What Is The Tokenization of Real Estate?
The capital-intensive nature of real estate investment remains a big entry barrier for many potential investors. Because of this fact, the benefits of residential and commercial real estate investing seem to be exclusively reserved for high wealthy individuals, families, and corporations.
But what if real estate tokenization is lowering that barrier for people like you?
That’s what we’ll be discussing in this post. Regardless of your financial status or background, we’ll explore how tokenization of real estate assets is lowering the entry barrier for individual and corporate investors alike.
Before proceeding to that, let’s look at the basics.
What Is Tokenization of Real Estate Investing?
Tokenization is the process of creating, distributing, and managing digital tokens that represent units of ownership in real estate assets. Instead of using traditional paper documentation, investors can use virtual tokens to conduct their transactions in a secure and legally binding process.
Looking at the words tokens and tokenization, the whole concept may sound too technical for some people. Let’s break down a little bit more for everyone.
What is a token?
Wikipedia defines it as a thing serving as a representation of something else. The second definition is ‘a voucher that can be exchanged for goods or services, typically one given as a gift or forming part of a promotional offer’. In the traditional banking context, tokens are used for different purposes.
Looking at today’s world of blockchain technology, a token is a type of cryptocurrency that represents an asset. Interestingly, these tokens can be used for different purposes including storage of value, making purchases, or investments.
Within the context of real estate tokenization, a token can represent the right to share in profits earned from the use of an asset, an equity interest in a legal entity that owns tokenized real estate, an interest in a tokenized debt instrument, or ownership of a unit in real estate property.
Whether you are interested in residential or commercial real estate tokenization, some of the assets that can be tokenized include office buildings, single-family homes, retail spaces, multi-family structures, warehouses, and more.
Benefits of The Tokenization Of Real Estate
Irrespective of the spectrum from which you want to participate in real estate tokenization, some of the potential benefits are within your reach. Now, real estate investment is no longer an exclusive playground for wealthy individuals, families, and corporations. People like you can start participating today. Below are some of the benefits of tokenized real estate investment.
Lower Investment Capital
The digital nature of tokenized real estate allows for smaller units of ownership. Whether you want to invest in tokenized assets by way of debt or equity, these units or tokens can be split to make them affordable to individual and corporate investors alike. In other words, smaller units of tokenized real estate assets often require lower capital on the side of investors. Here is the exact thing that expands investment opportunities for people who might have been excluded entirely. That’s one of the cools benefits of real estate tokenization.
Higher Level of Liquidity
Among other things, the ease of valuation, fractional ownership, and transaction flexibility contributes to a higher level of liquidity. When these factors are present, tokenized real estate creates opportunities for increased revenue for most of the parties involved.
For example, the digital nature of real estate tokens makes it easy to evaluate before, during, and after a transaction. Interestingly, the same processes that could have taken weeks or months to close a real estate transaction can be executed within a few days. The outcome is that increased transaction frequency and flexibility create value for all parties.
A higher number of closed deals will naturally earn more operating fees for the managers and profits for the investors. These are the potential outcomes of increased liquidity.
New Source of Development Capital
Given that most real estate development projects happen in the private markets, pooling a significant amount of capital to get things done is never an easy thing.
But in today’s world, tokenization of commercial real estate is creating a new source of capital for development projects.
By lowering the amount required for investment, a higher number of investors can now participate, thereby providing the capital needed to finance projects. Instead of wading through traditional financing sources, tokenization is now helping people to raise capital through debt and equity.
The route you choose either as a project manager or investor will be dependent on your real estate risk tolerance. For beginners, you may want to start with small units of equity.
Besides being capital intensive, offering, structuring, financing, and closing real estate deals are hard. When the sensitive issues of trust and credibility are introduced into the picture, things might get even harder.
However, the use of blockchain technology makes it easy to record every instance of a transaction without costly and time-consuming paperwork. That’s the exact thing that makes due diligence, increased transparency, and transaction flexibility possible.
Based on these facts, the transaction history, pricing, and current value of tokenized real estate assets can be analyzed almost in an instant before undertaking any fresh transaction.
These are some of the potential benefits of tokenization you may experience when you get on the right path.
Conclusion? So What Is The Tokenization Of Real Estate? IT IS THE FUTURE!
By getting in with a limited amount of capital, there is a chance you’ll discover some other interesting benefits of tokenized real estate investment. As your experience with this type of investment grows, you’ll be able to minimize any potential risks that might be involved.
Most important, you should take your technical experience with all things blockchain and cryptocurrency into account before diving in. In addition to that, consider the legality of any investment options presented to you. Try to consider the credibility of the corporate entities involved. Are the companies making an offer registered with the appropriate regulatory authorities where the real estate properties are located?
Even though tokenization is more digital in nature, you don’t have to ignore the prevailing real estate laws in the country, state, or city where the underlying properties reside.