Tokenized Real Estate: Myths & Common Misconceptions
If you’ve paid enough attention to what’s been happening in the crypto world, you’ve probably heard of tokenization, at least by name. If you didn’t, then you are missing out a whole universe of investment opportunities, especially in tokenized real estate.
Just as a quick recap, tokenization is a process in which a real world asset is fragmented into tokens of the same value within the blockchain system. These tokens represent the fractional ownership of a property and give you the right to perceive benefits from it.
As such, this system works perfectly with the crowdfunding model. Say you need to finance a real estate development but you only have 20% of the capital needed. If you get a loan, which is the traditional way to get the fundings, you would be contracting a debt with a high interest rate.
So, instead of that, you can tokenize the property and fundraise the project through multiple small investors, which will own a little share of a property that otherwise would be inaccessible for them.
Sounds good, right? In fact, it sounds too good to be true, almost like a fairy tale. And like many stories, there are a lot of myths that revolve around the blockchain and tokenization in real estate.
And today, we’ll take care of that. In this piece, we will go over some of the most common ideas that are currently circulating in terms of tokenized real estate and decide whether they are myths or simply a misconception.
Is Tokenization a Myth?
People are saying a lot of things about blockchain technology and tokenization, mostly online (shocker, we know.)
Naturally, it led to more than a little confusion and misinformation around this subject matter, and that’s to say the least. Especially when it comes to trustless peer-to-peer transactions and fractional ownership.
So, before making any other judgment, let’s take a closer look.
What is a trustless transaction?
It sounds like a really bad thing but it isn’t at all. Despite its confusing name, “trustless” technology implies that blockchain eliminates the need for a third party to guarantee a reliable and safe transaction.
What does this mean? Mainly that the two parties involved in any traditional trading won’t necessarily need a bank or a broker as an intermediary to operate. Both participants ‘trust’ in the technology to work properly, rather than a financial institution or other kind of entity.
Now, all that being said, we’re talking about a new technology after all. And if you’re not an expert, which most people aren’t, it’s not that easy to understand the ins-and-outs of how it actually works.
Let’s use asset backed tokens as an example, like real estate tokens. In reality, it is somewhat complicated to truly know if they are backed by institutional quality properties or not…
Unless the transaction is powered by smart contracts that verify all the conditions and then, and only then, execute the trade.
In any case, always stick to a simple but effective precept: Trust but also verify. In tokenized real estate, all transactions are traceable. Meaning you can always check where tokens (or property ownership, for that matter) come from.
Fractional ownership
When it came up, fractionalization was a mind-blowing concept because it brought up the possibility to tokenize every asset in the world. As such, the first applications of this model were on high-value pieces of art to build a more competitive market.
When people decided to try and marry real estate with tokenization, it seemed like the definitive solution to a long-overdue problem of inaccessibility; as it gives younger generations the possibility to own a part of a property. In theory.
Even though that tokenization opens up the real estate market, both legally and technically, it’s equally important to take into account that it’s a tricky process.
In the real world, buying a fractionalized property with, say, another 100 people it’s hardly the ideal scenario. Can you imagine what that would look like? Who gets to live there? You’ll have to take turns!
Fortunately, there’s an amazing alternative: fractionalized real estate investing.
If instead of using it for living purposes, you and the other 100 co-owners rent or sell the property and split the profits… Well, that sounds like smart business! After all, the ownership rights stay the same, but every party gets their corresponding share.
High liquidity
One of the problems that tokenized real estate projects solve is the illiquid state of any property. Selling a tiny fraction of a house is considerably easier than selling the entire house.
But, then again, it is not as simple as that. Tokens can be traded with other people but they work similar to the stocks. If a person wants to sell their tokens, they will need a buyer to actually purchase them. So liquidity is tied to other people, but most equities work that way.
To summarize, neither trustless technology nor fractional ownership represent a black/white scenario. Both depend on the given use.
When you trace an asset backed token within the blockchain, it guarantees you real property ownership. And when you invest to get returns, you can always sell your share as long as there’s a buyer.
So tokenization it’s more reality than myth and, putting it to good use, it will be a game changer in the real estate industry.
The Future of Real Estate Tokenization
Real estate tokenization companies are changing all the traditional market rules, and at a fast pace. And as the industry grows, fractionalized properties will become the norm instead of the exception.
Mind you, the global tokenized real estate market is expected to grow from $1.9 billion in 2020 and $2.3 billion in 2021, to almost $6 billion in 2026. That 's something.
In an expanding industry, anticipation is the best tool for your business. So, as a financial advisor, it might be a good idea to consider a real estate tokenization platform with high-quality assets to include in your portfolio and investment strategies, don’t you think?