How Blockchain & Tokenization are Changing the Face of Private Real Estate Investing

The world of finance and investing was rather stagnant over the past few decades. Sure, there was the shift from offline to online banking, but that was merely …

Blockchain

The world of finance and investing was rather stagnant over the past few decades. Sure, there was the shift from offline to online banking, but that was merely a change in process. It’s been a while since a revolutionary technology came along and changed how investments and financial transactions are invested, recorded, and secured. But here comes blockchain and tokenization – two innovations that will fundamentally transform every area of finance, including private real estate investing.  

Understanding Tokenization and Blockchain

They’re terms that get thrown around a lot these days, but it’s amazing how misunderstood tokenization and blockchain truly are. Most people only have a vague understanding of what they are, or they may even possess the completely wrong idea. So before digging too deep, let’s make sure we’re on the same page.  

Asset tokenization, which is what we’re discussing within the context of real estate, is the ability to convert the rights to assets with economic value in the form of a digital token. Imagine, for example, that you want to invest in a piece of real estate little by little over time. Tokenization allows you to purchase a $100,000 property in increments of, say, $1,000 per month. For each $1,000, you get a token, which represents a 1 percent share of the overall property.  

It also works in the opposite direction. Let’s say you own a $100,000 piece of real estate, but need $10,000 in cash to secure another investment. You could sell 10 tokens, get $10,000 in return, and still own the property. 

Tokens can be stored and managed on a blockchain network, which is essentially an “incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually anything of value.” It’s a time-stamped series of records that aren’t owned by any single person and that can be securely accessed for anyone and everyone to see. Think of it as a permanent record that can’t be altered or erased. 

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In other words, tokenization democratizes investing, while blockchain enhances the security of transactions by protecting the best interests of both the investor and the owner of the underlying asset.  

4 Impacts on Private Real Estate Investing 

Tokenization and blockchain will ultimately impact every aspect of business and finances, but it’ll prove to be especially influential and transformational in private real estate investing. Here are some of the impacts it will have: 

  1.     Lower Barriers to Investing 

Real estate investing has typically only been available to those with large amounts of assets and the right connections, but this is changing. Real estate investing networks will start using tokenization to sell partial investments in raw land, single-family rental properties, multifamily buildings, and even commercial properties. As a result, individuals won’t need hundreds of thousands of dollars to add real estate to their portfolios. For a few thousand dollars – or perhaps even a few hundred – anyone can get started.

Tokenization will essentially transform the world of private real estate into a P2P equity trading exchange with coins that are securely swapped without the need for any sort of intermediary. 

  1.     Smoother Transactions 

As any seasoned real estate investor or homebuyer knows, real estate transactions are complicated and expensive. Blockchain should change this for the better.

“By using blockchain in transactions like title and MLS search, escrow, and financing, there is an immutable, virtually incorruptible record of every transaction on a secure distributed ledger, which will be very disruptive and transformative to the way things are currently done in real estate,” explains Ken Zimmerman, CEO and founder of Chateaux Software. 

With frictionless, inexpensive transactions will come greater transactional volume. This could provide a significant boost to an already healthy market. 

  1.     Lower Risk of Fraud

As mentioned, the blockchain provides a transparent and immutable ledger system that everyone can see. And because it’s unable to be altered or erased, real estate investment fraud will become a thing of yesterday. It’ll also become much easier to conduct due diligence on a property. 

  1.     Introducing Liquidity 

One of the big knocks against private real estate investing has always been the lack of liquidity. It can take months or years to pull money out of an investment, which prevents many people from heavily investing (even if it produces better returns than other types of investments). Tokenization changes this.

With tokenization, you don’t have to wait for someone to buy a real estate asset in one fell swoop. You can sell it off little by little and immediately cash in. There’s no waiting for paperwork to clear, closing dates to be set, or wire transfers to come in. It all happens in real time.

What Does the Future Hold? 

This is only the beginning. It’ll take a few more months or years for the general public – including the majority of real estate investors – to become comfortable with the idea of using tokenization and blockchain in investing. But once these concepts take off, the marketplace will look dramatically different than it does today. And if you ask anyone in the industry, that’s a good thing!

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