assets and transactions should be easily verifiable. See How To Verify Authenticity of Digital Assets
Lower Transaction Costs
Blockchain technology is incredibly efficient. This efficiency can be easily leveraged to multiple layers within a tokenization structure to the point that it can disrupt how traditional businesses operate. For example, in real estate transactions it is customary to utilize escrow services to hold earnest money on behalf of a purchaser during the process of completing a transaction. This silly step can be completely eliminated through the use tokens representing real estate.
Another example is the custom of using real estate brokers and title companies to buy and sell property. Broker and title fees can range from about 5% to 7% of the purchase price of the property. When trading tokens, users won’t have to pay for broker or title services at all!
Automation
Blockchain efficiencies have also led to automation of real estate tasks and investment management. For example, through tokenization, it is possible to automate cash distributions to token holders. The same concept can be used to automate payments to real estate management firms, lenders, etc.
Whenever investors sell real estate they are required to report and pay taxes. Imagine the difficulty of figuring out taxes if investors were buying and selling real estate hundreds of times per year. Well, this process can also be simplified and automated through real estate tokenization. After all, blockchain is simply a trusted decentralized ledger – an accountant’s dream.
Tokens can also be used to send messages to investors and for investors to vote.
Scalability
Once a tokenization process has been established it can be easily repeated. This is probably one of the biggest advantages of arriving early in this space. As adoption grows, early adopters will be in an excellent position to leverage their existing processes and grow their real estate portfolios, investor’s base, etc.
Improved Opportunity for Diversification
Most real estate investors remain niche specific. Single family residential real estate investing is by far the most common form of real estate investing. Few venture into other types of real estate investments such as multi-family, commercial, industrial, land, etc.
Given a lower barrier to entry and how easy it can be to buy real estate tokens, investors can now diversify their real estate investments. Think how cool it would be for an entity to to tokenize an RV park, and for you to own fractional ownership on that RV Park and later staying at it for to check on your investment while enjoying your vacation.
Let’s also consider geographical diversification. Real estate tokenization will make it possible for an investor to own real estate in multiple geographical areas, all over the world!
Growing Market
According to CoStar, the value of the world’s real estate assets is well past the $300 trillion mark. That’s a humongous market. However, tokenized real estate accounts for only $53.7M, according to a report by the Security Token Group. Although the tokenized real estate market is growing rapidly it is only a miniscule percentage of the total real estate market.
Adoption of blockchain technology is in its infancy. It is like the early days of the internet, when many people thought the internet was a solution looking for a problem. Disrupting the traditional real estate market won’t be easy, but it is inevitable.
It will take a few years for mass adoption to proliferate, but eventually buying real estate tokens will be as common as buying stocks using a smart phone.
As with the internet, those that recognize the potential of real estate tokenization are likely to benefit form what could be an explosive market growth.
Peer to Peer Transactions
One of the features of blockchain technology is its ability to permit peer to peer transactions. You and I can trade Bitcoin without the need for a third party. And in some decentralized applications you and I can already trade NFTs and other tokens, without the need for a third party.
Trading real estate tokens peer to peer will be a a little more difficult due to the need to meet regulatory compliance, but it is bound to happen.
Dissadvantages of Tokenizing Real Estate
There are certain disadvantages that come with tokenizing real estate.
Leverage
One of the reasons why investors love real estate investing is because you can leverage your money. This is thanks to the use of financing. You can buy real estate worth $100,000 with as little as $5,000 in down payment. When that investments grows at a rate of 2.5% in the first year, you grew your equity by 50% in a single year.
I suspect this will not always be the case in most tokenized real estate projects. That’s because most of those projects will seek to bypass bank financing. The most likely scenario is that when you buy a real estate token you won’t benefit in the same way from property appreciation and leveraging as in the traditional market.
New market
Real estate tokenization is in its infancy and will require significantly more adoption to truly take off. New markets open the doors for bad actors and gullible investors to be taken advantage of. And then there are the well meaning early adopters that fail to understand the risks that come along with new technologies. We’ve already seen too many examples of smart contracts being exploited by hackers. As I’ve mentioned before, smart contracts are the wrong tool for asset tokenization.
Lack of education – Public awareness
Most people don’t understand blockchain technology or its revolutionary nature. Imagine telling your father that you bought tokens representing fractional ownership on a real estate property in Australia using your smart phone. Chances are he won’t understand a thing. Indeed, we have a long road ahead to educate the public.
Cryptocurrency Volatility
The current bear market provided a reality check for many crypto investors. Many of these investors will be disillusioned for years to come. Cryptocurrencies will continue to be volatile. Many crypto projects are likely to fail and take many investors with them. All of this will translate into an adoption challenge for real estate tokenization.
Lack of Data (compared to stock)
When you buy a stock you can read quarterly and annual reports to help you make an informed decision. This type of information does not currently exist for real estate investments over the blockchain. If it exists, it does not fall under the same compliance scrutiny we are accustomed to see in the stock market.
Regulation Uncertainty
With emerging tech it is often the case that regulation can’t keep pace with new products and developments. This can lead to uncertainty, confusion, and often fines. Real estate tokenization is already taking place in many parts of the world, but each country will have different laws affecting regulation.
Conclusion Why Real Estate Tokenization Is the Way of The Future
I believe that the pros for real estate tokenization greatly outweigh the cons. Time will tell, but I am convinced that real estate tokenization is the way of the future. Buying, selling, and trading property tokens will be as common as it is to buy, sell, and trade stocks nowadays.
See also 13 Best Assets to Tokenize On the Blockchain
If you see things differently I’d love to hear from you. Please comment below.