Real estate tokenization is a game changer. and while tokenized real estate has been around for a couple of years now, it’s just now starting to be easy to do with a variety of platforms that can help.
Real estate tokens offer investors more control and more freedom over traditional investment options, without sacrificing stability or security. Here’s why tokenization is here to stay and how to get started.
What are the benefits of real estate tokenization?
Most real estate investments require investors to hang on to their investments through the full term of the project. Realization only occurs when the project’s sponsor refinances or sells the property.
Investors have another option to realize their investment sooner—selling shares through a stock exchange on the secondary market.
The problem is, our traditional secondary market for real estate is expensive and inefficient. With multiple transfer agents, brokers, custodians and service providers all collecting their own fees, settlements typically take at least three days. These settlements are prone to high transaction costs and offer limited real-time price data, making these secondary markets useful for very large, public REITs only.
Blockchain technology offers a big technological advantage over traditional markets. Shares in blockchain form are called tokens, and these tokens enable automation and streamlining on a scale that obsoletes many of these aforementioned service providers. What’s more, blockchain provides better trading speed, price transparency, and security.
To put it simply, blockchain tokenization puts more control in the hands of real estate investors.
How does tokenization work in real estate?
When a sponsor conducts an offering to raise capital for a real estate project, they can issue the shares in token form or they may elect to convert the shares into tokens in the future. They also may offer investors the opportunity to exchange shares for tokens in an upstream entity.
The initial investment process for a crowdfunded real estate deal with tokenization is exactly the same as one without the option to tokenize. Initially, the difference will not be obvious to an investor.
Tokens are simply digital shares with the same rights as other shares. With a tokenized share, shares are recorded on the blockchain, after which an investor can choose to sell part or all of their investment whenever they choose. Of course, they can hold on to their share for the life of their project, same as before.
How does tokenization solve real estate liquidity?
We all know that real estate is not a very liquid asset. There are many different moving parts, especially regarding legal transfer.
With tokenization, transfer of ownership could be as simple as trading cryptocurrency, meaning investor-to-investor, cutting out the middleman.
Can tokenization make it easier to look for property?
Ease of access means more choices for investors, and access to a larger pool of buyers for sellers.
Does tokenization provide undeniable proof of ownership?
Traditionally, one displays legal ownership through legal documents that show the asset’s sale and ownership rights of new investors.
Tokenization, on the other hand, uses the same ledger system as cryptocurrencies like Bitcoin or Ethereum.
Distributed ledgers are databases that are shared and synchronized, available through multiple sites and accessible by multiple users. Any changes to this ledger are copied to ALL users within seconds, and every transaction is validated by the network.
Blockchain technology mitigates the issue of ownership claims because the network can easily validate every transaction to show who exactly owns an asset.
How does tokenized real estate lower the barrier of entry?
For starters, tokenized assets can be divided into smaller amounts. Just like you don’t have to buy or trade a single Bitcoin at once, a real estate token can be subdivided into smaller pieces to lower the financial barrier of entry for new investors.
Tokenization also eliminates the cumbersome transfer of legal documents, making it so even new investors can get into the real estate market—online—with little to no experience.
Can tokenized real estate improve transparency?
The distributed ledger we’ve been talking about can also offer better transparency than the traditional real estate market. Every transaction must be approved by other users, and each of these transactions are public.
As for security, blockchain technology has proven itself to be extremely secure, making it an ideal vehicle for new investors to get into real estate.
How do tokenized real estate lower transaction costs?
Unless an investor is buying into a real estate investment trust (REIT), they face high transaction costs. REITs themselves aren’t perfect, and typically require large minimum investments.
Tokenized sales are free from traditional closing costs associated with real estate, meaning much lower fees for investors.
Are digital shares different from cryptocurrency like Bitcoin?
Although Bitcoin, Ethereum, and other types of cryptocurrency are unregulated by the SEC, the types of tokenized real estate we’ve been discussing can be regulated. That means they come with investor protections, despite the tokens themselves being held on their respective blockchain ledger.
In short, Bitcoin is semi-anonymous, while digital securities can only be held and traded by those who have passed stringent KYC requirements.
What are the tax considerations of tokenized real estate?
Real Estate token issuers must take extra measures to ensure compliance with applicable laws. Security tokens are subject to more than regulation as securities, so some may also be regulated under anti-fraud and consumer-protection law. Issuers and investors should consult their legal representation to develop a comprehensive strategy.
What is the future outlook for real estate tokens?
Investors of all sizes can now more easily purchase real estate, thanks to tokenization. One of the great benefits of this emerging technology is that it will increase liquidity in the market, which means more low-level investors can enter the industry.
While there are some hurdles to jump before tokenization of real estate becomes mainstream, the fact is that real estate tokenization solves a lot of the issues that stop investors from real estate investing, and thats a good thing. To learn how you can tokenize your real estate assets, just reach out to us here at CrowdEngine.
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