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How could tokenization reshape real estate investing?

Real estate experts and investors are starting to look toward asset tokenization as a way to improve the real estate investment world.

How could tokenization reshape real estate investing?
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Real estate investing has been a reliable way to build wealth for centuries, and over the past few decades, it’s been responsible for generating countless self-made millionaires. But the basic tenets of real estate investing haven’t changed much over the years—so it makes sense that it’s in line for a major shakeup.

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Real estate experts and investors are starting to look toward asset tokenization as a way to improve the real estate investment world, provide more investment opportunities to eager financiers, and potentially spur further economic growth.

But how exactly could this work and what would those changes be?

WHAT IS ASSET TOKENIZATION?

Asset tokenization refers to the process of taking an asset and “tokenizing” it, dividing it into easily divisible, fungible tokens that can then be exchanged at users’ discretion.

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By now, you’re almost certainly familiar with Bitcoin, a cryptocurrency that’s built on blockchain technology. Without going too much into detail, the entire Bitcoin world is built upon peer-to-peer connections and encrypted shared ledgers; it’s a decentralized system that essentially makes Bitcoin transactions fast, cheap, and nearly fraud-proof. Bitcoins themselves can be divided into smaller units and exchanged with one another, and they have a finite supply.

Asset tokenization could work fundamentally the same way, with divisible tokens representing a share of ownership stake in a different asset. In the real estate context, this could mean a residential property could become tokenized, with 100 individual digital tokens that each represent a 1 percent ownership stake in that property.

THE ADVANTAGES OF TOKENIZATION IN REAL ESTATE INVESTING

Even with the above example, you’re probably thinking of ways this could change the world of real estate investing. Realistically speaking, there are many different advantages of tokenizing real estate this way.

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Higher liquidity. If you’ve enjoyed the sellers’ market of the past few years, you probably don’t have any concerns about selling a house. But the real estate market can suffer from liquidity problems. An investor getting rid of a fractional share of ownership in a property would be much easier than getting rid of an entire property by themselves. This means tokenization could finally make the real estate market liquid enough to attract investors for whom liquidity is a concern.

Divisibility and fractional ownership. Asset tokenization also enjoys the benefits of divisibility and fractional ownership. If someone doesn’t want to purchase a million-dollar apartment complex that’s being built in their town, they don’t have to. They can still invest in it by buying a small fraction of the building with whatever money they want to spend on it. If they want to invest $1,000, they can do that.

Accessibility. Digital transactions can also improve accessibility. As long as an investor has a computer and a bit of technical know-how, they can hypothetically purchase a fractional share of real estate that interests them. Note that they may also be able to forgo the typical processes of working with banks, lawyers, and agents to purchase property; many of the bureaucratic hurdles are removed.

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Speed and cost reduction. Cryptocurrency enthusiasts are quick to point out that blockchain technology has the potential to make financial transactions much faster and much cheaper. While there are some kinks to still work out in this area, asset tokenization does have the potential to eliminate several costs associated with buying and managing property. Real estate transactions would have the potential to be much quicker and easier to manage.

New investment and rental models. Leaders in the investment field also need to understand that asset tokenization is so new and so innovative that it could create entirely new investment and rental models for real estate investors. For example, you can imagine a scenario in which a renter, instead of paying rent traditionally, buys a fractional share of ownership in the property every month, gradually working their way toward ownership in a measurable way.

WHAT’S HOLDING THE INDUSTRY BACK? 

Why don’t leaders bring asset tokenization to the real estate world and start capitalizing on the benefits?

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The technology is still new, which leads to a few different complications. For starters, there is no regulatory framework in place supporting this leap forward. Legal hurdles and regulatory complications are causing some investors and engineers to steer clear of this potential innovation. It’s also hard to convince somebody unfamiliar with this technology that buying a digital token representing a fractional share of ownership in a property is just as good as conventional ownership, so there may be an adoption problem initially.

Still, given enough time, all these problems should eventually be sorted out. The investment industry may not have the perfect technology to realize it yet, but sooner or later, asset tokenization is coming to the world of real estate investing, and it’s on leaders in the field to be prepared for it.


Ty Foster is a Managing Director at Invest.net. An experienced investment professional, Ty resides in Salt Lake City, UT. 

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