Investing in real estate is an excellent way to start your investment portfolio. And the best part is that you don’t need loads of money to start investing since there are many ways, including crowdfunding, REITs, and tokenization.
The tokenization of real estate assets is gaining popularity amongst investors. This is because the transactions are conducted on a blockchain platform, guaranteeing a secure and transparent transaction.
What is Real Estate Tokenization?
Through tokenization, a real estate asset is divided into small sections called fractions. And this makes it possible for investors to purchase a fraction of a real estate asset using digital tokens.
The token is created using blockchain technology, and the buyer is given ownership of a share of the real estate asset. The token is usually sold and bought on a digital marketplace.
Tokenization provides investors an efficient and secure way of buying and selling property. It has also made the real estate market accessible to investors worldwide, irrespective of your capital. And the best part is that it enhances liquidity, as you can sell your share anytime and anywhere.
For instance, if you don’t have the amount required to invest in your desired property ($100,000), tokenization has made it possible to start with as low as $5,000. Your security token is 5% of the entire real estate asset value. Tokenization is an excellent way to diversify your portfolio.
How Does Real Estate Tokenization Work?
The tokenization process requires creating smart contracts which outline asset ownership terms. This includes the number of tokens, price per token, and the revenue sharing terms.
The smart contract is recorded on a blockchain real estate platform, thus, allowing for a transparent and safe way to track ownership and transactions.
What are the Benefits of Real Estate Tokenization
Are you on the fence about investing in real estate via blockchain technology? Below are the benefits of real estate tokenization, including liquidity, low capital requirement, and transparency.
● Increased Liquidity
Through tokenization, investors can buy and sell tokens on the digital marketplace. This is because the real estate assets are recorded on the blockchain platform using the digital ledger. This makes transferring ownership pretty easy. Since everything is done on a blockchain platform, it shortens the purchase time and other costs involved, such as those of intermediaries, lawyers, and trust agents.
The transfer process is easy and legal. This means you can sell your tokens quickly and easily, unlike traditional methods where you have to find a buyer, which takes months or even years, and the lengthy paper procedure.
● Fractional Ownership
If you can’t afford to invest in the entire property, no worries, as you can own part of the real asset property through tokenization.
Tokenization allows you to invest small amounts of capital in various properties, thus helping you lower your risk.
Tokenization has made investing in real estate possible for all, as you don’t need large amounts of capital. Therefore, people looking to start their investment journey in real estate can opt for real estate tokenization.
The tokenization of real estate assets is done on blockchain technology. And this guarantees you a secure and transparent transaction. This is because the blockchain ledger is decentralized, thus allowing the recording of transactions across a network of computers. This makes it easy to detect fraud and errors.
Besides, every investor has a private account to hold, of which the access key is a combination of characters and symbols, which are difficult to hack.
● Proof of Ownership
In a traditional setting, if there is an ownership dispute for a property, the contending parties have to go through a rigorous legal battle, which causes time and money wastage. Through tokenization, it’s easy to prove ownership as all the data is stored on the blockchain platform, and no one can tamper with it.
● Reduced Transaction Costs
Buying or selling real estate assets the traditional way involves a lot of additional costs, making the process expensive. However, through real estate asset tokenization, blockchain technology offers investors to streamline their transactions and minimize costs. Most processes are automated, and the digital ledge is permanent and unchangeable.
Blockchain technology allows transactions to be completed swiftly with lowers costs, thus allowing investors to earn higher returns. Unlike traditional methods, where you need to hire an investment advisor to keep track of your investment portfolio, tokenization lets you track your investment in real-time.
● Low entry Barriers
We are not all lucky to have large pools of capital to invest. As such, real estate tokenization makes it possible for all investors to participate in real estate, despite having low capital. And the best part is you can invest from any part of the globe.
● Potential for Higher Returns
Tokenization makes the real estate industry more efficient; thus, investors have the potential to earn more. This is because investors can buy and sell their tokens fast, thus increasing liquidity. This increases the demand for tokens, thus an increase in the price of the tokens.
● Portifolio Diversification
Investment 101 advises you not to put all your eggs in one basket. As such, you should invest in various properties to increase your potential for higher returns and lower risk.
● Reduced Cost and Time Wastage
Tokenization of real estate saves investors from making long queues and excessive paperwork. This is because all the data is stored on the blockchain platform, eliminating the need for lengthy paper. And since the transactions are done on the blockchain platform, investors can buy or sell the tokens from anywhere in the world.
What are the Drawbacks of Real Estate Tokenization
Despite all the benefits, investing in real estate tokens comes with various challenges. These include:
● Securities Law Implications
Real estate tokenization is classified as a security; however, you must analyze each token before investing. This is because if the token is a security, then the token must be sold with a prospectus. But, if it’s not a security, the token must be sold with an exception, such as the ‘accredited investor’ exemption.
There are no regulations governing the buying and selling of cryptocurrencies and tokens. This makes it challenging for companies to navigate real estate tokenization’s legal and compliance requirements. As such, issuers and investors are having difficulty figuring out how to comply with the regulation.
● Technical Difficulties
To ensure the blockchain platform is secure, the providers must conduct continual audits and ensure the smart contracts codes are updated regularly to keep hackers at bay.
They must also ensure that the off-chain real-world asset is on par with the on-chain asset. This requires that the data from the real-world asset be collected and updated regularly on the platform.
● Dispute Resolution Barriers
Since no regulations govern buying and selling real estate tokens, it will be hard for traders to solve disputes. Since tokens can be traded globally, it’s unclear which court is mandated to oversee the dispute. Therefore, when buying or selling a token, the parties can include a clause choosing an exclusive jurisdiction in the smart contract.
● Liquidity and Market Depth
As we’ve seen, tokenizing real estate leads to increased liquidity, which is also based on market depth.
Market depth refers to the number of buyers and sellers in the market. For instance, if there is no market depth, the number of sellers and buyers in the market is low, making it difficult for investors to buy or sell their tokens.
● Transparency and Security
Transactions made on the blockchain technology are safe, secure, and transparent. However, the lack of laws governing the buying and selling of tokenized assets makes it challenging to know if a legitimate asset backs the tokens.
● A Lack of Investor Education and Understanding
There are limited resources to educate people on blockchain technology. Therefore many people shy away from investing in tokenized assets as they do not understand the benefits or profits of real estate tokenization.
There is no way investors can determine the value of tokenized assets. This is because the value of the real estate asset is affected by various factors, including location, condition, and market conditions.
● Lack of Standardization
There are no standards governing the tokenization of real estate assets. This makes it challenging for investors to compare and evaluate varying investment opportunities. And this often leads to confusion and mistrust. Therefore, an investor must understand these challenges and do their due diligence before investing money.
What is the Future of Real Estate Tokenization?
Real estate tokenization is an excellent investment method as it saves you time and is cost-effective. But, the government is yet to establish laws governing the buying and selling of tokens. Besides, there are no standards governing the tokenization of real estate assets.
Therefore, for real estate tokenization to be wholly embraced, the government needs to enact laws governing the tokenization of assets. There is also a need for the real estate industry to establish tokenization and avail education on the buying and selling of digital assets to all.
Real estate tokenization is excellent for people to invest in the real estate industry and diversify their investment portfolio. Investing in tokens offers many benefits, including liquidity, accessibility, and transparency. It also allows investors with small amounts of capital to be involved since it involves dividing real estate property into small manageable fractions, then sold as tokens.
Despite the benefits, there are also drawbacks to real estate tokenization, including a lack of investor education and no tokenization standards and regulations. That said, the future of real estate tokenization looks promising as more companies adopt it.