Tokenized Real Estate: How does it work, and what are the benefits?
Few sectors appear at first glance to be more rooted in traditional concepts of property and its associated financial structures than real estate.
When we think about real estate, we associate it instantly with bricks and mortar and land, with the understanding that we are talking about constructions you can see and touch.
That perception has, however, altered irrevocably with the advent of blockchain technology and the concept of tokenized real estate.
In this guide to tokenized real estate, we’ll examine how the new digital realm has brought extraordinary change to real estate ownership. We’ll explain what is tokenized real estate, and how to tokenize real estate. We’ll also look at the benefits of real estate tokenization – and at some of the pitfalls that might lie in wait for those who want to engage in this thoroughly radical way with the ownership of property.
At ZirconTech, we work closely with many organizations operating in the field of real estate. We are often asked to use our extensive expertise in blockchain technology to deliver valuable advice to individuals and companies considering moving into tokenized real estate. Here is our insight on this intriguing, exciting, and ever-growing innovation.
What is tokenized real estate?
Historically, real estate has been the epitome of an illiquid asset. Buying and selling it has always implied a high level of investment, accompanied by a protracted legal and financial process.
The key to understanding tokenized real estate is fragmentation. The value and ownership of the property in question – whether it is residential or commercial – can be broken into several real estate tokens. Each real estate token represents a portion of the property, along with its associated rights and obligations.
The specifics of each real estate token are contained in a smart contract. This means that any transaction relating to the tokenized real estate in question can take place quickly and automatically if a condition in the contract makes that possible.
Any person or organization that buys a real estate token relating to the property now owns a share of the actual real estate concerned. That means they are liable for any losses it suffers – and any profits that accrue when its ownership is transferred.
Take the example of the owners of a property valued at $250,000 who want to raise some capital. That asset can be broken down into 250 portions, each worth $1,000 in digital real estate tokens. The owner can now sell as many of those portions to raise the capital they need.
Tokenized real estate comes into its own in the case of large pieces of commercial property. Few investors could afford, for instance, to purchase an entire shopping mall, or a multi-storey apartment building. But by embracing the concept of tokenized ownership, the owners of such properties could liquidate a portion of their holding and raise funds quickly and easily.
Once you grasp the concept of the tokenized ownership of real estate, the possibilities multiply almost before your eyes. We can all think of large industrial properties, or massive commercial areas, that could potentially be subjected beneficially to the implementation of tokenized real estate. Now let’s take a deeper look at the ways in which tokenized real property can assist those who own it – and invest in it.
What are the benefits of real estate tokenization?
Faster, smoother, cheaper transactions
In many nations across the world, buying and selling property is a by-word for a process that is frustrating, expensive and immensely time-consuming. Tokenized real estate benefits from the transparency that is at the heart of the blockchain. The decentralized nature of the blockchain means that transactions relating to tokenized ownership can be conducted transparently and in a straightforward manner.
When it comes to tokenized real property, there are no vast packages of paperwork, and no exhausting, painstaking transactions. With the involvement of automated smart contracts, there is no need for human interaction and a deal can proceed automatically. Think of it this way; there is no such thing as “office hours” in this concept – your deal can go through at any time.
One of the associated benefits of real estate tokenization is that the transaction should cost much less than it would have under the traditional system.
This is closely associated with the benefit above; traditionally, liquidity has always been an issue around trading in real estate. Potential investors were deterred by the large sums involved and the difficulty of moving their currency quickly.
In the context of tokenized real estate, the liquidity comes from the division of the ownership of the property into several smaller pieces – and from the fact that they can be bought and sold much more quickly than through traditional means.
Easier search process
Trying to track down the ideal property to invest in can be a labor-intensive process. Tokenized real property is available in one centralized digital location. That makes it far easier to narrow down your search for the ideal investment.
Access for smaller investors
The advent of tokenized real estate expands hugely the number of people with the financial power to invest in property. No longer is this an option solely for those with fat wallets.
Thanks to the fragmentation of the ownership of the asset in question, and the relatively small cost of each real estate token, people and companies with more modest budgets at their disposal can realistically aspire to acquiring a foothold in the property investment landscape.
A more fluid marketplace
The greater freedom that blockchain technology has brought to financial transactions generally now applies to property through the introduction of tokenized real estate.
Property can now be bought and sold in a seamless, decentralized manner. The ownership of a small stake in the asset in question grants its owner a say in its destiny, meaning the power to decide what happens to it is similarly decentralized.
More efficient chains
Many of us have experienced the frustration of being part of a long chain of buyers and sellers of properties. The fact that tokenized real estate is transacted with minimal human input ensures the whole process moves much more freely and quickly, thanks to the involvement of the smart contracts that oversee the system.
Smart contracts also imply transparency. No longer is there any doubt as to who owns what, or how much of a property. The ownership of each real estate token is available for all to see.
What are the drawbacks associated with tokenized real estate?
While there are undoubted positives to the potential of this new style of property ownership, and several benefits of real estate tokenization, it has to be said that there are risks and downsides associated with this field too.
Smart contracts are extremely secure – but there is always the risk posed by determined hackers who use ever more sophisticated methods in their efforts to crack the code of the contracts and steal the money they represent.
You should make sure that the smart contract relating to any real estate token in your possession is absolutely watertight. As well as giving you greater peace of mind, you will be insured against the nightmare scenario that, if your financial assets are lost in such a way, it will not be possible to recover them.
You may be a digital native who is thoroughly comfortable with the concept of blockchain technology and associated innovations such as tokenized real estate. However, many of your transactions may still have to involve regulatory bodies staffed by people who are less sure of this landscape.
This can lead to the risk of a less effective set of regulations – which can gnaw away at your peace of mind and decrease your faith in the new system.
The rules regarding tax on cryptocurrencies are still being formulated in many jurisdictions. While tokenized real estate has leapt forward, and while those who embrace it have become comfortable with the concept, the taxation system governing such transactions is still in the process of being finalized. That, again, can lead to a lack of trust in the overall concept of tokenized real estate.
Real estate tokenization platforms
If you are interested in exploring the potential of tokenized ownership of real estate, where should you look to get started? There are several platforms that have been launched in this space.
We recommend that you research your options thoroughly before plunging into the world of tokenized real property. You should be able to find out how many successful investments they have overseen, as well as their range of current options available to new investors in tokenized real estate.
- RealT: This platform has been operating in the tokenized real estate market for longer than any of its principal rivals. It has a solid record of success when it comes to investment in the tokenized ownership of property. You also have the benefit of knowing you are working with a team full of experience in this particular corner of the property sector.
- DigiShares: An operator that brings a broader scope to the concept of tokenized ownership of assets. As well as real estate, it deals with transactions relating to equity in organizations, and a range of other physical assets. That means you have the potential to make investments here in a wider definition of assets than simply tokenized real estate.
- ArrivedHomes: This is one of the newer arrivals to the tokenized real estate landscape. The focus here is on residential property rather than industrial, retail or commercial. By investing here, you can invest in rental properties and get a share of the rent paid, as well as any profit if the real estate is sold.
- Tokenized Real Estate by ZirconTech: ZirconTech’s PaaS solution ensures security, efficiency, and a personalized experience for every client, allowing you to tokenize and manage assets securely, swiftly, and with immutable traceability.
These platforms are provided for information purposes only. Any investment in tokenized real estate is taken at your own risk and, obviously, can go down in value as well as up.
Conclusion: How ZirconTech can help you on your tokenized real estate journey
If you want to know more about tokenized real estate, and how it might benefit you and your organization, we welcome the opportunity to begin our discussion today. Please get in touch!