Real Estate Property Backed Tokenization

Tokenized Real Estate Investing

Real estate is the fastest growing investment asset class. In the United States alone, there are approximately $5 trillion in residential real estate assets. The total value of all U.S. residential real estate is more than $60 trillion, making it the largest single asset class in the world.

The trend of tokenization in real estate is very similar to that of other industries. It is being used to address many challenges in real estate transactions.

What is Tokenization?

Tokenization is the process of converting ownership rights into digital tokens. The process is similar to what happens when a stock is issued by a company. The company issues shares or tokens and gives them to its shareholders. This helps create liquidity and reduce the cost of raising capital for an investor. The tokens can be sold or transferred at any time to another investor.

How does tokenization work in real estate?

It works like this: You cannot legally tokenize an actual property. To tokenize real estate, instead, you would tokenize the DAO LLC that owns the property. Once the DAO LLC is tokenized, you then fractionalize the DAO LLC into a certain number of digital tokens built on the blockchain of your choice. These tokens are backed by the underlying property. Each token has a value equal to the amount of equity the buyer has in the property. Buyers purchase the tokens directly from a marketplace after which the tokens are then transferred to the buyer’s digital wallet. The buyer now owns the tokens which represents ownership in the DAO LLC that owns the property.

Why use tokenization?

Digital tokens provide investors with the opportunity to diversify their investments across different properties and increase their overall portfolio returns while allowing for fractional ownership of assets. For example, if you want to own a property worth $1 million but you only have $500 available for your investment, you can still invest fractionally by simply purchasing $500 worth of tokens in the underlying property of interest. Despite the fractional investment, you will still be able to participate in any net income generated by the property while also experiencing the appreciation or depreciation of the property as a real estate asset. Tokens also eliminate the need to maintain multiple bank accounts while also minimizing transactional and overhead fees and costs.

How do tokens impact the transaction?

There are many benefits to using tokens in real estate transactions. First, the investor does not need to wait for the sale of the underlying asset in order to liquidate their investment. Second, tokens can be purchased for as little as $50––there is no longer a need to put a 20% down payment down just to purchase a property. Third, the investor is not required to be present at closing. Fourth, there is less paperwork involved and transactional fees are minimized by the tokenization process. Finally, the investor does not need a separate bank account - just a digital wallet from which to hold, buy and eventually sell the tokens based upon each investor’s investment goals and timelines.

The Basics of Fluctuating Real Estate Valuations

Real estate has always been considered a core asset for investors. The fact that it consistently appreciates in value over time represents a key benefit of relative stability versus other free market investments such as stocks. As with any investment, there are perennial market risks associated with it. One risk is the fluctuation of property asset values based on fluctuating economic conditions including local economic activity and macro economic activity. For example, if an area becomes a hot spot for businesses and construction, the value of real estate may increase within that hyper locale. At the same time, if the economy suffers the ebbs and flows of economic cycles at large, the value of real estate as a whole may experience asset depreciation.

Another macro risk is inflation. If the cost of living goes up, so does the price of everything. Inflation makes real estate less valuable because it costs more to buy or sell the property. However, inflation is not a problem that affects all properties equally. It's not a uniform, one-size-fits-all situation. Certain types of properties will become less valuable than others when inflation occurs based upon local economic conditions.

The Solution to Fluctuating Real Estate Markets: Tokenization

Tokenization allows real estate to be priced according to its specific property related characteristics rather than as a whole. This means that you can have the flexibility and timing to buy a home in regions that may be less prone to negative economic conditions while also being primed for potential above average price appreciation due to prevailing, favorable hyper local economic conditions.

Why Tokenization is Important

Investing in real estate as an asset class is generally viewed as a long-term endeavor typically requiring years to see consistent returns from your investments. During those years, real estate prices will fluctuate due to many of the local and macro economic factors previously mentioned. These factors include economic growth, inflation, and the condition of the local housing market. Tokenizing real estate is a great way to protect or hedge your real estate portfolio investment. An investor can utilize the benefits of tokenization, namely the flexibility and ease of instant, low cost liquidity into and out of properties, in order to hedge against or take advantage of shorter term fluctuations.

In addition to hedging and asset protection options, tokenization of real estate is also beneficial because it offers more asset portfolio flexibility by providing the digital tools for as much control over your investment as possible. For instance, you may want to buy additional property in anticipation of a market recovery or you may also want to diversify your real estate holdings by buying another fractional piece of real estate at a later date or stepped into over time. Tokenization allows you to make these types of customized investment decisions instantly and seamlessly while minimizing costs with less hassle.

What is the future of tokenized real estate?

The future of tokenized real estate is bright. There are many advantages to using this innovative technology. Real estate is a fast-growing market, and the demand for real estate continues to rise. There is a huge demand for rental housing in the U.S., and in many countries around the world. Real estate is a stable investment, which means it is often less volatile than other markets such as the stock markets while real estate can also offer relatively high returns long term and continuous income property revenue while holding tokens to each rental property.