Real Estate Tokenization — A Beginner’s Guide
Real estate is one of the most prominent asset classes in the world, valued at about $256 trillion globally. The value of global real estate remains fairly stable but it keeps changing owners on a regular basis.
Unfortunately, the record-keeping and the ownership transfer process for real estate is archaic, at least in comparison to what the current technology can enable. There are certain limitations that deter real estate businesses from using the existing technology. This means that real estate, in spite of the connectivity offered by the Internet and digital transformation onslaught, is still signified by pieces of paper. Transactions might take weeks or months, and the process is heavily plagued by red tapes and intermediaries that translate into humongous costs, and needless to say, there are heavy geographic restrictions as well.
Another problem with real estate is that the asset can be handled only as a whole. It is not possible to subdivide the asset and while real estate might be lucrative, it still lacks liquidity. The same argument can be extended to gold reserves, collectibles, and fine art.
The Tokenization Revolution
All the deterrence hampering real estate trading has been rendered obsolete by the introduction of tokenization. Tokenization is the process of breaking real-world assets into virtual representations called tokens that digitally exist on a blockchain network. These tokens not only represent value but also serve as proof of ownership.
The Advantages
Tokenizing real estate brings a plethora of advantages that can positively revolutionize not only the process but also the scope and efficiency of real estate activities.
The first and foremost advantage that talk initiation brings to the table is enhanced liquidity. Since high-value real estate like commercial real estate can be broken down into tokens with smaller values, it becomes accessible even for retail investors. Therefore, however high the value of the real estate asset is, it can easily be sold either in whole or in part by tokenization.
The entire process of tokenization is carried out on the blockchain and the technology is governed by self-executing programs called smart contracts. These smart contracts take care of the trust needed in real estate ownership transfer without the involvement of a third party. Therefore, The need for the third-party and the cost and risk associated with them is completely eliminated.
A real estate property that is worth $10 million can be broken down into tokens valued at $100 each. This makes it easy for retail investors to participate in commercial real estate that works, until now, considered inaccessible to anyone except for a few high-profile investors.
Since the entry barrier is reduced, it becomes easy for an asset owner to sell their property in full or in part. Since the entire process is carried out on the blockchain, it is fast, efficient, and cheap. It also ensures transparency and consistency of information. Discrepancies in ownership information are completely eliminated when we bring tokenization into the picture.
How To Tokenize?
Tokenizing real estate is a straightforward process but it involves pulling together some information and keeping ready a few aspects in place.
The first step is to select the asset. While it is, on paper, possible to tokenize any real estate asset, you will need to look at an asset that has a sizable market, so you can properly evaluate a token value. It is strongly suggested that the valuation is done by an auditing or accounting company. You will also need to determine the function of the token if it will be giving equity or sharing profits. You will also need to understand your competition, so you can position your token better.
When you bring a proposal to an investor, you will need to tell them the value that you will be presenting to them. For this purpose, it is important to have a solid business model. Document the foundations of your idea, identify sources of revenue, the definition of your customer base, the financing-all this will constitute the analysis of the business requirement stage.
The next one is the stage of token economics. You will need to understand how many tokens will exist and how many will be distributed to the users, developers, investors, and creators. If the token supply is too high, it will dilute the demand and might deter investors from purchasing the token. On the other side, if the token value is too high, it might damage the liquidity of the asset. Therefore, you will need to take into consideration all these factors before you can determine the number of tokens and the value of the token.
Next comes the crucial step of transforming all the ideas and operational efforts into reality from a technical perspective. You can either code the platform yourself or better, entrust the process of platform development to a blockchain development company that specializes in the creation of real estate tokenization platforms. Even if you were to go to partner with a blockchain development company, you will need to understand their expertise and experience in real estate tokenization.
Maybe the blockchain technology is designed to be decentralized but since real estate is, by definition, security, it cannot operate outside the law. Therefore, your real estate tokenization platform should be compliant with the legal requirements of the jurisdiction. There are factors like the kind of asset you are tokenizing, the place where it is being tokenized come up and the portfolio of investors who will participate. A blockchain development company that knows how to tokenize real estate assets should also know the legal implications and handle it without any confusion or discrepancy.
The white paper can be considered the most crucial document in the entire process. It is considered to be the connecting isthmus between people who are into technology and people who are into investments. It should detail all the essential bits of information like the token economics, expected portfolio of investors, details regarding the real estate property, and the value it brings. It is highly recommended that this content marketing entity is handled by someone who has experience in blockchain coding and in real estate marketing.
Once you have all the ideas in place, you can consider developing a minimum viable product (MVP). This will give investors an additional layer of trust in your real estate tokenization project. If everything until now is done right, attracting investors to invest in your real estate token will be a breeze. With this investment, you can build a prototype and expand your network.
The Limitations
The biggest limitation for real estate tokenization is not the absence of investors or the scarcity of real estate properties but rather the legal dimension. The legal systems around the world have not evolved enough to accommodate things related to the blockchain technology, cryptocurrency, tokens, and tokenization. It is, however, just a matter of time before all legal systems evolve to accommodate the distributed ledger technology and its implications.
Conclusion
If you are one of those aspiring entrepreneurs who would like to make a profit by tokenizing real-world assets, you can get in touch with a blockchain development company that specializes in real estate tokenization platform. They will take care to understand your requirements and present you with a perfect solution that makes tokenizing real-world assets a breeze.
