REINNO: Tokenization

Real estate might be one of the most promising investment options. It gives you the opportunity to benefit from ongoing passive income through rent and long-term capital gains through value appreciation. However, the real estate market efficiency is far from being optimal.

Low liquidity can overshadow the advantages this asset class offers. Nowadays the properties and their sizes are predefined by construction companies, leaving investors with almost no flexibility. The units are indivisible which increases the minimum investment amount. To add a new asset to a portfolio, one has to purchase an entire property. As a result, smaller players are left out and diversification becomes challenging.

Other sources of inefficiency include paperwork and slow payments. Every transaction requires middlemen and thorough checks of information to confirm accuracy. The process of collecting the documents from multiple parties and agencies is often lengthy and frustrating. Then there are banks that take days to process a money transfer, especially when large sums are involved. As a result, settlements might be hard and costly to achieve.

There were multiple attempts to improve market conditions and real estate liquidity. One of the most recent solutions is tokenization.

To put it simply, tokenization enables the transition of record keeping and accounting from paper to an entirely digital form. A token, therefore, is a digital unit of account implemented to reflect a user’s balance in regards to a corresponding asset, and to prove the ownership of that asset.

From the legal standpoint, a tokenization platform is not too different from a regular paper record in the sense that it provides a way to register legal titles and property rights. However, thanks to its digital nature, it also offers a way to quickly transfer these rights in a secure manner.

Blockchain is the technology that makes this improvement possible. As a type of a distributed ledger — a decentralized database — it offers a new way of storing and synchronizing information between parties.

When someone decides to tokenize real estate, they provide relevant documentation to a tokenization company that performs a check of title, mortgages, financial projections, etc. From then on, the information in regards to this asset will be available on the platform. Other users will be able to check such factors as the location, size, type of the building, floor plan, as well as supporting legal documents. This simplifies and automates future transactions, as the paperwork only has to be done once — when tokenization is initiated. Investors will be able to make informed decisions and compare multiple properties online, without the need to physically check the real estate.

Since everyone on the platform has access to the same real-time data, the problem of asymmetric information disappears. Moreover, the records on blockchain are immutable by nature. Therefore, you can add a new “block” but you cannot change an existing one, making the history of transactions and changes transparent. For instance, transferring an asset from one user to another will create a new record with an updated token owner but it will always be possible to check who held this asset previously.

Representing titles as tokens also solves the problem of indivisibility. Once an asset has a digital equivalent, it is simple to split it into smaller fractions, each carrying equal ownership rights. This asset characteristic empowers smaller players that would be left out if they had to buy the whole property. Diversification becomes easier too. Now instead of investing all of your capital into one building, you can buy a fraction of several ones and adjust the amounts as market conditions change.

The number of tokens associated with a particular asset is defined in a smart contract — a protocol that enables contract facilitation, verification and enforcement digitally without the need for third parties. Smart contracts are self-executing, meaning that once a certain condition is true, a predefined event will occur. Therefore, they are superior to traditional contracts in terms of automation and reduced costs. Since emotionless code treats all users as equals, smart contracts cannot be manipulated or abused to accommodate an influential player, making market conditions fairer.

With the right technology in place, tokenization can significantly improve liquidity of real estate and reduce the total cost of ownership throughout the whole ecosystem.

When looking for a tokenization partner, an investor should also consider the regulatory landscape. Since the concept is new, the legislators are still catching up. As expected, there are differences between the states in regards to issuing digital shares or securities, the way they are taxed and traded. It is important to be well aware of the rules and laws already in place and be prepared for changes coming up as the industry evolves.

With so many aspects to tokenization, from technical code to management and regulatory compliance, the idea of doing it with your assets might be overwhelming. To make things easier, REINNO takes care of the whole process from start to finish, including real estate appraisal, writing smart contracts, creating a custodian, preparing Reg D/Reg S offering and listing the tokens. It offers you an opportunity to tap into the new world of digitalized, divisible and liquid real estate and enjoy the benefits that come with it.

If you are considering tokenizing your property, please contact our team at office@reinno.io.