How Can I Buy a Share of a House for $1? on the Blockchain of Course!

It’s time we democratize the lucrative real estate industry.

Unless you’re Michael Burry, I think you’ll agree with me when I say that real estate is generally an attractive and often lucrative investment opportunity. However, the problem with real estate investing is that few individuals have access to sufficient cash to buy such an investment, and even fewer have the ability to manage it. But what if you could split the value of a property into a thousand little pieces? And what if you could trade these pieces on a marketplace with anyone over the internet?

Enter tokenized real estate.

In the same way you can split the value of an article into a thousand little pieces known as shares (the same way companies are split into shares), you can also split the value of property. Under one scenario, valuation is based on how much the rent of a particular piece will be. This is called revenue sharing. With this model, suppose there’s a plot of land that generates $10,000 in rent per year. Now suppose there are 100 token holders. Each token holder receives a piece of land, and each piece of land has an expected rent of $1,000. So how much will the total value be? The total value will be $100,000 (100 x 1000). If the value of the property or future profits appreciate, shareholders could sell their stake at a profit.

Source: https://blocksquare.io/

In a nutshell

Tokenization of real estate is a process that enables you to sell shares in a property just like publicly traded companies do.

So what’s the benefit? Before now, there was no way for you to get into real estate unless you had so much money to buy a property. But with tokenized real estate, you can actually buy a piece of property without having to put down enough money for the whole thing.

How does it work?

The concept of tokenized real estate is not new. Large financial institutions and other such companies have been buying, selling, and trading shares in real estate for years. But it wasn’t until blockchain technology came along that the structure of this investment could be changed in a way that’s truly beneficial to the everyday person. Let’s look at how tokenized real estate works:

1) The first step is to verify the ownership of the property before you sell shares and record it on a blockchain.

2) Next, you will need a method to identify the shares in the property. One company that is utilizing blockchain technology to do this is Brickblock. You can visit their websites for more information on how they are using smart contracts to accomplish this (https://brickblock.io/)

3) After you have verified ownership and identified the shares, you will issue them onto a blockchain such as Ethereum. This can be done through a smart contract. For information on how smart contracts work, visit https://www.ethereum.org/token/.

Source: https://blocksquare.io/

4) After the shares are issued, they will become tradable on exchanges just like any other cryptocurrency or token for that matter. You can read more about tokens here. Also, if you want to see how tokenization enables marketplaces for assets as intangible as NBA GIFs, read this article.

5) When it comes time to sell your shares in the property, you will use the same technology that allowed you to issue tokens and create a smart contract that allows people to buy new shares in your property.

Here’s a video to explain tokenization of different asset classes in general:

Benefits of tokenization for property owners:

1. Increase liquidity for real estate assets. For owners of real estate, tokenization has the potential to increase liquidity and improve access to capital. This could lower their overall cost of raising capital as well.
2. Improved market price discovery. Tokenization makes it easier to synthesize market value and has the ability to increase accuracy of a property’s market price. This could be useful for owners who need to assess the value of their property.
3. Lower costs for real estate transactions. The lower transaction costs associated with tokenization should make it easier for owners to sell their property, which in turn could lead them to obtain a higher selling price on average than what they would have otherwise received had they sold the property traditionally.
4. Eliminate geographical limitations, as well as reduce the risk of fraud, corruption, and conflicts of interest as the previous third party is eliminated from the equation.
5. Enable a new source of capital for property development projects. The ability to trade tokens on the marketplace increases number of participants by removing entry barriers for investors and funders.

Benefits of tokenization for investors:

1. Smaller minimum investment threshold than the traditional structure of real estate investing. This allows investors with less capital to gain access to the global real estate market.
2. Reduction in costs and administrative expenses. This is due to the elimination of multiple intermediaries and their associated fees (think real estate agents, lawyers, escrow companies etc.).
3. Access to previously unavailable real estate assets, e.g., private equity funds and REITs. The influx of capital increases the liquidity of assets, allowing them to gain market value and be sold at higher rates than ever before.
4. Total transparency on ownership, payments, and fund performance. This is made possible through the use of blockchain technology to ensure data immutability and transparency.
5. Increased liquidity of properties and assets. This is guaranteed by the underlying technology that smart contracts are built on — blockchain.

However, as with any emerging technology, there are disadvantages that need to be weighed out.

1. Regulatory uncertainty. In order for tokenization to work properly, laws and regulations will have to change such that the idea of a family selling “shares” in their home becomes legal. It’s not exactly clear how this is going to happen in today’s regulatory environment.
2. Scalability. The last issue that we see is the ability for blockchain-based systems to handle large volumes of transactions. In the case of tokenization, not only are there large transaction volumes when tokenized real estate is sold, but also transaction volumes when shares are issued and traded on secondary markets. This creates challenges for any blockchain platform in terms of scalability.
3. UI/UX designed specifically for tokenization. Given the newness of tokenization from a regulatory standpoint (i.e. legal and tax implications), the UI/UX will need to be designed to fit those regulatory requirements.

The current housing market is too slow for investors. There are many middlemen, which increases the cost of lending. Funding for a project can be difficult to find. Tokenization is a way for companies to automate many of the middleman functions in their business. This can help add liquidity to an asset class that needs it. In summary, tokenization has the potential to make a big impact in the real estate investment space and the success or failure of tokenization technology will depend a lot on how quickly the legal system catches up.