Technology is rapidly changing how people interact with the world and the playing field in the global real estate market. Technology advances have given traditional real estate agents/brokers, property managers, housing developers, and investors various new tools to understand and leverage.
Examples, Social Media Platforms, Virtual Tours, 3D Tours, Data Analytics and AI/Machine Learning, Property Management Software (TRIMM Software), Smart Locks and Access Control, Keyless Entry and Video Monitoring, Blockchain, the Internet of Things (IoT) and more.
Then there is the rise of cryptocurrency, with many people wanting to cash in on the following market boom. In a recent study, it has been found that 84% of Americans have heard about cryptocurrencies; however, currently, only 16% have personally invested or traded digitally. However, new research from The Ascent, a Motley Fool service, found that over 50 million Americans -- are likely to buy crypto in the next year.
The real estate market is in the early stages of starting to embrace the cryptocurrency trend with Blockchain and Real Estate Tokenization. Tokenization is changing the way investors capitalize on their real estate investments. Even an investor with limited investment capital can experience investing in the real estate market through tokenization.
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What is Tokenized Real Estate?
The emergence of Bitcoin in 2009 ushered in the cryptocurrency revolution. Tokenized real estate uses blockchain technology and applies it to trading real estate assets. Tokenized real estate opens up increased investment opportunities, especially for new investors wanting to invest passively in real estate.
Tokenized real estate is real estate whose value has been converted into and represented as real estate tokens. This real estate token can be traded on a blockchain platform that supports smart contracts, such as Ethereum. Besides real estate, you can also tokenize other assets such as:
Precious metals
Art
Equity shares
Investment Funds
Collectible cars
Luxury goods
How Does Tokenization Work?
Tokenization involves the representation of an interest in real estate with securitized virtual real estate tokens. These tokens represent either physical or digital assets associated with the property. When a real estate asset is tokenized, this tokenization process enables you to divide your property into smaller shares that you can then sell as tokens on the market.
Take this example: You own a single property in California with a total value of $3,000,000. You're thinking of raising capital for a business venture, but at the same time, you also need a house to live in. Potentially you can use this property and convert it into 3,000,000 digital tokens. These tokens are issued on a compatible blockchain platform that supports exchanging real estate tokens. The initial investment process starts with an Initial Token Offering or ITO.
If someone buys the virtual tokens from you, they have fractional ownership of the property. With this analogy, if someone buys all 3,000,000 tokens, they become 100% owners of the property. Even if they only own part of the property, token owners are entitled to dividend or rental distributions (applicable for Commercial Real Estate Properties) and a prorated portion if there's a sale of the property
Real estate tokenization is an effective means of raising capital through investors. Tokenization is also a good way to start building a real estate investment with minimal capital.
The Benefits of Tokenization
Real estate has long been considered a non-liquid asset. With the emergence of tokenization in real estate, increasingly buyers, sellers and investors can have greater liquidity.
Improved Liquidity
You are turning what was once a non-liquid asset into something more liquid and readily available with tokenization. This liquidity of a real estate token is a significant selling point that can attract potential investors. Buying cryptocurrencies can be simpler than buying and managing a real estate property, so the ease of financial transactions and not dealing with property headaches can be significant advantages for real estate investors.
Tokenized real estate tends to be easier to buy and sell with the transfer occurring directly between seller and buyer, giving investors more incentive to invest in the real estate market.
Elimination of the middleman
Real estate is non-liquid in itself. But what also reduces the income generated from real estate is the involvement of middlemen. More than one middleman is involved, and a lot of time can be spent on negotiations going back and forth.
Tokenization reduces the need for middlemen as transactions occur in the cryptocurrency market directly between a seller and a buyer. Reducing the involvement of middlemen can result in faster transaction times and lowers the costs involved in traditional real estate transactions.
Reduced Costs
As mentioned earlier, middlemen add to the costs in a real estate transaction. With Tokenization there are fewer transaction fees involved in buying and selling tokenized real estate, and it tends to be a more efficient process. Smaller Fees and less time can translate to higher returns from tokenized real estate transactions.
Proof of Ownership
Proving real estate ownership rights requires some lengthy paperwork. You may be asked to provide a warranty deed, a quitclaim deed, or a bill of sale to represent ownership. With tokenized real estate, your ownership of a property or a piece of property is indisputable since it utilizes a distributed ledger system on a blockchain, the same system that cryptocurrencies use.
This system prevents fraud by preventing unauthorized changes from being made. Verification isbe handled electronically in the blockchain system. Before a transaction is added to the blockchain it must be authenticated and authorized, preventing future disputes regarding the legal ownership.
Source: Euromoney
How Are Digital Shares Different from Cryptocurrencies?
Although the terms token and cryptocurrency are frequently interchanged, they do not mean the same thing.
Digital Shares
Digital shares are issued in the form of tokens. These tokens use blockchain technology and operate on blockchain platforms. Tokens hold value and can be exchanged on multiple blockchain platforms. Depending on the type, tokens can represent anything with value, such as real estate, art, or luxury goods.
An account signs a transaction that directs the smart contract to debit a set amount from its ledger and then transfers the same number of digital tokens into another account to transfer ownership of these tokens. These digital shares or tokens can be traded or stored for value. Tokens can usually interact on multiple blockchains.
Cryptocurrencies
Several crypto exchanges have developed over the years, some performing better than others. Cryptocurrencies operate using the same blockchain technology as tokens. The most popular cryptocurrencies are Bitcoin, Ethereum, XRP, and Tether.
Unlike tokens, cryptocurrencies cannot interact on multiple blockchains; in other words, you can only use a cryptocurrency on its native platform. Cryptocurrencies are issued in the form of coins, and their primary purpose is for payments, in the same way you would pay for goods and services with fiat money.
Although both tokens and cryptocurrency operate using the same technology, how people use them on blockchain platforms varies greatly.
The Future of Commercial Real Estate Tokenization
Fractional real estate is not a new concept. Real estate investors have been capitalizing on this concept since it was introduced in the 1960s through Real Estate Investment Trusts or REITs. This concept was created to enable investors, especially small investors, to invest and gain income from real estate funds. Fractional real estate has come a long way since its inception, and there's a bright outlook for real estate tokenization.
Through blockchain technology, investors and sellers can come together in a worldwide market that allows them to complete real estate transactions with unprecedented speed and ease. Although tokenization can help raise capital from a broader range of individuals as opposed to a traditional real estate market, there are some challenges that tokenization still needs to address if it wants to secure its spot as a key investment vehicle in the future of real estate investing.
Smart Contracts
Smart contracts are at the core of a secure blockchain system. These need to undergo rigorous security audits to ensure that whatever issue encountered during its inception will not affect the tokens' integrity. If the code for a smart contract is faulty, investors may be more prone to hacking and be subject to reissuance of tokens.
Legal Considerations
Real Estate Securitized Tokens must be registered under the Securities and Exchange Commission or SEC. The SEC is still catching up to the rapidly evolving world of real estate securities and tokenization.
Some real estate token issuers may choose not to register under the SEC. In such scenarios, these entities must file for an exemption from SEC registration. Otherwise, they may be subject to certain penalties that affect investors.
Taxation
Cryptocurrencies and digital tokens can be considered capital assets for taxation purposes. For real estate tokenization to propel itself into the future, issues on taxation need to be resolved. The U.S. tax law has yet to refine its policies on taxation for virtual currencies.
As of now, legalities involving taxation for digital tokens such as asset-backed tokens, real estate tokens, and security tokens are still complicated and challenging. To attract more investors to buy into the tokenization of real estate, taxation laws have to provide explicit provisions on these matters in order to make real estate transactions more frictionless.
Conclusion
Technology advancements have affected almost all industries, including the real estate industry. By staying up to date with the latest information, you can participate in this meta-trend and global shift to maximize your investment portfolio’s value and income potential. With this guide, you can start to equip yourself with the knowledge you need to propel your investment portfolio into the next frontier of the digital age.
How Can EquityBrix Help?
EquityBrix can help you grow your wealth through our fractional real estate investment platform. Our team marries the needs of potential investors and real estate developers by providing opportunities for above-market returns to investors. EquityBrix is committed to creating high-yield investment offerings, and we can help guide you through the new era of real estate investing.
If you want more information about tokenized real estate investing go to EquityBrix or EquityBrix.com/Learn.
If you are looking to grow your wealth and diversify your investment portfolio by learning about innovative ways of investing in real estate go to EquityBrix, or contact us for more information, or sign-up for the EquityBrix Newsletter.
EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
FAQs
What is tokenized real estate?
Tokenization, as it pertains to real estate, is the process of creating a virtual token(s) that represents ownership of a type of real estate asset. This is similar to non-fungible tokens (“NFTs”), except a real estate token would be tied to the value of a physical asset
What are the benefits of tokenizing real estate?
When you tokenize a real estate asset, it enables you to make it more liquid and easier to trade. There is also the benefit of a reduced transaction cost and indisputable proof of ownership.
Can you tokenize a house?
Yes. Like any real estate asset, it can be tokenized and converted into digital value.
*Disclaimer: EquitySlice is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
