As the world evolves and becomes increasingly digitized, investing is changing too. Real estate tokenization and fractional real estate investing are two fairly new investment strategies that leverage new technology.
What is real estate tokenization?
Tokenization in real estate refers to converting real estate assets into tokens on the blockchain and putting them up for sale. This can also be done for properties that are under construction.
The tokens signify investments in real estate and are also used to digitally map properties on the blockchain. They can also work to raise capital to develop investments properties. Investors who buy the tokens own a portion of the asset, and every token represents direct ownership. These assets vary from a piece of real estate to shares in a company that owns real estate, participating in a real estate investment fund, and so forth.
Tokenization in real estate is a way for entities to raise capital, similar to crowdfunding. But, instead of money in a GoFundMe account, tokenization investors use tokens on the blockchain for their transactions.
Experts believe that real estate tokenization can change the economy in a beneficial way thanks to its:
- Flexibility. Anyone can invest and instantly become a partial property owner to start generating profits. Investors can also use their tokens to turn profits by selling them for more money than their original purchase prices. Tokenization is a better alternative to traditional crowdfunding because it gives users instant digital ownership.
- No limits based on location. Tokenization removes location limitations for real estate investors. If you live in Chicago and you want to invest in property in Hong Kong, there’s nothing stopping you.
- Convenience. Blockchain technology takes away common investment barriers like notary and bank fees, which allows investors to increase their returns faster.
- Diversification. With tokenization, investors don’t need massive sums of money to purchase real estate to diversify their portfolios.
- Accessibility. All users have to buy is a single token to get started investing, making the investment much more accessible to investors who don’t have stacks of cash to invest.
- Security. Blockchain technology provides the highest level of security because investments are assigned digitally to investors until they are refunded or sold.
What is fractional real estate investing?
Fractional real estate investors purchase properties that have been divided into smaller shares or units that are sold at lower prices than if they were buying the entire property.
Fractionalized real estate investing can be compared to timeshares. But, instead of owning units of time, fractionalized investors own part of the property and can earn passive income from rent, profit when the property is sold, or make money when they sell their shares for more than they paid.
Fractionalized real estate investing includes the benefits of tokenization mentioned above, plus:
- Affordability. The barrier to entry for fractionalized real estate investing is lower than having to purchase an entire property and maintain it on your own.
- Liquidity. It’s much easier to sell your shares in fractional real estate investments than it is to prepare a property for sale, list it on the real estate market, wait for it to sell, and pay the associated realtor and closing costs.
- Shared risk. Fractional real estate owners share everything, from losses and gains to responsibilities. There’s no maintenance to worry about or dealing with tenant complaints and problems. Instead, you work with an expert team that handles it for you.
Final thoughts
Both fractional real estate investing and real estate tokenization allow investors to own pieces of larger investments, such as real estate. They also both take a crowdfunding approach to raising capital. The main difference is that tokenization takes place on the blockchain, whereas fractionalization uses physical currency. Which one is best for you depends on your financial situation and investment goals. So take some time to do proper research and then speak with a professional to find the investments that work best with your needs.
