What is Tokenized Real Estate?

When we talk about how one day, “everything will tokenized” that includes real estates.

How would tokenization benefit the sector?

Will new opportunities emerge from introducing tokenized real estate?

Tokenized real estate means that ownership of land, property and buildings would be tracked & transacted via the blockchain.

If you bought a house tomorrow, you would get paperwork to prove your ownership (the deed) and what is included in ownership (the title).

Those documents need to be stored securely.

When you go to sell the house, those documents would need to be transferred to the next owner.

This could be done using the blockchain (a form of a database), and NFTs that represent ownership of the real estate asset.

Tokenized real estate enables fractionalized ownership in a new way.

Similar to how many people can own shares of a company, fractionalized ownership allows multiple people to own one property (home, office building, hotel, etc.).

Fractionalized ownership, using the blockchain and tokenized assets, makes the process of buying and selling real estate much easier.

You can use smart contracts and online exchanges to buy and sell “shares” similar to how stocks are traded. The automated mechanism around buying & selling doesn’t exist right now for real estate.

Owning a fraction of a property could give lower net worth individuals the option to invest in real estate. You could buy a portion of an asset (currently you have to buy the whole asset).

Unfortunately for Americans though, this type of investing is currently limited only to accredited investors (fractional real estate shares are considered securities).

So the “financial inclusion” benefits are only applicable to people in some countries.

Real estate investors would have a new set of options to diversify through. Let’s say you had $300K to invest in real estate. In some markets that would get you one house. With tokenized real estate, you could alternatively invest $50K in 6 different properties to spread out your risk.

Crowd funding to build or buy large real estate properties would have a different mechanism with tokenization.

Let’s say 100 people wanted to go in on building a resort.

Each person would be issued “shares” which would be represented by semi-fungible NFTs.

The owners could vote on decisions about the project using blockchain voting (similar to a DAO), and receive dividends or income via a digital wallet using smart contracts.

This automation would remove some administrative costs that are necessary in the current system.

Are there downsides to tokenization of real estate? A few. This change would likely make non-techie people nervous as new jargon, tools & systems would become part of a currently old school market. That’s a reality whenever an industry adopts new tech.

From an investment perspective, people who are not currently in the real estate market might hop in if the barrier to entry were lower.

However, not all real estate investments are profitable, and inexperienced investors may lose money if investing looks & feels easier.

To fully migrate the paperwork (titles & deeds) to the blockchain is a massive task. There are millions (if not hundreds of millions) of individual properties that would need to be logged and digitized. This will take considerable time and money.

There may not be a compelling incentive for some markets (deeds in the US are stored at the county level) to take on that effort and expense.

Some sectors within real estate would become obsolete as well, which may lead some in the industry to resist change. Title insurance, escrow accounts and attorneys who support the administrative side would all experience disruption with digitization of real estate.

Tokenization of real estate would make the process of buying & selling property more seamless, and would remove some counter party risk. It would also open up a very different market within real estate ownership and investing.

However, to move the entire real estate market – globally – to the blockchain is a monumental project in scope that could take decades.