What is tokenization?
Tokenization is a process where assets are converted into a digitized format. This includes converting ownerships and rights to a digital form. This technology has been around for several decades to help encrypt sensitive information such as medical records or credit card information. Now, new capabilities provided by blockchain technology are expanding its applications in a way that’s revolutionizing how individuals invest in traditional assets such as real estate.
Tokenization powered by blockchain technology is one such application. It facilitates the divisibility of assets such as real estate. This creates two new advantages: lowering the barrier to entry for investors and increasing the liquidity of a traditionally illiquid asset.
Tokenization of real estate facilitates faster and less expensive transactions. Traditionally, if you wanted to transfer the deed of a house, you would need lawyers, escrow, banks, and possibly a brokerage. By tokenizing a deed, you can transfer it from one owner to the next after a successful real estate transaction. (Though it’s worth noting that currently, the process of tokenizing an asset is still expensive.)
Additionally, transactions completed on the blockchain offer transparency. Potential asset investors will be able to see all previous owners, which provides legitimacy and builds trust in regards to the asset’s origin. This also helps reduce the risk of fraud while lending a hand to due diligence.
Tokenization case study
Being that tokenization is still a relatively expensive process, the value of the asset being tokenized must be taken into consideration. For example, a $50K or $100K asset such as a small property in Detroit, Michigan would not normally be thought of as a cost-effective candidate for real estate tokenization.
However, if there are multiple properties of the same value in the same real estate investing group, it makes sense to place all projects on the same tokenization platform to enhance investors’ flow. For the issuer, using a single tokenization platform allows them to offer the asset at a lower price.
That’s where a recent real estate tokenization case came in where a property was tokenized then sold online without intermediaries. A property offered at 5846 Crane Street in Detroit was able to raise $148,890 on a tokenization platform shared with other properties, and the potential investment return constituted 11.73%. There have been other success stories for properties with even smaller initial offerings.
This strategy demonstrates that if developers and real estate investors use an economy of scale when creating an offer, the real estate tokenization process can still yield a return on investment.
The bottom line
Blockchain technology and tokenized real estate are creating more opportunities to invest in real estate by facilitating asset divisibility. In other words, if you’ve always wanted to invest in real estate, but don’t have the down payment, technology will allow you to start investing at a much lower financial threshold.